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Wall Street Loving High Pump Prices?

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April 25, 2012 – Comments (1)

Board: Macro Economics

Author: putnid

Also, anybody who believes that buying X contracts of oil futures drives up the price, but those same X contracts can then be "flipped" without simultaneously driving DOWN the price, are nuts.

Sad to see that so many simply buy into Wall Street memes without a moment's contemplation.

There was a time when commodities were tightly regulated, when trading was limited to transactions between principals (i.e., producers and their direct customers). Futures contracts were traded between principals to reduce risks. Back in those rational days, futures contracts in oil amounted to roughly 3-4 times the physical quantities actually bought and sold.

Fast forward to today: At present, futures contracts in oil total to roughly 70-80 times the actual physical quantities traded. Why is that? Because Wall Street profits mightily...the way Enron did by trading energy futures.

The financialization of commodities has consequences. It's crazy to think that this explosion in commodities trading has zero effect on prices paid by consumers. The cereal manufacturer desiring to purchase wheat has to purchase a contract from someone. Used to be that "someone" was a wheat farmer. Nowadays, the contracts are bought, held and traded by countless others who purchased those contracts with the sole expectation of making a profit. Sure, the bulk of those futures contracts are washed out in the end, but the final purchase price of the commodity reflects, to a degree, the intervening bidding.

How much proof does one need, given the very real experience in 2008 when the "financial industry" imploded? One should recall that oil (along with a whole host of other commodities) plunged from $100+/barrel to $32/barrel almost overnight. It wasn't because oil producers stopped producing or refiners stopped buying crude. No, the actual supply/demand picture didn't change all that much. What changed dramatically was that hedgies and other "investors" cashed out dramatically as their customers rushed to raise cash.

Obviously, the real world is far more complicated than the picture I've drawn. Supply/demand dynamics are real. Currency valuations play a significant role, too. Even so, speculative excesses cannot be dismissed as inconsequential (available analyses suggest that speculative trading adds about 20% to the cost of oil...others believe the impact is more significant than that).

60 Minutes aired a good segment called "Big Oil" recently. It's worth viewing by anyone genuinely interested in the subject of speculation in oil and its consequences. At one point, in the 2008 parabolic rush to $140/barrel oil, Morgan Stanley "owned" more oil and any oil producer. There's plenty of information available in the transcripts of the Congressional hearings that were held on this subject. Books have been written, countless articles have been posted. The facts are available.

Wall Street, meanwhile, continues to proclaim that unbridled commodity futures trading has no effect, that all this speculative activity is merely doing "God's work." Yeah, right. Just like Enron claimed it served society by trading energy futures.

1 Comments – Post Your Own

#1) On April 25, 2012 at 11:22 PM, Melaschasm (57.59) wrote:

If speculators are pushing up oil prices by 20%, why don't the refiners purchase oil from the producers directly for 10% less than the futures contracts, thus spliting the speculators' profits?

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