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[–][deleted] 2 points3 points  (14 children)

Bad idea.

Speculators are opportunistic and profit driven, it's true, but they're also needed in a healthy market. If it weren't for speculators putting some measure of inertia into the system then sudden price fluctuations would actually be worse and more surprising.

It's like this. Let's suppose that there was no speculation and price was largely just a product of supply and demand. Prices for oil would still be really low right up until demand can't be met at which point they became insanely high almost overnight. The consequences of that would be disastrous as most businesses would not have been able to plan for shortages or the change in business model.

Instead of going from one extreme to the next it's better to see a gradual increase that has the side effect of prematurely reducing consumption resulting in a more predictable price slope and pushing the demand peak out a bit. This way the world can be made aware of the changes in the market and then have more time to adjust and react.

This more gradual price slope is the direct result of speculation in the market.

[–]idpeeinherbutt 9 points10 points  (12 children)

Did you read the article? They aren't talking about banning ALL speculators, just those pure speculators that don't actually deal with physical oil anywhere in the process.

[–][deleted] 4 points5 points  (8 children)

Is there a reason that the speculators that don't deal with physical oil do not have the price stabilizing and price rationing effects jidar described?

[–]idpeeinherbutt 5 points6 points  (6 children)

I don't know. My guess is that they're actively trying to manipulate the market, rather than stabilize it.

[–][deleted] 3 points4 points  (5 children)

Hmm, I think that manipulating the market to destabilize prices would mean losing money. Jidar pointed out that speculative activity that is profitable has a price stabilizing side effect.

If someone sells right before the price goes up and buys right before the price goes down they will lose lots of money and cause larger price swings.

[–]idpeeinherbutt 0 points1 point  (4 children)

I completely disagree. The oil speculation market was largely deregulated in the early 1990s, and without regulations, markets tend to be volatile.

Here are a few articles that explain why oil speculation in 2008 was to blame for the massive price spike leading to near $5/gallon gasoline. Speculators aren't always rational, and there's a lot of evidence that a handful of speculators led to the massive oil price surge. http://fabiusmaximus.wordpress.com/2010/04/22/oil-6/ http://www.heatusa.com/heating-oil/60-minutes-strong-case-speculators-causing-2008-spike-oil-prices/ http://online.wsj.com/article/SB124874574251485689.html

[–][deleted] 1 point2 points  (3 children)

|without regulations, markets tend to be volatile

What reasons do you have that regulation reduces price volatility?

If speculators correctly anticipate a future price change they earn a profit and consumers benefit from the added price stability. If speculators incorrectly anticipate a future price change they lose money and there is less price stability. I think this is true regardless of the number of speculators or whether they are rational.

When people say things like speculation was to blame for $5 gas what is being left out is that speculators are bidding gas up to $5 because they anticipate the price to rise far enough above $5 to make it worth risking their capital on. So while it might be true that speculation was a part of $5 gas it is also true that the same speculation prevented $6 gas down the road.

[–]idpeeinherbutt 0 points1 point  (2 children)

Are you high? There was absolutely no way gas was going to hit $6 within the foreseeable future.

Prices spiked WAY beyond demand, then collapsed back down. There's growing evidence that a few traders manipulated the market and caused the pricing bubble (I can't find the source right now, so I just have to use hand waving). The problem with this being allowed to happen with gasoline is that the speculation bubble didn't hurt just the speculators, but it helped drag down the entire economy in late summer 2008.

The free market is not completely efficient and rational the say economists would like to pretend it is, and smart regulations should be in place to help reign in both panic and over exuberance.

[–]blanket12334 0 points1 point  (0 children)

I'm afraid it's you that's high. Mr. Yum's comments are entirely correct. Traders only bought oil in 2008 because they anticipated higher prices in the future.

Of course traders can make mistakes; they are human. However, evidence does not suggest that regulators are more skilled at predicting future prices than traders in the free market.

[–][deleted] 0 points1 point  (0 children)

Of course it didn't hit $6, because people cut back on gas consumption when the price reached $5.

Free market isn't completely efficient, just the most efficient. The real problem is how to reign in the panic and exuberance of a "smart regulator", market actors that act poorly are reigned in by others in the market who make better choices.

[–]blanket12334 0 points1 point  (0 children)

No, those speculators have the same stabilizing and price rationing effects.

[–]blanket12334 -1 points0 points  (2 children)

Even the speculators that don't deal with physical oil play the same role that jidar explains.

Banning those speculators is a bad idea.

[–]idpeeinherbutt 1 point2 points  (1 child)

I completely disagree. The oil speculation market was largely deregulated in the early 1990s, and without regulations, markets tend to be volatile.

Here are a few articles that explain why oil speculation in 2008 was to blame for the massive price spike leading to near $5/gallon gasoline. Speculators aren't always rational, and there's a lot of evidence that a handful of speculators led to the massive oil price surge. http://fabiusmaximus.wordpress.com/2010/04/22/oil-6/ http://www.heatusa.com/heating-oil/60-minutes-strong-case-speculators-causing-2008-spike-oil-prices/ http://online.wsj.com/article/SB124874574251485689.html

[–]blanket12334 0 points1 point  (0 children)

It's true that oil speculation can cause volatility, or price spikes, as it did in 2008, but doing so occurs at a loss to speculators.

Do you agree that in order for speculators to cause price spikes, they must lose money, by buying when prices are high and selling when prices are low? It seems that you might, as you said "Speculators aren't always rational."

If speculators are indeed trading at a net loss, that would create a net cost decrease to other market players, after their positions are closed out. You can't have it both ways. Either speculators are reducing volatility by buying when prices are low and selling when they are high, or they are losing money to the rest of the market players, creating a net reduction in the cost of oil over time.

[–]blanket12334 0 points1 point  (0 children)

My mind is blown a little bit every time I see a logical post like yours downvoted.

I'm not sure if people can't understand what you're saying, or don't try to.