372. SPECULATION FIGHT: JUST WARMING UP
Recently, the CFTC released an Interim Report arguing that speculation has not systematically driven the rise in crude oil prices. In the Oil Drum camp, this was greeted with a wave of high-fives and honking of party horns, as if it marked the end of the speculation debate. The debate has not ended, however. In fact, it has hardly begun, and will continue and intensify for a number of powerful, common-sense reasons:
1) The speculation issue is not limited to crude oil. It involves agricultural futures markets as well. Farmers and grain elevators are facing punishing margin calls, inability to market their crops, inability to capture futures prices, and failure of futures to converge with cash prices Source1, Source2, Source3, Source4.
Here's Tom Buis, president of the National Farmers Union: "There's something wrong. I have doubts whether the CFTC is the place to rectify the problem - it may warrant congressional intervention. When regulators say a problem doesn't exist, despite the fact farmers cannot market their commodities that sounds an alarm." Source
These problems in agricultural markets have become so bad that the CFTC has been forced to call hearings in April and July to deal with irate farmers, grain dealers etc. And the people complaining are not denialist newbies grasping at the straw of "speculation" to avoid facing peak oil. They are long-time futures market insiders -- people who've been in the market for decades. They say the problem is a massive influx of speculators from Wall Street. Should we tell the farmers to shut up because the speculation debate is over? Tell them they're in denial? That it's all in their heads? Obviously not. Rampant commodity speculation is causing severe problems in a broad range of markets, and common sense says we should dig down and get to the bottom of it. There is no reason whatsoever for allowing Wall Street to turn critical markets for food and energy into casinos for rich people.
2) The issue isn't: did speculation singlehandedly cause the run up in oil from $10 in 1998 to $145 in 2008? Clearly, supply and demand are the foundation of the trend. Everyone agrees with that. The issue is: how much cheaper can oil (and other commodities) be if index speculators are forced to liquidate their rolling long positions? Even a $10 or $20 benefit could be worthwhile.
3) Here's the Interim Report on the topic of index investors:
Commodity index funds have grown significantly during the past few years, bringing significant long positions to commodity markets. In the futures markets, these funds have typically been long-only funds, buying near-term futures contracts and rolling their positions into more distant months as the delivery month approaches. Commodity index funds are often utilized by pension funds and other large institutions that seek commodity exposure to diversify existing portfolios of stocks and bonds and this exposure is provided by swap dealers. Although commodity swap dealers' gross positions have grown significantly, swap dealers' net positions decreased substantially between 2006 and June 2008. (Figure 12) This suggests that flows from commodity index funds have been offset by other swap dealer activity and thus have not necessarily contributed to the recent price increases in crude oil.So the argument is this: The long positions held by index investors are being offset by the short positions of someone else in the market and thus have "not necessarily" contributed to rising prices.
Across all maturities, the aggregate position of swap dealers in WTI crude oil futures contracts was only marginally net long as of the end of June 2008 and was net short on average during the first five months of 2008. This means that swap dealers' futures positions, on balance, were poised to benefit more from a fall in crude oil prices than from a rise in crude oil prices.
(P. 23-24)
But if you look at it that way, every participant in the futures market is being offset by his or her counterparty, so no one does/can contribute to a price rise or fall. It's very much like saying that a bubble can't form in the stock market because for every buyer of a stock, there must be a seller, and thus the downward pressure of each seller cancels out the upward pressure of each buyer. In short, it's a piece of sophistry.
As I said above, the important question is: how much cheaper will oil be if index speculators are forced to liquidate their rolling long positions? As I showed in 360. WHEN INDEX SPECULATORS SELL, the experiment has already been done once, and the results were very interesting. In 2006, index speculators were forced to sell $6 billion worth of rolling long positions in gasoline due to a rejuggling of the composition of the GSCI, and gasoline prices fell $0.82 in four weeks.
The simplest way of settling this issue is to take a pass on the spin and Wall Street smoke screens, and do the test empirically. Force the index longs to sell without rolling, and see what happens. The CFTC says index longs aren't affecting prices at all, so nothing will happen. What have we got to lose?
4) It's interesting how a generally leftish website like The Oil Drum immediately pimps for banks, hedgefunds, speculators and other Wall Street interests on the speculation issue. In a way, I think they see speculation as a sort of stealth carbon tax... "What's wrong with index funds and other long-only investors keeping oil prices at an elevated level? That's exactly what we wanted to do anyway! It's like a carbon tax, only better, because the NASCAR stooges can't object to it."
Another way to look at it, I suppose, is that commodity speculation is the last hurrah for the banks. You know the swap dealers we keep hearing about? It turns out that these are the same large banks who brought you the mortgage crisis. They're like vampires that have to suck the blood of some financial bubble, and at this point, their commodities businesses are the only profit center left standing. This is likely a major reason why the Bush administration is so keen to paper over the issue, and let the commodity speculation fest continue.
5) Many defenders of speculation say something like this: "The people who are investing long in oil and other commodities are only trying to preserve the value of their money against inflation. You can't blame them." And that's all true. However, if it's okay for one person to change their money into commodities to protect it against inflation, then surely it's okay for everybody to simultaneously change all of their money into commodities. We can't blame them right?
Unfortunately, that scenario isn't an investment strategy anymore; it's a full-scale loss of confidence in paper currency, which would be an unmitigated disaster for everyone. We simply can't have everyone changing their money into wheat or petroleum products and holding it as a money surrogate.
If it's not okay for everybody, then it shouldn't be okay for a privileged elite.
6) Eliminating index speculators from commodity markets is not an "anti-market" move. It's simply a restoration of futures markets to the smoothly functioning Ronald-Reagan-approved free-market state they existed in for decades before the index fund pig wallow of the 2000s.
7) Some people claim that futures markets are just a form of gambling that doesn't actually affect real world prices -- rather like people betting on a basketball game who don't affect the outcome. If that's the case, there's really no good grounds for not regulating speculation. Governments routinely regulate gambling.
Further reading:
Commodity Speculation Fight Only Just Beginning
The industrialised world, which has the power to substantially reduce commodity speculation if it chooses to use it, is ultimately disadvantaged by high commodity prices. If the blow represented by rising demand and severely constrained supply can be softened then it is not hard to argue that it should be. Free market diehards may disagree, but sometimes free market principles have to be sacrificed for the sake of realpolitik, or maybe just commonsense.
CFTC Official Seeks Independent Study On Speculators In Markets
A Commodity Futures Trading Commission official said Tuesday that billions of dollars in speculative investment are having an impact on futures markets, but Commissioner Bart Chilton is calling for an independent study to determine just how much.
Chilton said Bush administration officials have continuously downplayed the role of speculators on oil and agricultural futures but that an independent evaluation is needed to take political spin out of the assessment.
"I've got to believe that $250 billion (in new speculative investment over recent years) is having some ... impact" on futures, Chilton said in a written statement.
by JD
posted by JD @ 4:09 AM
39 comments
39 Comments:
As usual, please use the Name/URL option (you don't have to register, just enter a screen-name) or sign your anonymous post at the bottom. The conversation is better without multiple anons.
Thank you,
JD
Another great post.
Besides, does anyone expect the R-Party run CFTC to say something like this, "Yes, one of the greatest transfers of wealth out of the United States in all history, aided and abetted by quisling financial shops and speculators, happened under our noses on our watch, during the Bush Administration."
Also, go to Simmons website, and read his account of how a single financial shop, liquidating positions, drove oil prices down for six months by about 20 percent in the 1980s.
Obviously, speculators believe other speculators can move NYMEX prices.
My fear now is that the speculative bubble will pop, driving prices actually down below their "true" price. Once the commodity funds start unloading, look out below.
Of course they are gong
This is a brilliant post, congrats JD.
I like this paragraph a lot, for I was thinking exactly in these lines the other day, but couldn't exactly find the correct words. It's a "debunking Zenon" classic:
"But if you look at it that way, every participant in the futures market is being offset by his or her counterparty, so no one does/can contribute to a price rise or fall. It's very much like saying that a bubble can't form in the stock market because for every buyer of a stock, there must be a seller, and thus the downward pressure of each seller cancels out the upward pressure of each buyer. In short, it's a piece of sophistry."
Spot on. And the worst part is that this is sheer propaganda bullshit, because it is so econ 101.
This is very interesting, I'm just hoping someone might explain it a little more for a non-financial (but science backgrounded) person like myself.
Are you advocating that all kinds of commodities speculation cease, or only certain kinds ("long") and if so can you describe the difference between kinds you think are harmful and others that are more neutral?
Also, does anyone have an opinion about when the commodities market bubble might pop, with or without government influence?
Prices of oil jump up ~$25 and now back down by that much over the course of a couple of weeks, yet speculation is supposed to help with volatility and ensure fair prices for customers. Obviously supply and/or demand hasn't changed that quickly. Supply has been more than adequate the whole time (as proven by many real world instances, i.e. full tankers in Iran, other producers cutting production or contemplating cutting production because there are no physical buyers, etc) and demand has been slumping for months.
DoctorJJ
Speculators can speculate on the down just as much as they can on the up swing.
There is no doubt that paper speculation has an immediate and direct impact upon futures markets, but the question is whether or not they have an impact upon spot prices, which is what us at the pump pay.
It is possible for high futures prices to cause investors to buy physical oil and store it somewhere, thus building inventory at the expense of higher spot prices today. But there is no evidence that this is happening inside the United States. I have no idea what Iran is doing, someone in Iran would be better at answering that.
What people forget is that supply and demand are hard to guage. All the markets can do is try to arrive at a fair price differential between the future and the present using inventory figures as a guage on the future. If inventories are low and fail to improve week after week of price increases, then they must push the price up higher to rebuild inventories. But there is a lag, high prices today build inventories tomorrow, so just having a market is purely speculative.
Well, now we have the reverse: prices fall everyweek and inventories remain high, so the price will keep falling until inventories start to be eaten into.
This is how a market as large and diverse operates, a ping pong bouncing off the upper or lower bound over and over, with the hope that the average is where demand meets supply.
Unfortunately, that scenario isn't an investment strategy anymore; it's a full-scale loss of confidence in paper currency, which would be an unmitigated disaster for everyone.
At last I agree with JD on something; there is a growing loss of confidence in paper currency, and it will be an unmitigated disaster in time.
Great post. I didn't really understand it too much, but I got the gist of it.
Like yesterday for example Gas supplies dropped a little and Oil rockets up $5...Hmm...even investors today and economist believe that the report should no have supported a jump like that..It'll be a day or two before the price melts back down to $120.
We clearly aren't having any real supply issues, just apprently phantom ones.
-Justin
You're kind of misrepresenting the CFTC report a bit. I was a firm believer that index speculators were driving up the price of oil until I read the report. The key point is that index funds are just a _single_ type of investor that engages in the trade of commodity Swaps. There are other types who -- apparently -- have been betting that oil is in a bubble and will collapse at each step of the way.
Swaps only affect the market price when there is a NET change either way. Swap agreements are usually made on the side (what politicans sometimes call 'shadow markets') and the parties only head down to NYMEX to buy actual futures contracts at the end of the month to cover their net position.
As the CFTC report shows, the net position in Swaps was actually SHORT over the relevant period, which means that the sum total of all Swap based speculative activity actually _depressed_ oil prices. Thus, the driver of the price increase was either supply/demand based or a "normal" bubble that's just based on fear and paranoia and what have you. Or both.
Restricting the ability of institutional investors to invest in commodities will certainly lower their price. It will also have very very serious effects on the economy, most of them negative. The CFTC report shows that there are organic supply/demand forces driving the increase in oil, and I believe that for the government to continue to dissuss/blame "speculators" is misleading, short-sighted, and generally a bad idea.
Gregory,
Please read through JD's post #366. FUTURES PRICES DETERMINE PHYSICAL OIL PRICES. (and the linked references)
Prompt month futures became spot, nevertheless and in contrast to JD, what I've found over the last years has been a general failure to even consider real changes in the modern oil price regime. Evidently most mainstream economists, to pick just one group, are very uncomfortable with fact checking if doing so might force modification of a cherished cost of production/supply/demand frame of reference. The old book Flatland comes to mind.
Then as well, multiple causes - some with merit - find support in over priced oils. The push for green investment, for example, is very worthwhile but in my opinion should not be built upon false foundations such as (financial) desires to create a new bubble.
Beyond that, it might be worthwhile to recognize that, as JD points out, commodities in general have been transformed into a financial asset class and that this began some years ago.
In either 2002 or 2003, perhaps earlier, Goldman Sachs began recommending commodities be added to portfolios since they tend to be uncorrelated to traditional investments such as equities. Recall the, put nicely, weak performance of traditionals at that time.
The head of one of Citigroups commodity trading desks, speaking particulary to metals but also more generally, noted in January 2006 that: A flood of investment funds is driving base metal prices much higher than can be supported by fundamental analysis of supply and demand. It’s a bubble which could grow a lot bigger before bursting.
Noting as well that:
Fund investments began to surge in early 2004.
Commodity markets have always been strongly influenced by speculation. For example, surging investor demand contributed to the 1994-95 boom. In this cycle though, funds deployed are perhaps double the previous high.
Since early 2004, when this investment cycle began, funds invested have tripled.
[I would add here that, on BIS data, growth in over the counter commodity derivatives did not stop then but at end 2007 had reached a notional value of $9 trillion, roughly 900% higher than end 2004]
All commodities are involved
All classes of commodities – base and precious metals, energy and softs (agricultural goods), have enjoyed substantial price gains.
Much of which had to do with the entrance of long-only funds (mutual funds, pension funds, etc.) who are implementing an asset allocation shift away from more traditional sectors.
(Beyond fundamentals – the funds phenomenon, Citigroup Research) (My emphasis)
Frank Veneroso's* 2007 presentation to the World Bank is also an interesting read and can be downloaded at:
http://www.venerosoassociates.net/
Now, so far as the CFTC, Steven Briese, a well recognized expert in that agencies commitment of trader reports and commodity futures/options markets, is certainly worth a read, his latest, If the CFTC is not in the wrong, please tell us how. at:
http://commitmentsoftraders.org/?p=39#more-39
*(Frank Veneroso… From 1991 to 1994 Frank Veneroso was the partner responsible for global investment policy formulation at hedge fund Omega Advisors. From 1995 to 2000 and prior to 1991, through his own firm, Mr. Veneroso was an investment strategy advisor to global money managers and an economic adviser to institutions and governments around the world in the areas of money and banking, financial instability and crisis, privatization, and development and globalization of securities markets. His clients have included the World Bank, the International Finance Corporation, and The Organization of American States. He has advised the Governments of Bahrain, Brazil, Chile, Ecuador, Korea, Mexico, Peru, Portugal, Thailand, Venezuela and the United Arab Emerates. Frank is a graduate from Harvard and has authored many articles on the subjects of international finance.)
forgot,
when looking at longer than weekly periods, inventories are effected by shape of forward curve; there is such thing as the storage trade which, in re Cushing, was nicely brought out in a WSJ article last year. The very same stored oil can be sold multiple times over without a drop taken from or added to the tank.
Well where do I start... I own a pizza resturant and my main ingredient is cheese. As you can imagine I live by the CME and the spot price of cheese because I pay a % over closing trade. 2 things to note this year ( actually the last 2 years but this year is the worst). Cheese hits a record price in May and holds firm for much of June. But there were no trades to justify the price surge. In fact cheese would close 10 cents higher than the previous on a " bid". That's rediculous! An offer would be wagered at a certain price...nobody would take it and that would be the closing price. SO the next day alot of cheese would move at that price because obviously everyone would jump on it if " bids " and " offers " are determining price not actual product changing hands. Everyone wanted to get ahead of another price move..even though there was nothing happening to justify it. But now it is falling hard and I think alot of it has to do with hedges pulling out. But 401k's gotta make money somewhere so I get ready for the next influx of cash looking to make 11%. Maybe they could start hedging furniture and put all the furniture stores out of business...heck a couch could end up costing $10,000...you know supply and demand....heheheh
I find JD's point 4 particularly interesting and had been going to post a comment to that effect on a previous post. The likes of Matt Simmons, Goldman Sachs, Boone Pickens et al are normally the kind of people that TODers would regard as being the devil in disguise.
One reason I suspect certainly the British government is reluctant to go up against the investment bank lunacy is the fact that both goldman and morgan stanley are heavily involved in various government financing schemes (pfi etc).
One thing I find interesting about NYMEX futures; if the oil traders really were worried about peak oil, why is oil for delivery in 2012, the crunch date that often appears on peak oil sites, trading below today's price?
I thought you were just arguing that the recent drop in prices is strongly influenced by supply/demand in your earlier 2 posts?
Mind clarifying what you exactly think about this recent change?
Adam: Swaps only affect the market price when there is a NET change either way.
Actually, that's incorrect. The main thrust of the Interim Report is that net position changes by trader subcategories do not cause price changes. Read P. 27 again, carefully.
As the CFTC report shows, the net position in Swaps was actually SHORT over the relevant period, which means that the sum total of all Swap based speculative activity actually _depressed_ oil prices.
As above, you haven't understood that positions (and position changes) do not cause price changes.
The main problem with the positions-based approach is that positions are the *result* of the process which sets prices not its cause. I will explain this in more detail in another post, but the mechanism which drives futures prices higher (or lower) is well-understood. Essentially, futures are sold by an auction-like process (where both sellers and buyers compete). Prices go up when bidders outnumber sellers, and go down when sellers outnumber bidders. This is explicitly stated on the NYMEX website here and here. Now, consider a situation where you have a hundred bidders but only one seller at the current price. The bidders bid up the price substantially until only one bidder is left, and then the contract is concluded. At this point the positions are: one participant short, one long. Can you use that information to understand why the price rose? Obviously not. The information on positions conveys no data whatsoever on why the price rose, because positions come into existence after the price setting auction in the trading pit has run its course. So it's no big surprise that position changes do not cause price changes. The Interim Report is looking for the cause of price changes in data where it can't possibly exist.
If you're still not convinced, here's another way to look at it: You say that the net short position of swap dealers depressed oil prices, but why? The net short position of swap dealers is always exactly balanced by the net long position of the swap dealers' counterparties. So why doesn't the net long position of those counterparties boost oil prices? It seems that it definitely should, because I'm using precisely the same argument you are. But then we've reached a reductio ad absurdum, because prices can't be boosted and depressed at the same time.
Restricting the ability of institutional investors to invest in commodities will certainly lower their price. It will also have very very serious effects on the economy, most of them negative.
Forcing index speculators out of the market will not have any notable negative consequences for one simple reason: futures markets functioned superbly for decades without their presence.
babun,
I don't know the exact ratios of supply/demand vs. speculation/financial-factors in oil price movements. I don't think anyone does. However, I am convinced of two points:
1) Recently, there has been a large drop in demand, particularly in the US, and this should affect price.
2) The price of commodities will drop if index investors are forced to stop rolling.
More broadly, I would repeat what I said in the post: The backbone of the trend is supply and demand, but prices are elevated due to index investors, and eliminating that premium would be beneficial even if it is only $10-20.
New WSJ article:
The New Chemistry of Speculation
"Even as Washington attempts to crack down on speculation in food, fuel and metals, Wall Street is rolling out new ways to bring in money.
In May, Credit Suisse Group and Deutsche Bank AG began offering investments in iron ore, a component of steel. About one billion tons of iron ore is mined a year but isn't traded on a futures exchange. So it has been virtually impossible for speculators to bet on price movements.
The investment banks were inundated with interest in iron-ore deals, which function like futures contracts. In just two months, investors and hedgers took on more than $500 million of notional exposure -- about 2.7 million metric tons -- making this one of the biggest commodities markets to spring up almost overnight.
The new markets show how hard it will be for legislators to curb commodities speculation. Such trading is spreading to an array of other goods, from jet fuel to chicken, that have been off-limits to investors because they aren't traded on futures markets. They also are offered for commodities already bought and sold on global exchanges, including crude oil, corn and coffee."
Link
Since most peak oil theories mention speculation I personally see it as a sign that PO is here.
As I have stated before my worries are economic and political.
The fact that the "elite" have decided to protect themselves at the expense of the rest of us does not bode well. The elite are abandoning the US dollar and it will be an "unmitigated disaster".
The people doing this (in the USA anyway)have the politicians in their pockets. I doubt it will be stopped anytime soon.
The gov't can put out all the BS GDP numbers in the world and it won't change the fact the USA is teetering on the brink of economic ruin. How much longer will the world accept our deflated currency?
This "New Gilded Age" is going to end worse than the last one.
shiner,
Correlation is not causation.
Just because peak oil theories predict speculation doesn't mean that this is "Peak Oil Armageddon."
For one, the flood of people speculating is more likely the result of stock markets being hit by the housing crunch-- something that came almost completely independently of oil prices. People move their money into commodities after market crashes ALL THE TIME. This is not new, and I could have predicted this independently of peak oil.
That's the point: many of peak oil's strongest predictions can easily happen independently of oil prices.
IMO these banks and investment outfits (hedge funds and rogue traders) even countries maybe involved!, will try and invent any new way to scam the system at large. It has been proven with Enron and with BreX, with Amaranth Gas debacle, with Nortel, with the mortgage meltdown/credit crunch and other dubious investment shams. Now with commodities, a rush in of money, running from the credit mortgage problems, was to blame.
How can you possibly argue that a drop in the price of oil would be beneficial? We need high prices to force people to move to alternative energy sources or eliminate energy use.
"How can you possibly argue that a drop in the price of oil would be beneficial? We need high prices to force people to move to alternative energy sources or eliminate energy use."
I would like to see steady price increases just for those reasons. However the sudden unnecessary run up of prices so that oil producing nations can get $700 billion a year and oil companies can profit $10 Billion in a quarter is ridiculous and doesn't help anyone. That being said, I'd like to see oil at a reasonable price point, say $80-100 a barrel (what oil probably should be right now), and then have a tax system that makes using oil prohibitively expensive, in a step-wise fashion, over the course of the next 10-20 years. Those taxes could be used to fund research and to develop alternative energies, so that we simultaneously wean ourselves off of foreign oil while having the money and means to replace our energy consumption with renewable, domestic supplies.
DoctorJJ
Mark,
Here's the contradiction or, if you like, paradox:
High energy prices may not be 'the' cause of recessions but, to the extent these higher prices exacerbate economic conditions they also make sufficient investment in alternatives less likely.
Contrarywise, and to extent lower priced traditional sources help mitigate economic contraction, alternative sources can more easily move from the phase of innovation to that of more generalized production and use.
contraints and possibilities go hand in hand.
DoctorJJ,
Still, one could argue that if the taxes are not invested properly, we'd see an associated deadweight loss with the taxes. Or, at least that's probably what the CATOites would think. I, for one, think a price floor can do a lot of good if the tax revenues are put toward renewable credits or something similar.
Perhaps some states will start before the feds do. Seems that in the US, anything with energy has to be solved at the state level or lower, anyway.
juan,
That depends on a lot of factors-- the biggest being who does what with the money that's spent.
Let's say I transfer $1000 to Exxon, and Exxon's after tax income is 10%. Most corporations these days either do plowback or investment of some sort. Let's say 1% goes to investment in alternative energy solutions: that's $1 per $1000 spent. Now, that may not seem like much, but if it's billions of dollars it can add up.
That's assuming Exxon isn't just giving it all to shareholders or spending it on jet planes or some such frivolity. In that case, yeah, it's pretty much deadweight loss.
But remember that many energy companies, who are seeing windfalls, are also the same people putting money into future energy solutions. In other words, we don't have to spend money directly as a society on windmills to actually GET windmills.
Again, however, that's a best case scenario. I don't know enough about most of the energy company's accounting sheets to say where the profits are spent. I do know, however, that money doesn't just "vanish" because it's spent on energy.
Well, maybe the money sent to Saudi does...
OT but check this ou from St Petersburg Times:
• But while the world focuses on Beijing this month, something much bigger is taking root in millions of acres of farmland in Southwest China that could reduce pollution on an Olympic scale. Jatropha (Jatropha curcas), known to environmental groups as the "bioenergy tree," is being planted in massive fields by farmers who have received subsidies and seedlings from the Chinese government. • Jatropha curcas is one of many species of jatropha, which are planted as a flowering landscape specimen throughout the Tampa Bay area. Jatropha is a hardy, Florida-friendly evergreen that produces pretty red flowers. But that's not this Cuban native's real claim to fame.
Nature's green gold
Oil from the jatropha tree is considered one of the top — if not the best — sources of biodiesel, the world's fastest-growing alternative to crude oil. China is poised to be the world leader in jatropha cultivation, with an estimated 2-billion gallons of jatropha oil in annual production by 2010.
Let's see, divide 2 billion by 42, any you get almost 48 million barrels. Call it five days of Chinese oil consumption. By 2010. Whatif they keep it up, and keep expanding jatropha, while fuels prcies are dergged, and EV become the norm.
Suddenly, you see demand from China going flat.
benny,
My only concern is that the jatropha will displace food lands. Is jatropha growable on marginal lands?
If so, then this is very interesting news, indeed.
I believe jatropha is one of the few biofuels that doesn't interfere with food supplies.
If I had money, I would be looking at the West Indies to set up biofuel programs. Lots of ruined estates and idle land - and potentially great climatic conditions - combined with a large potential workforce.
ari,
I'm speaking from a macro perspective in which investment is necessarily and historically related to change in the avg rate of profit. For example, when we look at yty % change in nonres fixed investment in the u.s., this measure entered into obvious downtrend very shortly after avg rate of nonfinancial corp profit began its slide in the late 1960s.
Even as the rate has trended down, the mass, esp since ~'83, rose...something accomplished via what the pres of the minn frb called a substitution of credit for business and consumer spending (in contrast to a sufficiency of profit of production capital).
IOW, there has been a mitigating of overaccumulation and a long slowing through a turn to finance which began decades ago and is quite likely on its last legs.
To differing degrees, the same conditions have applied at global level where, since 1970, there has been a decade by decade lower gdp growth rate and, at least in re mfg, a very discontinuous but downtrending rate of profit.
Some of the above might be assigned to mere correlation but this part of the capital system's logic is pretty basic...investment is not driven by production of use values no matter how desired but by profit rate, and to the extent this is expected to rise and that the rise be durable.
Absent these conditions, we see what we've seen, limits. (which from a strictly micro level are not all so visible even though that is where they originate, i.e. what is perfectly logical for firms in paticular can be very illogical for the economy as a whole. So 'we' come up with system absolving excuses involving all sorts of supposedly exogenous 'causes').
juan,
What you say is true, to a varying extent, at the macro level-- I don't necessarily disagree. It's also an interesting phenomenon.
I'm certainly not one to say that investment is a surefire thing, especially when companies are bleeding money on energy. I also admit to being largely focused on the micro (finance and strategy) end of things, so I'll have to take your word on the more macro outlook. Nonetheless, I do know that, at least anecdotally, there has been an interesting "relocalization" to some extent of manufacturing, and while importers are getting slammed, many domestic manufacturers are benefitting-- including through higher after-tax profits. It's hard to say, I think, what happens 20, 10, or even 5 years from now. It's easy to say, however, that right NOW a lot of companies, including manufacturers, are getting hammered.
I'll have to look into what you say, however, as it's interesting. I admit that I'm a bit focused on micro-level issues, and especially on Asian-Pacific businesses that may not be indicative of what happens here in the US.
Thanks for some food for thought.
JD:
You're still not quite getting it right. A Swap is not a futures contract. A swap is an agreement to exchange money based on the price of a futures contract. Index speculators don't invest in barrels of oil (for fairly obvious reasons, like storage, complexity, and futures market regulation). What they do is they make agreements with Swap dealers (who do trade in oil, on occasion) which basically say "I will give you $124 now (the cost of a barrel of oil today) if you give me the cost of a barrel of oil at the end of the contract period.
Looking at it in this light the whole thing makes a little more sense. The Swap dealer is basically looking to balance his positions and bank the spread. Suppose I go to him and want to make a long swap agreement (I give him money now, he pays me the oil price next month. I'm dramatically oversimplifying for illustration). He now has an excess of long positions. In order to manage this risk, the swap dealer may choose to go to the futures market and buy a single oil contract at today's price, knowing that he can sell it in a month and settle up with me, earning whatever spread he built in to the agreement.
The key is, they only go down to the futures market when they have a NET excess of long positions. And while it is apparently true that net contract positions do not lead price changes in the market, net SWAP positions directly translate into additional demand or supply for the future, which will certainly causally affect the price of the market. If a Swap dealer is inundated with hedge funds trying to take long swaps, he will have no choice but to buy and roll actual futures contracts.
BUT! Swap dealers have had net short positions over the relevant period. That means that, as I said, the net result of all swap arrangements in the system actually depressed the price of oil, by creating an excess of SELLERS in these NYMEX auctions you describe.
As to the second point, the main fear with restricting index speculators is that he market will destabilize completely as index funds try to unload a commodity that they are not legally allowed to own. This would (obviously) reduce the value of the index funds that are exposed to commodities. Since most hedge funds are actually connected to pension funds, this could damage pension payouts, which would have incredibly serious, negative effects on consumer spending, confidence, and a host of other important good things. Saying that the market functioned well without index speculators is like saying that my brain functioned perfectly well before I got this giant tumor -- it doesn't mean I'm not going to kill myself trying to remove it.
adam,
where is the swap dealer position and size data, and are you referring only to nymex?
two months ago, bloomberg reported that:
``A lot of money is flowing into these markets, potentially creating a bubble,'' [acting cftc chairman] Lukken said.
[noting as well that]``We don't have the regulatory tools needed to spot that sort of situation.''
Chilton and Lukken both said that the international nature of trading, the increase in the number of traders and amount of money being traded creates new challenges for the commission.
iow if relying on cftc (or isda) data, there may be some very big holes esp as the former had until recently denied the very possibility of a commodity price bubble.
Unfortunately, that scenario isn't an investment strategy anymore; it's a full-scale loss of confidence in paper currency, which would be an unmitigated disaster for everyone. We simply can't have everyone changing their money into wheat or petroleum products and holding it as a money surrogate.
If it's not okay for everybody, then it shouldn't be okay for a privileged elite.
Well, fact is it is a full-scale loss of confidence in paper currency, and index funds do make this accessible to "everybody" in a way that direct ownership of futures contracts (or outright hoarding) isn't.
The correction to this is easy: give savers a positive real return on their savings net of taxes! As long as the US government is unwilling to do that, and penalizes savers through outright taxation of interest and the stealth tax of inflation, while forcing them to accept piddly nominal interest rates, the government can expect more of the same.
I found this article quite by chance whilst researching something vaguely related:
http://www.insideronline.org/summary.cfm?id=7250
Well worth a read - covers a variety of pathways to synthetic fuels and talks about inefficiency in certain refinery operations.
drdoom,
i agree that index funds, and etfs, have made it easier for more institutions and individuals to own claims.
i also agree that negative real interest rates are no plus for savers.
but do not agree with the implied notion that commodity 'based' paper is in some way immune to what has been/is a spreading/deepening financial crisis, esp as prices of this paper have been inflated well beyond fundamentals.
iow, bubbles end and those relying on some supposed permanant appreciation generally come out w/less than they had, even when they imagine to be perfectly hedged
doctordoom is right, of course.
When jd says "If it's not okay for everybody, then it shouldn't be okay for a privileged elite." Who do you think CalPERS represents, anyway? I guess CA state employees are now the "privileged elite".
You should be hearing more about this in the next few days:
http://www.moslereconomics.com/2008/08/05/re-cftc-reclassifies-crude-oil-position/
Unfortunately, that scenario isn't an investment strategy anymore; it's a full-scale loss of confidence in paper currency, which would be an unmitigated disaster for everyone. We simply can't have everyone changing their money into wheat or petroleum products and holding it as a money surrogate.
Give the man a cigar Charlie, we've got a winner. When the US Government as much as announces that it's going to prop up Wall Street's losses at all costs at the same time that Ben Bernanke is spinning the printing presses somewhat in excess of the speed of light we might have a problem
Currently the US monetary policy is 'Zimbabwe with aircraft carriers.' Honor our money or we'll bomb the crap out of you is not sound economic policy.
"I believe jatropha is one of the few biofuels that doesn't interfere with food supplies. "
A company out in california had a successful trial of jet fuel based on jatropha that it grew in california.
If Jatropha can be grown in the US
I wonder if maybe I have written off jet travel to cancun too hastily.
DB
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