Green Room

Why Obama’s war on oil speculators is poppycock (Choose – onions or corn)

posted at 10:16 am on April 25, 2012 by

Economist Dr. Mark Perry has a series of posts at his blog Carpe Diem which makes the case that “speculators” play and key and positive role in commodities markets.

One of the more intriguing posts deals with onions and oil. Oh, and corn. Perry quotes a 2008 Fortune magazine article:

“Before the government starts scrutinizing the role that speculators may have played in driving up fuel and food prices, investigators may want to take a look at price swings in a commodity not in today’s news: onions.

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings.”

The proof is in the charts. The first chart compares the volatility in the onion market, in which futures trading was banned, with that of the oil market.

 

Compare the mean and standard deviation differences in the two markets. Remember blue – no futures trading. Red – futures trading.

So, you say, comparing onions and oil is like, well, comparing onions and oil! OK, how about onions an corn. Again the same difference applies. No futures trading for onions but there is with corn.

Result? The same:

 

The point, of course, is those futures contracts help moderate a market. Or as Perry says:

The fact that the volatility of onion prices is so much greater than the volatility of corn prices lends further statistical support to the notion that markets with futures trading like corn have lower price volatility than markets without futures contracts like onions.

Bingo. So, the President’s war on “oil speculators” is an obvious distraction. But here’s the other side of that – if successful, you may end up seeing oil act like onions. Is that something most of us would prefer? Given these facts, it seems the height of folly to attempt to regulate or ban futures trading in oil, doesn’t it?

A few more charts to finish the point. First, futures trading in natural gas:

 

If oil speculation (or, as implied, greed) is the cause of rising oil prices, why aren’t natural gas prices rising as well in futures trades (not as “greedy”)?

In fact, it is because of “speculators” that we’ve seen the price of natural gas go down. So futures markets do what? They react to market signals on supply and demand. What this tells us is we most likely have an over abundance of natural gas.

So what does the market do? It adjusts the price to the reality of the supply v demand – in this case, the price goes down. And it also does things like this:

 

When natural gas price were up and oil prices down, more drilling rigs were allocated by those markets to natural gas. As oil prices have risen dramatically recently, while natural gas prices have fallen, there’s been just as dramatic a shift in the allocation of drilling rigs from natural gas to oil.

The success in the natural gas sector has driven supply up while demand has yet to increase proportionately. Meanwhile, we’d had an abundant supply of oil, which has now become very tight (geopolitics, folks – governments at work and war) driving up the price of crude. The market is reacting.

And as it reacts, guess what?

 

Crude futures are down as they obviously see future supply growing as the market adjusts and reacts. All driven by “speculators” who are, right now, in the middle of moderating the market.

So, as President Obama continues with his “blame the speculators” nonsense, you have a choice.

Onions or corn?

Markets or bureaucrats?

PS – if you’d like to read some academic pieces on why “speculators” are a key to a market economy, read this.

~McQ

Twitter: @McQandO

Recently in the Green Room:

Blowback

Trackbacks/Pings

Trackback URL

Comments

So, the President’s war on “oil speculators” is an obvious distraction.

Only if by “distraction” you mean, “BIG FAT LYING ATTACK ON CAPITALISM”. Then…yeah…

Ragspierre on April 25, 2012 at 10:36 AM

No more facts, please.

They conflict with the reality of His speeches.

BobMbx on April 25, 2012 at 12:20 PM

Excellent, excellent piece, Bruce. Heads may explode.

J.E. Dyer on April 25, 2012 at 3:11 PM

Thanks so much Bruce for this piece. It’s an important issue, but it doesn’t get any attention.

thuja on April 25, 2012 at 9:19 PM


HotAir — Politics, Culture, Media, 2017, Breaking News from a conservative viewpoint

McConnell may not get his wish on health care vote

Taylor Millard Jun 25, 2017 7:31 PM
Top Pick

Senate leadership wants a vote this week, others say, “Negative, Ghost Rider.”

Top Pick

Helping others without the government.

“…the reality is the reality.”

These kiosks don’t make $15 per hour or need benefits

Going for the record

“We will answer them on the field”

Taking it to the limit

Sunday morning talking heads

Jazz Shaw Jun 25, 2017 8:01 AM

Health care and tweeting and Russia, oh my!

Will they stay or will they go?

I can’t imagine what I was thinking when I said that

Rocking the boat majorly

Big government never contracts. It only grows more powerful

It’s only a “ban” until it becomes inconvenient

The decline and fall of Obamacare and the AHCA

Jazz Shaw Jun 24, 2017 8:31 AM

This was all over before it began

Fixing crime in America is a complicated issue

Taylor Millard Jun 23, 2017 8:31 PM

Cops alone won’t solve it.

Victim’s father was President Maduro’s supervisor back when he was a bus driver.

Democrats forgot all about the “era of good feelings”

“Bernie and Jane Sanders have lawyered up.”

“the Judiciary Committee is examining the circumstances surrounding the removal of James Comey.”

Winning isn’t everything. It is the only thing

Trump signs VA reform bill into law

John Sexton Jun 23, 2017 2:41 PM

“What happened was a national disgrace, and yet some of the employees involved in these scandals remained on the payrolls.”

A new era of something.

“…died suddenly in less than a week just after his return to the U.S.”

The shortsightedness of “Denounce and Preserve”

Taylor Millard Jun 23, 2017 12:11 PM

Pragmatism for the sake of pragmatism doesn’t always work.

Perhaps if you threw in a new car?

Gay marriages still growing, but not as fast

Andrew Malcolm Jun 23, 2017 10:31 AM

More, but not as quickly.

Should’ve stuck with the pirate gig. It was working for him

The battle for the rubble of Raqqa is underway

Andrew Malcolm Jun 23, 2017 8:51 AM

Won’t be much left.

Your list of demands is a publicity stunt

“what happened that day was emblematic of a deeply troubling trend among progressives…”

“The jobs are still leaving. Nothing has stopped.”

Bad vendor. Bad! No cookie!

“The Corps is just starting to grapple with the issues the court has identified.”

“So you want me to sing my praises, is that what you’re saying?”

Why would we possibly want that?

“I mean he sold our country to The Russians.”

I could think of someone else you might want to ask about…