
Why Gas Is So Expensive Today (Hint: It’s Not Libya) - Apocryphon
http://www.cpeterson.org/2011/03/10/why-gas-is-so-expensive-today-hint-its-not-libya/
======
miked
If you are going to explain a system-wide phenomena, you need a systemic
explanation.

Gas isn't expensive today. What's expensive today are almost all commodities.
<http://www.indexmundi.com/commodities/>

This is a systemic problem. Any valid explanation of price increases in a
commodity, e.g., oil (gas), has to explain why prices are rising almost across
the board.

Global commodity price increases are being driven by two main factors. The
first is rapidly rising standards of living in the developing world as many
nations, especially China and East Asian countries, have freed up their
markets. This has caused a dramatic rise in living standards and a huge
decrease in the number of people living in poverty. These people are now
buying the things that we in developed take for granted, and that is driving
the prices of copper for cars and new homes, steel for buildings, oil for
transport, corn for livestock feed, etc.

The other systemic factor is massive currency inflation in almost all OECD
coountries. When inflation happens in more normal circumstances, an inflating
country's money falls in price relative to those of other countries, and it's
easy to see which countries are destroying their currency and which aren't.
People sell the increasingly worthless currency and buy the strong ones. What
we have today is almost all OECD countries inflating their currencies at once
in a (failed) effort to boost their economies. This means that anyone who
wants to protect their wealth needs to invest in something that will rise at
least as fast as inflation. That means commodities.

BTW: If speculators can somehow control prices in a way largely independent of
constraints, then why aren't they always doing it? It's not like human beings
just started getting greedy last year. And why have, for instance, prices of
natural gas fallen thru the floor (hint: greatly increased supply due to
drilling breakthroughs)? Where are the all-powerful speculators on that?

~~~
jeromec
_Gas isn't expensive today. What's expensive today are almost all
commodities.<http://www.indexmundi.com/commodities/>

This is a systemic problem. Any valid explanation of price increases in a
commodity, e.g., oil (gas), has to explain why prices are rising almost across
the board._

This is almost exactly the point the article is trying to explain: commodity
prices are rising across the board in line with the commodities index, but why
should there be an index at all? In the market you have the supplier, buyer,
and consumer. The "speculator" was placed into the mix _with a limited role_
for providing liquidity; this role was intentional and helpful since in the
real world there could be a delay between the time a grower/supplier and
buyer/cereal producer actually needed what the other had (raw material or
cash); with the speculator there was always the opportunity to buy or sell.
However, there were intentional, specific limits placed on the speculator.
This was to ensure he couldn't corner the market and artificially skew prices.
As long as these limits remained intact the market operated as designed, and
the actual price of commodities reflected real world supply and demand (since
the main players in the market were physical hedgers - people who actually had
stake in/cared about the physical commodity). Goldman Sachs was able to get
these "speculator handcuffs" removed. This means the actual market price for
commodities doesn't necessarily reflect _supply and demand_. Rather, it also
has the component of speculation priced into it. We can see this even within
these last few days. The price of a barrel of oil was skyrocketing above $100;
this seemed to make sense due to the unrest in the Middle East, then amazingly
with the earthquake in Japan it quickly dropped below $100. In such as short
time was there _really_ an escalation then de-escalation in the demand for
oil!? Of course not. The price was following speculation, people who are only
in the market to make money. The end result is that ordinary consumers must
pay at the pump what the whims of investors say, never mind progress made
whether politically or technologically, or reductions by consumers in a
recession to ease pressure on demand and oil prices. Natural gas is not as
attractive to speculators as oil.

~~~
fauigerzigerk
Don't forget that speculation works both ways. It can also bring down prices
very quickly and consumers benefit from that. What speculation really does, in
my view, is to insert a component of future expectations in addition to the
current supply and demand effects.

It is not entirely clear to me that adding this expectations component is
always bad. It can get out of control when it becomes self feeding, but it can
also convey valuable information that allows us to react early to fundamental
supply and demand issues. We clearly have fundamental supply issues in crude
oil and in agricultural products. The blog post is totally wrong on that one.
Pointing to falling US demand of crude oil makes no sense in a world where the
marginal buyer is in Asia.

~~~
jeromec
_Don't forget that speculation works both ways. It can also bring down prices
very quickly and consumers benefit from that._

That's like me expecting you to say "thanks" for returning an item I took from
you when it's speculation which helped drive up prices in the first place.

 _What speculation really does, in my view, is to insert a component of future
expectations in addition to the current supply and demand effects._

That's exactly what it does. Why do we need that?

 _It is not entirely clear to me that adding this expectations component is
always bad. It can get out of control when it becomes self feeding, but it can
also convey valuable information that allows us to react early to fundamental
supply and demand issues._

React early and do what? This isn't like hurricane preparedness. Again, the
point the article is trying to convey is that prices _don't_ reflect supply
and demand. We experience sky rocketing gas prices but no longer see gas
shortage or rationing lines. In 2008 we had significantly more people go
hungry from food shortages, although nothing has changed about wheat farming
except, if anything, farmers producing it more efficiently. The wheat harvest
that year was the most bountiful the world had ever seen.

~~~
fauigerzigerk
I think we need a component of future expectations in prices because it
increases incentives and provides funding for averting real future shortages.

~~~
jeromec
_I think we need a component of future expectations in prices because it
increases incentives_

I'm _extremely_ wary of the term "increased incentives" in light of recent
events sparked by this model on Wall St.

 _and provides funding for averting real future shortages._

We just don't see gas lines to support that argument.

Edit: And what do you mean "provides funding" anyway? Speculative contracts
don't raise oil producing levels, nor stockpile oil (as our Strategic Reserve
does). The extra money which exists is all used up by the speculators playing
the game.

~~~
fauigerzigerk
General anti Wall St. sentiment is not a very potent argument. It's difficult
to deny that higher prices increase supply and/or destroy demand. Wall St.
didn't invent this logic.

~~~
jeromec
_General anti Wall St. sentiment is not a very potent argument._

I'm not anti-Wall St. But I _am_ anti-recklessness when it means wreaking
havoc on our national (and by extension entire world) economy.

 _It's difficult to deny that higher prices increase supply and/or destroy
demand._

No, it's not. Actually, higher prices usually mean there is _decreased_ supply
and _increased_ demand. That's in a normal market. But we don't even have a
normal oil market. That's the entire point. When oil prices skyrocketed to
record levels above $145/barrel in 2008 it wasn't because of increased demand,
and those astronomical prices didn't mean an increased supply of oil either.

~~~
fauigerzigerk
I think our misunderstanding is that you're talking about what has happened
and I'm talking about what is resulting from it. Higher prices mean that
demand has been growing faster than supply. As a consequence, suppliers now
want to supply more and consumers want to consume less. So higher prices
incentivise more supply.

~~~
jeromec
_Higher prices mean that demand has been growing faster than supply._

But that's not the cause of our higher prices. Listen, I can't keep arguing
this. Do me a big favor and just read the first 3 paragraphs here:

[http://useconomy.about.com/od/commoditiesmarketfaq/p/high_oi...](http://useconomy.about.com/od/commoditiesmarketfaq/p/high_oil_prices.htm)

 _As a consequence, suppliers now want to supply more and consumers want to
consume less._

Suppliers want to supply more. So, if you're some Saudi Arabian sheik
witnessing these astronomical oil prices you really want _increase oil
production_ and _supply more_? What will that do to oil prices? Think about
what you're saying.

~~~
fauigerzigerk
Exactly. If I'm an owner of an oil field I prefer to sell at higher prices and
if prices are high I invest more in exploration.

Of course prices are not just influenced by supply and demand. They are also
influenced by speculation. I never denied that. What I'm saying is that
speculation changes the timing and increases the volatility, but it cannot
decouple from supply and demand indefinitely.

So if we're running out of easily accessible oil in, say 20 years, and
speculation increases today's prices in expectation of that, that's a good
thing. Of course it is a double edged sword. Sometimes future expectations
never materialize and speculation ends up destroying value.

------
Eliezer
If oil is priced above demand, there should be large supplies of unsold oil
piling up in tankers.

 _Period, god damn it._

If there is no unsold oil piling up in tankers than _oil is currently priced
at the level where demand at that price equals the supply_. You cannot blame
commodity speculators for this!

My understanding is that during the last price speculation bubble, there
_were_ oil tankers piling up. If this is not happening now then commodities
speculators have got nothing to do with it. _Why is this so hard for people to
understand?_

~~~
rmah
Not just tankers, but oil storage depots. One of the largest oil storage areas
is in Cushing, OK. The amounts of oil stored there are at record levels. As
reference, read:
[http://www.voanews.com/english/news/a-13-2009-01-23-voa61-68...](http://www.voanews.com/english/news/a-13-2009-01-23-voa61-68809857.html)
or
[http://af.reuters.com/article/energyOilNews/idAFN02226876201...](http://af.reuters.com/article/energyOilNews/idAFN0222687620110302).

It's so full that they're building more capacity to store more oil. The
situation is the same in other parts of the world.

BTW, this is common knowledge for those who follow the commodities markets.
Oil prices are high because of perceived risk of _potential_ supply
contraction due to instability in the middle east. It's a risk trade, i.e.
speculation.

~~~
natrius
And if those speculators are right, people will be praising them for having
the foresight to save oil for such a situation, which will lower prices
compared to the speculation-free scenario.

Speculation could probably have negative effects on markets in theory, but
it's so hard to take such claims seriously since they're rarely based on sound
economics.

~~~
im3w1l
Speculation has had negative effects in practice: The tulip crisis. Sometimes
speculation can turn into a pyramid game. I'm not saying that this is always,
or even often the case, but it is sometimes the case.

~~~
RickHull
> Speculation has had negative effects in practice: The tulip crisis

Guess who got hurt in the tulip crisis?

...

The speculators. Their harm tends to be self-contained.

------
friism
The Economist disagrees with the conclusion that higher prices are due to
speculation: "Studies have shown that commodities that are not traded on
exchanges have tended to rise as fast, and be as volatile, as those that are."
<http://www.economist.com/node/17913011?story_id=17913011>

~~~
light3
There is definitely a correlation, at least recently, between availability of
credit and the increase in commodity prices.

One way to explain this is to look at house prices, and how real-estate agents
'value' these. They will value a property based on the past value of this
property, the general increase in price levels since the last sell, and the
price of recently sold properties in the area. Properties are not homogeneous,
however the 'value' of all properties in a given area will be affected by the
price changes of those being bought/sold.

------
csomar
_The global speculative frenzy sparked riots in more than thirty countries and
drove the number of the world’s “food insecure” to more than a billion._

Sorry, they did no wrong. They live in the USA and they have the right to
manage their trading/strategies/prices the way they like. As a Tunisian
citizen, I'm looking for the government to secure food and energy for the
population. We have enough lands and water. This is actually a good thing:
Solve the problem once in a time and stop the dependency to foreign countries.

On a related note, what happened in Tunisia was a bubble and not a revolution.
The bubble burst, destroyed the political system as it was intimately related
to the economical one. I'll leave that for a longer article I'll be publishing
this summer, which explains and reveals many facts TVs and media are unaware
about.

~~~
kelnos
_Sorry, they did no wrong. They live in the USA and they have the right to
manage their trading/strategies/prices the way they like._

I don't think I agree. Let's think about the situation (assuming the posted
article is correct): the price of wheat was relatively stable, on the order of
$3-$6 per bushel. This system was fine, and stable, for years and years.

Then some financial analysts come into the picture and decide that this is an
untapped market where they can make some money. So they do their magic, and --
again let's assume the article is correct and this was actually the cause --
wheat prices jump like crazy.

The result, in real terms, is that a larger portion of the world had to be
considered "food insecure," and I'd imagine that some people actually went
without food that wouldn't have otherwise.

Is a financial firm's ability to make money (legally, even) more important
than people's ability to eat? Or even just more important than people's
ability to feel safe and secure in knowing where their next meal is coming
from?

From my perspective, that's a resounding no. The ethical and moral obligations
easily outstrip the financial benefits.

As you say, maybe it had positive aftereffects, that the Tunisian government
stepped back and decided it needed to take local action to make the country
self-sufficient. And that's great, but I don't know that that would work
everywhere in the world.

~~~
RickHull
> So they do their magic, and -- again let's assume the article is correct and
> this was actually the cause -- wheat prices jump like crazy.

If you are not going to explain prices in terms of supply and demand, you need
to have clear, compelling alternate explanation. Magic and assumptions don't
cut it. If the "natural" (i.e. where supply meets demand) price of wheat is
$3, it would be very difficult (and likely expensive) to establish an
artificial price of $6. I am curious to know what that story is, exactly.

~~~
A1kmm
Food prices are not perfectly elastic when it comes to the basic staples like
wheat, especially in the short term. People need a certain amount of food, and
their choices come down to eat if you can afford it, or die. Demand by
households doesn't change much with price, but they will pay anything from
zero up to everything they have.

The price is therefore depends on the suppliers. Normally, competition between
suppliers will bring the price down to near the cost of production. However,
if there is a futures market filled with overly confident speculators, who buy
the grains at a high price and push it even higher, the cost to all the owners
of the stock when delivery is due will be far higher than the cost of
production; if most of the market paid this same price, there will be no-one
with the volume who can afford to compete and push down prices; the final
price is likely to strike a balance between the loss of value from throwing
away wheat because some people had to starve as they couldn't afford the
price, and the revenue from selling the wheat at the highest price.

In effect, against inelastic demand, a futures market and confident
speculators have the same effect as rational price fixing by a cartel.

~~~
natnat
Demand for grains is actually quite elastic. When the price of things like
corn and wheat is low, farmers feed them to animals and people consume more
meat. When the price increases, people consume less meat and more grain, and
in doing so, consume a lot less grain.

In economies where people are too poor to afford meat, fluctuating food prices
are a much bigger issue. But in the US, we use more food than we need to in
order to enjoy a luxury commodity.

------
light3
"because none of the banks sell what they hold, the price goes up; because the
price goes up, more people make money on their positions; because they make
more money on their positions they buy more stuff and don’t sell what they
hold; and on and on forever"

That is until the bubble pops, those who got in late and can't sell will make
a loss. The bid-ask spread widens, in particular there is glut of people
wanting to sell at high prices, whilst there are few cautious buyers willing
to offer lower prices.

------
Yrlec
I would say that the main reason prices of commodities are going up is that
the FED is printing massive amounts of $ through QE1 and QE2.

If you think that this is a speculative bubble caused by traders then I
suggest you just short the commodities and make some money bursting the bubble
and bringing prices down again. Put your money where your mouth is.

~~~
coenhyde
It's almost becoming taboo to talk about the FED's activities, as though it's
some kind of conspiracy but in my opinion this is a very valid point.

It's hard to call it a bubble when all asset classes are inflating.

Edit: Just to be clear i'm not arguing the premise of the article, just that
such extreme speculation would not be possible without the enormous
concessions made for these banks.

~~~
Yrlec
Exactly. It's not the commodities that's rising, it's the fiat currencies
that's falling.

~~~
patrickk
What do you think the outcome will be of all this currency devaluation? Long
term that is?

~~~
Yrlec
Many countries (for instance the US) currently have massive debt and budget
deficits. They have three ways out of it: 1\. Increasing taxes. 2\. Lowering
expenditure. 3\. Printing money.

From a political point of view #3 is by far the easiest route. I therefore
fear that many countries will "default through inflation". In other words, we
will see massive inflation, possible even hyper-inflation. This will be a huge
hit to the middle-class. Because people with job but no savings are affected
the most by massive inflation.

I'd recommend everyone to watch this short-clip:
<http://www.youtube.com/watch?v=2I0QN-FYkpw> and this film
<http://www.youtube.com/watch?v=4ECi6WJpbzE>

~~~
patrickk
Thanks for those.

Another interesting video, if you haven't seen it already - Quantitative
Easing explained:

<http://www.youtube.com/watch?v=PTUY16CkS-k>

" _Printing money is the last refuge of failed economic empires and banana
republics and the Fed doesn't want to admit this is their only idea._ " Don't
worry, it's (partially) tongue-in-cheek.

 _"In other words, we will see massive inflation, possible even hyper-
inflation."_ Do governments ever learn? This is what happened in the Weimar
Republic and is happening today in Zimbabwe.

Where I live (Ireland), the government is trying to do option 1 and 2, without
success so far. Austerity measures are hurting the economy short-term by
dampening consumer confidence (fortunately, internal consumption isn't
everything, as we are an extremely open economy and will pick up as exports
grow.) They'd possibly be trying option 3, except the European Central Bank
controls our currency and ECB rules state that a country can't run a deficit
over 3% of GDP without incurring major penalties.

~~~
Yrlec
That video was hilarious (and informative)!

Austerity measures are painful but necessary. I think that ten years from now
you will be better of than the Americans, simply because the austerity
measures are stopping all the malinvestment and over-consumption as quickly as
possible. I'm Swedish and we went through the same process twenty years ago
when our real estate market crashed. Luckily we didn't do like Japan, which
still hasn't recovered from their crash from the early 90's (they did what the
FED is doing now).

Bankruptcy is never fun but it's the main thing that makes a market driven
economy more efficient than a planned economy. You have to stop malinvestments
and reallocate resources to something more efficient. This reallocation can be
painful but is necessary in the long run. The recession is not the problem,
the boom was the problem.

------
ck2
Just wait another year when the oil cartels/speculators have us accepting $4
prices.

The only "good" thing this is making happen is it's slowly taking extra
huge/heavy vehicles off the road as people stop replacing them with the same
thing every few years. Low 20s mpg for the city isn't worth it anymore.

Oil is expensive because we'll pay that much and use even more.

Did you know the armed forces pay full top price for fuel in Iraq and
Afghanistan?

------
pero
_The current spike in gas prices is not primarily a result of anything to do
with the freedom fighters in the Arab world...Nor is it a result of OPEC’s
production levels...

Rather, the spikes are primarily a result of the speculative market on oil._

Well, uh, what are their speculations based on?

~~~
JWLong
The point that he's trying to make all throughout the piece is that, yes, the
speculation is partly based on the civil unrest in the Arab world but that the
influx in speculatory money is inflating the issue beyond the simple idea of
supply/demand.

In essence, the presence of speculators exacerbates the price hikes that
normally come of a volatile market. This turns the whole market into one giant
feedback loop.

(this is all assuming that I understand correctly, of course)

------
ajpatel
I always find it difficult to grasp these economic concepts not having studied
anything remotely as detailed in my college economics classes. But he's done
an excellent job of explaining it in layman's terms. I found myself on an
emotional roller coaster whilst reading this piece - at moments I was enraged,
then again at moments felt like I could suggest something that would solve the
issues, and then felt a little "let's stick it to the man"-ish near the
middle. Excellent writing...

Anyways, in terms of the questions my non-economically-inclined-self has to
ask,

Who else knows about this? Are politicians aware? Is it something that's not
being addressed because they are afraid of losing the support of their wealthy
donors? Do the likes of Obama and McCain not address this and place blame
elsewhere because it's too complicated to explain to the American public? Has
anyone ever tried? I was born and raised here and have never been presented
with anything nearly as lucid as this to understand this system over the past
26 years that I have been alive. To those of us who don't study economics
outside of the 1-2 required classes as part of college studies, this type of
explanation of Wall Street and the commodities market is never really given to
us. We don't even cover investment options in school to be honest - most of us
don't know what 401k's, IRA's, etc. are when we get out of college.

So back to the original question - who knows about this and what have they
done to make the public aware?

Chris repeatedly mentions that commodities trading bets long and they mostly
bet on the prices to go up. "But in commodities, where almost all speculative
money is betting long, betting on prices to go up, this is not a good
thing—unless you’re one of the speculators."

So my question is, would it balance itself out if we required the banks to
allow their investors to bet on prices to go down as well as up?

Is this something the banks are abusing their power with - meaning now that
they have the letters making them authorized as physical hedgers rather than
merely speculators, are they abusing this power by not presenting their
investors with the option to bet on prices going down?

Why can't we just revoke these letters given to the banks? What are the
downsides? Basically, all these questions are simply my logical brain trying
to figure out "Ok, you presented the problem spectacularly well; now what's
the solution?" That seems to be my naturally-triggered response to reading
your post. I hope he'll oblige with a follow-up or some other readers have
answers to these questions.

~~~
RickHull
> But he's done an excellent job of explaining it in layman's terms. I found
> myself on an emotional roller coaster whilst reading this piece - at moments
> I was enraged, then again at moments felt like I could suggest something
> that would solve the issues, and then felt a little "let's stick it to the
> man"-ish near the middle. Excellent writing...

Sigh... You are responding to rhetoric. That's why it's an emotional
rollercoaster. Bad guys are identified and vilified, so you can feel like a
righteous victim.

Markets tend to reflect overall sentiment and expectations about the real
world. There are a lot of tricks that bad guys can play to defraud markets,
but speculation is assuredly not one of them.

------
kylewpppd
Personally, while high oil prices hurt in the short to medium term, hopefully
it sends the US economy towards less dependence on oil. To me, this is a good
thing. I just hope the US is smart enough to invest in reducing demand rather
than increasing supply.

Also, if this type of story is interesting to you, I highly recommend Paul
Krugman's blog at <http://krugman.blogs.nytimes.com/> . Also NPR's planet
money (blog & podcast) has great information and is much less slanted than
Krugman's. <http://www.npr.org/blogs/money/> .

------
jrockway
Isn't the _real_ problem that oil is produced by a cartel that controls
prices? Can't the oil-producing countries just put more oil onto the market to
decrease prices, if they wanted to?

The issue is that oil producers have no incentive to increase supply: they
have a fixed amount of oil under their land, and releasing it slowly makes
them more money. Commodities speculators are also tying up some supply (in
offshore tankers), but there is more oil in the earth than there is in
investment-bank-owned tankers.

~~~
nostrademons
OPEC members continuously cheat on each other. The reason oil prices collapsed
in the early 1980s and stayed that way for two decades was because OPEC had no
teeth. Somebody would always overproduce and reap the lion's share of the
rewards, and then _everyone_ had an incentive to overproduce.

~~~
natnat
OPEC also has an interest in keeping oil prices low over time. When oil prices
are higher, people start investing in more efficient technology, reducing
their overall need for oil, and consequently, OPEC's potential for political
pressure.

------
powertower
I've once heard that a typical barrel of oil trades hands (ownership) 30 times
before it makes it into your gas tank.

20 of those times nothing is transported, refined, added... Meaning it was
pure speculation buy/sells.

And when you remove that speculation, prices go down 50%.

------
fanboy123
People didn't believe in 07/08 that much of the price movement was due to the
devaluation of the dollar. Perhaps the real bump in prices is due to the
devaluation and perceived future devaluation of developed economy currencies.
QE/helicoptering money/printing money to stave off deflation ain't free.

A lot of the speculation on comm is because monied people believe that US
monetary policy will end with uncontrolled inflation rather than the soft
landing the fed is hoping for. To my understanding this is a greater picture
case of supply and demand. It's just that the product isn't crude it's
insurance.

------
orijing
> the primary culprit is the reinflating of the commodities market that helped
> drive the Great Financial Crisis.

The author doesn't claim any special knowledge, yet makes a rather vacuous
guess: "The primary culprit [for the reinflating of the commodities market] is
the reinflating of the commodities market"

He's arguing that the reason commodities (in particular oil) is so expensive
now is that commodities are expensive.

There are many domains where I lack any sort of expertise, and I defer to the
experts for their analysis and opinions. It doesn't appear that the author
maintained the same restraint.

~~~
brisance
He's saying that commodities are expensive now due to exemptions granted to
banks, and only to them, that allows them to rollover perpetually long
positions while charging management fees. This is causing inflation because
there is a lack of liquidity from a cornered market.

------
savramescu
I live in Romania. The price for gas has gone up almost 30% in the last year,
a raise that's so high that it's not justified by anything. We have 5-6 big
oil companies and they artificially drive the price high. We're one of the few
countries that has a decrease in gasoline sales (a decrease of 18%), but they
keep raising the price.

We're all going to change our cars for bikes soon. Or we're going to have
something similar to what happened in Libya focused on the oil companies.

------
kayoone
So what do you pay per gallon currently ? $3.50 ? That is $0.92 per litre. In
Germany we currently pay €1.50 per litre which is $2.1 or $9.25 per gallon.
Consider yourself happy americans!

------
gasull
QE1 and QE2.

------
nivertech
Long-only commodity ETFs are to blame here. People shouldn't funnel their
savings / pension funds into them.

------
vegai
Why do you call gas that which is not gas?

------
NY_USA_Hacker
The article is meaningless because skips over two big points:

First, for all those long only positions, for each of them, there needs to be
a corresponding short position. The article never explained where all those
short positions will come from.

Second, the article said that when the futures contracts expired and there was
settlement, the funds would just "roll over" their positions, that is, by
selling their long positions in the expiring contracts and buying long
positions in the next contract.

The problem is, just why can the funds be sure not to lose money during this
roll over process?

Or, if wheat should sell for $5 a bushel and some fund bought wheat at $100 a
bushel and doesn't want to take delivery, then the fund needs to sell the
wheat they bought (and would take delivery on), and who's going to pay them
$100 a bushel for their wheat (position)?

But prices have gone up. I just suspect that there's more to the system than
in the article.

~~~
ComputerGuru
_First, for all those long only positions, for each of them, there needs to be
a corresponding short position. The article never explained where all those
short positions will come from._

You might have glossed over the food section of the article - it discusses
exactly that.. basically, that the market has transformed from a balance of
long- and short- positions to only long, made possible because regardless of
whether the price went up or down, the big names would make money (if prices
went up, they make money the normal way, and if prices went down, they make
money via their profits gained through replication).

So long as corporations like Goldman Sachs are making this sort of crazy money
regardless of whether prices go up or down, you're going to be in a world of
hurt.

~~~
mooism2
I get that Goldman Sachs et al are making crazy money whether prices go up or
down, but investors in their funds only make money if prices go up, right?
They lose money if prices go down, don't they?

So if commodity prices go down in the long run, why does anyone invest in a
commodity fund long term?

~~~
ComputerGuru
That's where it gets crazy/wrong - since Goldman is "buying" regardless of
whether prices go up or down, it has the effect of artificially providing
feedback that triggers higher prices regardless of anything else.

So even if the investors lose a little in day-to-day trading, in the long-run,
they're gaining because contrary to what logic says, the prices _aren't_ going
down in the long run, they're actually going up (at least until the bubble
explodes).

Basically, if we all agree to continue buying something at whatever price it's
at regardless of whether we're losing or not, in the long run, we'll drive the
prices higher and our own (as investors) profits with them. And then the
bubble bursts... only to start over again.

~~~
mooism2
Yes, prices go up until the bubble pops, at which point fund investors (but
not Goldman) lose lots of money. Was the low point post-bubble above pre-
bubble prices?

~~~
mooism2
I'm sorry, was that a stupid question? Perhaps you could have told me why
after you downvoted.

~~~
ComputerGuru
Wasn't me that downvoted you, mate. But anyway, that's a difficult question to
answer and the response could go either way - it all depends on when you
officially define the bubble to have started/ended.

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Mz
I generally blame it on Peak Oil (and, yes, I am guilty of just sort of
skimming this piece).

~~~
sabat
It's not Peak Oil. Not in this case.

~~~
nostrademons
What time scale are we talking about? If we're asking why oil is more
expensive than it was in 1999, I think that's at least partially due to Peak
Oil (more due to China and India, though). If we're asking why oil is more
expensive than it was in 2009, I'd say it's because of geopolitical
instability, speculation, and price inelasticity.

~~~
Mz
I haven't had a car in roughly three years, so for me, I am thinking in a
longer time frame, not a shorter one. Prices will inevitably go up and down
some and be influenced by various factors on a day to day basis. But before my
divorce forced me out of college, I was an environmental resource management
major and went over peak oil in two classes, well before it was some kind of
buzz word. One of those classes covered peak oil quite in depth. This is part
of why I chose to give up my car when push came to shove for me financially: I
believe in the long haul, things will have to change. We will have to walk
more, use public transit more, live closer to work, shop closer to home,
develop more fuel alternatives and so on. Not everyone will go to the extremes
I have gone but the occasional extremist can help make more moderate
adaptations look a lot more normal, sane, comfortable, and so on.

(Having given up my car, I do not expect to ever own a car again, having
nothing whatsoever to do with peak oil. The short version is that some of the
really scary infections that people with my medical condition sometimes get,
which doctors don't know how to effectively treat and which 'normal' people
don't typically get, are used by environmental scientists for bioremediation
of petrochemical spills -- ie they eat petrochemicals. I have come to believe
that people like me absorb petrochemicals more than average and that this fact
contributes to our seriously negative health outcomes, including picking up
infections that think petrochemicals are yummy. I have done much better,
health-wise, without a car. Compared to what is supposed to happen to someone
with my diagnosis, a little walking is a minor burden.)

~~~
ck2
Unless you buy everything from local producers who get all their components
from local producers, you are indeed affected by oil prices, regardless if you
own a car or not.

~~~
nostrademons
There are degrees of affectedness, though. I live 2 miles from work, bike in
during spring/summer/fall, and my employer provides food on weekdays
(technically on weekends as well, if I wanted to go into work then). I tank up
on gas about once every 6 weeks, it costs me about $30, and I spend maybe
$25-30/week on food. It's well within my budget, and would continue to remain
so even if gas went to $10/gallon.

That's a far cry from someone who commutes 20 miles to work in an SUV and
spends $60/week just on gas. These people are hurting now. If you have the
opportunity to re-arrange your lifestyle so that it's a bit less sensitive to
oil prices, it may be a good idea to do so.

------
smogzer
begin bla bla bla.

... and since bernanke is printing money and making stockmarkets go up,
therefore the oil exporters also are printing what they have, i.e.oil, making
their "valuables" go up...

bla bla end

signature: soylent green is sheeple.

