Strong Evidence from Academic Research: Speculation Has Not Driven High Oil, Gas Prices
Economics professor Lutz Killian, University of Michigan, has a research paper titled "The Role of Speculation in Oil Markets: What Have We Learned So Far?" co-authored with Bassam Fattouh and Lavan Mahadeva, here's the abstract (emphasis added):
"A popular view is that the surge in the price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to regulate oil futures markets. This survey reviews the evidence supporting this view. We identify six strands in the literature corresponding to different empirical methodologies and discuss to what extent each approach sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets."
Here's the conclusion from a related, slightly less academic article by Professor Killian on the same topic (emphasis added):
"It is sometimes suggested that academics have failed to adequately
address the issue of speculation in oil markets and that more research
is needed to establish what seems obvious to many policymakers. This is
not the case. Rather, extensive research has produced a near-consensus
among academic experts that speculation has not been a key driver of
recent oil price fluctuations. This finding has important implication
for on-going policy efforts to regulate oil futures markets."
And here's from a CNN editorial by Professor Kilian:
"The Obama administration is mistaken in attributing high oil and gas prices to the presence of financial investors in oil futures markets. A popular view among pundits and policymakers has been that the sustained oil price increase between 2003 and mid-2008 could not possibly be explained by economic fundamentals, but must have been brought about by financial investors taking speculative positions in oil futures markets. Recent research has not been kind to this hypothesis. A large number of scientific studies have failed to produce any credible evidence that high oil and gas prices were caused by the presence of financial investors in oil futures markets.
In fact, there are strong indications that recent oil price fluctuations were mainly associated with changes in the global business cycle. Notably, between 2003 and mid-2008, global demand for oil increased faster than global oil production, resulting in a sustained increase in the price of oil. Much of the additional demand for oil came from emerging Asia. No nefarious speculators are required to explain this surge in the price of oil. Indeed, oil futures prices responded to much the same economic forces as prices in the physical market."
Bottom Line: Market forces, not speculators, are the main determinants of oil prices and all other commodity prices.
And here's from a CNN editorial by Professor Kilian:
"The Obama administration is mistaken in attributing high oil and gas prices to the presence of financial investors in oil futures markets. A popular view among pundits and policymakers has been that the sustained oil price increase between 2003 and mid-2008 could not possibly be explained by economic fundamentals, but must have been brought about by financial investors taking speculative positions in oil futures markets. Recent research has not been kind to this hypothesis. A large number of scientific studies have failed to produce any credible evidence that high oil and gas prices were caused by the presence of financial investors in oil futures markets.
In fact, there are strong indications that recent oil price fluctuations were mainly associated with changes in the global business cycle. Notably, between 2003 and mid-2008, global demand for oil increased faster than global oil production, resulting in a sustained increase in the price of oil. Much of the additional demand for oil came from emerging Asia. No nefarious speculators are required to explain this surge in the price of oil. Indeed, oil futures prices responded to much the same economic forces as prices in the physical market."
Bottom Line: Market forces, not speculators, are the main determinants of oil prices and all other commodity prices.
179 Comments:
Well, the term "economic expert" ranks up there with "men who are experts on women."
Obviously, "experts disagree." Here is St; Louis Fed:
The St. Louis Fed says speculators jacked up oil prices 15 percent in the 2008 run-up.
"However, speculation significantly contributed to the oil price increase between 2004 and 2008. Our analysis pins down the start of speculative forces driving oil prices in 2004, which is when significant investment started to flow into commodity markets. We find that the decline in the real price of oil in late 2008 is driven mainly by the negative global demand shock associated with the recession after the financial crisis. However, we note that the speculative shock also played a significant role in the decline as the financial crisis eroded the balance sheets of many financial institutions, which in turn a§ected their demand for commodity assets in their portfolio, consequently pushing prices down."
Take your arguments to the St Louis Fed, and tell them they have erred.
I can tell you futures markets, and all financial markets, have been gamed in the past and will be gamed in the future. There is no failsafe perfect free market.
Ben,
You keep harping on a single Fed and a single study from that one Fed (there are seven Feds in the country). Do you not understand that by design around 10% of all studies will make the wrong conclusion for purely statistical reasons (assuming the use of a p-value of 0.1, the standard p-value used in social science)? If 9 out of 10 studies say X and the other study says ~X (not X), then we can safely conclude X is true.
As economist Don Boudreaux recently explained:
"Speculators do cause oil prices today to rise -- but these higher prices merely reflect the reality that oil supplies tomorrow are expected to shrink (if, for example, tensions continue to rise in the Middle East).
A statement from Goldman Sachs explains the critical role which futures markets play in moving oil prices:
"We do find that buying and selling in the oil futures markets exerts an influence on oil prices. Buying and selling is how information about current and expected future oil supply and demand conditions is transmitted through the market, allowing the oil market to adjust the oil price in order to balance supply and demand. This is how a market works. Commissioner Chilton characterizes this as "speculation", with the suggestion it is unrelated to supply and demand conditions in the oil market. We disagree. In our view, this is the mechanism by which the oil market becomes better informed and reaches a consensus on issues such as the likely impact of the improving world economic outlook on oil demand and the increasing tensions with Iran on crude oil supplies. To say that "speculation" is contributing to higher oil prices is no different than to say that oil prices are rising on the expectation that the improving world economic outlook will lead to more oil demand and that tensions with Iran could lead to a disruption in crude oil supplies."
Speculation causes less volatility in markets, and serves the critical role of bringing information to the market by which supply and demand are brought into balance.
Having a financial history of “Bubbles” which includes those for Tulip Bulbs, real estate and anything deemed in short supply at the moment I have a hard time thinking that speculation was not part of it.
I think that modern methods have a hard time separating speculation and fear driven hoarding which I include in the term “speculation”
One thing we know is that China has stockpiled raw materials to meet future needs. Is this regular supply/demand or speculation? How many other nations are stockpiling oil? The US has its own strategic reserve.
Is the difference between speculation and building a strategic reserve the fact that speculators reverse their holdings as soon as they do not perceive a future advantage in holding longer?
got numbers?
you'd think a graph showing world demand vs price would be more convincing that academic folks offering what amounts to ...opinion.
" the markets have been game before and will be gamed again".
to deny that markets can be gamed flys in the face of history and common sense.
futures are basically gambling about future events. It may be sightly more calculated than putting a bet down at Las Vegas or buying a lottery ticket but buying or selling financial instruments based on what you think weather will be like in a year or whether or not the Middle East will blow up is gambling.
Exactly, Jet Beagle. Moreover, by the principle of "buy low, sell high" no speculator wants to move the oil price.
The only way to achieve that is by buying at higher and higher prices. When you realize you're the one moving the market, you back off. If you're the only bid, to whom will you sell once you've accumulated your position? Since you can't force everyone else to bid, a mere market participant can't effectively manipulate markets.
Each professional speculator has an idea of what he fair price of oil is. Once that price is hit, they don't continue to buy because there's no edge in the trade. And the same in reverse.
These people aren't trying do control the market, they're trying to make money.
Seeking,
Of course speculation causes bubbles. Note the tech bubble when uncertainty about the value of new technology led to fat-tailed distributions.
There is no uncertainty about oil in that sense. We are constantly exploring to bring new supply to market, economies shrink and expand and previously desperately poor people are becoming wealthier, increasing demand. Which, btw, YAY for that. Until you've been to Bangladesh or seen people living in graveyards in Cairo, you can't begin to know what poverty really looks like.
There is no evidence of hoarding oil. That strategic reserve has been there for a long time. That countries have one is nothing new.
Larry,
They offer an opinion that's more than a wild-ass guess - which is the type of opinion you're accustomed to offering.
They do, you know, actual research and if you made the slightest effort, you could access that research. The question is: are your math skills up to understanding it?
re: wild-ass guesses
with academic folks - I am totally wary of "opinion" without it being based, at least in part, on convincing, compelling empirical data.
go read the post again... I see far more opinion than "just the facts".
and what's REALLY FUNNY is that the same folks who point to these guys as reputable academics ...totally diss climate scientists... very selective in who they believe and why...
Lemme get this straight, Lar, your own uninformed pile of bull - or, better yet, the geysers of liquified BS that are Bunny's posts are credible.
People who base their opinions on data - you know, EMPIRICAL evidence are not. And you can make that decision without even glancing at the research.
And you don't find this moronic.
academic research is not opinion, at least "in theory".
much of what Perry posted on this thread seems to be opinion cloaked as "academic".
info vetting is importing these days.
anyone can post anything and claim it to be whatever they wish and "officialize" it by claiming some competency that mostly sheen.
got it?
I meant to put this in another post. Since Obama's latest threats, commodities hedge funds and traders have all had meetings with their staffs trying to guess what the White House will do and how to best protect themselves. These threats have real implications and the damage to the equities market has been significant since the SEC began to pump out one idiotic rule after another. It matters to all of us that financial markets function well and that goes for commodities markets to. This matters and I've thought a lot about this lately.
I've been thinking about the "financialization" of oil. How do they know that people are financializing oil? The people who offer this hypothesis state it as fact. And then point to the 10 or 12 oil ETFs - the biggest of which is USO, which owns just over 12,000 WTI light sweet futures contracts, representing about $1.27 Billion of oil or 1.2 Million barrels. That's it. That's the whole portfolio. Barely a drop in the bucket. And he other funds are smaller and often diversified into stocks of energy companies, not commodity derivatives. Even if everyone buying USO bought it as a hedge against a falling dollar, financialization of oil represents not even a rounding error.
Everyone who consumes fossil fuels and doesn't own an oil well is, however, by definition short the commodity. I think a better hypothesis is that people are hedging themselves against the price moves in oil by going long the commodity via shares in an ETF. And it should be noted, people also do that by taking long positions in oil producers. Do we complain about that?
at the end of the day, though, you're making a bet about what things that will happen in the future that will affect the price of oil.
Some folks are damned good at predicting the future but still guess wrong.
so.. you'll find some speculators - going both ways at once to preserve their capital but have it ready to deploy quickly.
this is why the folks who regulate the stock markets have been forced to suspend trading when something starts moving too fast at too large a volume.
we know this happens. We can't totally control it on a worldwide basis - but the point is - we know it can and does happen.
people making bets CAN influence how the market works.
Yeah, Larry, they make it work better.
"folks who regulate the stock markets have been forced to suspend trading when something starts moving too fast at too large a volume."
Jesus tap-dancing Christ!
Here's the reason they call this the Age of Information and not the Age of Knowledge. There's data galore to support any opinion out there.
Not all data is good data. You need some knowledge to separate the wheat from the chaff.
Jesus tap-dancing Christ!
Jesus H. KeeeeRIST!
I understand your view Methinks but you evade the realities here.
how can you talk about good and bad data when you totally disbelieve verifiable facts because they mess up your deepy-held beliefs?
:-)
you have to hold views that are consistent with the realities regardless of your ideology , right? That's where you have to admit that "theory" is trumped by what actually happens.
I know...
Jesus "cheese" Christ!
Methink:
Not all data is good data. You need some knowledge to separate the wheat from the chaff.
I agree, unfortunatley, where does the knowledge come from...more data.
Are you trying to say that we have no clue what's going on, Moe? How did we build cars, fly to the moon, get a working telephone if all data is bunk?
Exactly Methinks - that's why I ride a horse to work and fly on the backs of giant geese and use a cup and string to talk to friends...
No, Larry, I'm not evading. It's just that the hilarity of the disjointed idiocy you spout has worn off. It was fun for a while, but clowns and merry-go-rounds lose their appeal quickly.
no Methinks.. you're like many others unfortunately.
you fervently believe in a philosophy and from that point on, facts and realities are unwelcome if they undermine your beliefs.
economists don't build cars or things that fly to the moon - for very good reason.
they live in a world where realities "interfere" with theories.
Methinks,
I don't know if you are still checking the other threads so I'll repost:
Methinks:
Sorry I could not see your comments at Cafe Hayek.
I did not realize that one could insist on a physical settle on NYMEX WTI. I had been operating on the misunderstanding that the exchange would take a cash settle as obligation met.
Also do I understand you correctly in saying that the introduction of ETFs cannot increase the steepness of the forward curve?
If you are effectively trying to hold oil crude oil as a store of value rather than process it, does this not increase the demand for holding oil?
In which case the relevant comparison would be between ETF size and physical storage capacity
Ken-
You are right; many studies are flawed.
On the other hand, the Fed study is not bought and paid for, as the Fed has piles of its own money. So many "studies" today, even at an AEI or Heritage Foundation or liberal think tank, are essentially mouth-piecing for some interest group.
But I enjoy your enlightened commentary, and look forward to more conversation with you.
I remain deeply skeptical about oil futures markets, and the role of large, hugely powerful players.
OK. if speculators in oil have caused it to rise does that mean speculators in natural gas have caused it to fall?
http://bluecravat.blogspot.com/2012/04/what-would-politicians-do-without.html
Karl,
I am, but I'll post a reply here.
Those CH comments wouldn't post. It's a facebook issue, I'm told. Frustrating.
Here's a link to the contract specs for the light sweet contract so you can examine it for yourself:
http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
What you're interested in is "settlement" on the left hand side (unless you're dying to know all the trading rules).
Futures and forwards are both binding contracts. Both specify every detail of quantity, quality of the commodity, price and delivery. The difference is that futures are standardized contracts that lend themselves well to trading on exchanges where they benefit from the clearing process (eliminating counterparty risk). Forwards are OTC negotiated contracts and the lack of standardization makes them unsuitable for trading in a secondary market and counterparty risk is retained. Some ETFs allow themselves the option of buying forwards in their OAs, but don't prefer them because of the liquidity issue. You’ll find that the ETFs have a strong preference for the light sweet contract for that reason.
While forwards contracts can write in whatever options they want, futures contracts usually don’t include optionality. The ETF managers arrive in the oil pit (80% of the futures USO holds , for example, are traded on the floor) and roll the contracts before settlement. Since the future is so liquid and the fund only holds about 12,000 contracts, they are never afraid of being forced to hold to settlement. So, I think you may be conflating monetizing a contract before settlement and an option to settle for cash.
You were bang on correct that the managers persistently overpay for contracts. They don’t care if they overpay for contracts and they don’t bother working the trade to get the best prices. It's one of the reasons the funds underperform and I don't think they're particularly well run, but that's a different discussion. Managers stomp into the pit to roll the contracts and are arbed by the pit every month in basically the way I described in the email I sent to Don Boudreaux and which he posted on the CH wall on FB since it wouldn't post into the blog( I wasn't sure what you were talking about when I read your first comment there, btw. I wasn’t sure you were talking about the ETFs as I was thrown off by your talk of forwards).
However, once the contracts are rolled, the managers evaporate and the arbitrage opportunities are gone. There is no lasting effect. Contango is actually quite nuanced and we could spend all day talking about it, and it’s very interesting (to me alone maybe) but the main take-away is that it doesn’t represent a sustained arbitrage opportunity for shorts.
This comment has been removed by the author.
Karl, yes, but I'll reply here.
Those CH comments wouldn't post. It's a facebook issue, I'm told. Frustrating.
Here's a link to the contract specs for the light sweet contract so you can examine it for yourself:
http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
What you're interested in is "settlement" on the left hand side (unless you're dying to know all the trading rules).
Futures and forwards are both binding contracts. Both specify every detail of quantity, quality of the commodity, price and delivery. The difference is that futures are standardized contracts that lend themselves well to trading on exchanges where they benefit from the clearing process (eliminating counterparty risk). Forwards are OTC negotiated contracts and the lack of standardization makes them unsuitable for trading in a secondary market and counterparty risk is retained. Some ETFs allow themselves the option of buying forwards in their OAs, but don't prefer them because of the liquidity issue. You’ll find that the ETFs have a strong preference for the light sweet contract for that reason.
While forwards contracts can write in whatever options they want, futures contracts usually don’t include optionality. The ETF managers arrive in the oil pit (80% of the futures USO holds , for example, are traded on the floor) and roll the contracts before settlement. Since the future is so liquid and the fund only holds about 12,000 contracts, they are never afraid of being forced to hold to settlement. So, I think you may be conflating monetizing a contract before settlement with an option to settle for cash.
You were bang on correct that the managers persistently overpay for contracts. They don’t care if they overpay for contracts and they don’t bother working the trade to get the best prices. It's one of the reasons the funds underperform and I don't think they're particularly well run, but that's a different discussion. Managers stomp into the pit to roll the contracts and are arbed by the pit every month in basically the way I described in the email I sent to Don Boudreaux and which he posted on the CH wall on FB since it wouldn't post into the blog( I wasn't sure what you were talking about when I read your first comment there, btw. I wasn’t sure you were talking about the ETFs as I was thrown off by your talk of forwards).
However, once the contracts are rolled, the managers evaporate and the arbitrage opportunities are gone. There is no lasting effect. Contango is actually quite nuanced and we could spend all day talking about it, and it’s very interesting (to me alone maybe) but the main take-away is that it doesn’t represent a sustained arbitrage opportunity for shorts.
My personal guess is that more than buying oil to hedge against inflation, people realize that as consumers of oil they are by definition short oil. So, they try to hedge their personal commodity exposure by buying oil ETFs. I don't know for sure, but then I don't think it's correct to say one knows for sure that all those people are hedging against inflation either. And that effect would be spread among all storable commodities anyway, I would expect.
This comment has been removed by the author.
Karl,
I'm trying to respond, but my comment is too long for a single box. I have to split it into two and right now when I post the continuation, the first part is deleted. So, I'm going to try posting part one, waiting and then posting part 2 - part 2 is the more important part. Let's see if that works.
Karl,
Those CH comments wouldn't post. It's a facebook issue, I'm told. Frustrating.
Here's a link to the contract specs for the light sweet contract so you can examine it for yourself:
http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
What you're interested in is "settlement" on the left hand side (unless you're dying to know all the trading rules).
Futures and forwards are both binding contracts. Both specify every detail of quantity, quality of the commodity, price and delivery. The difference is that futures are standardized contracts that lend themselves well to trading on exchanges where they benefit from the clearing process (eliminating counterparty risk). Forwards are OTC negotiated contracts and the lack of standardization makes them unsuitable for trading in a secondary market and counterparty risk is retained. Some ETFs allow themselves the option of buying forwards in their OAs, but don't prefer them because of the liquidity issue. You’ll find that the ETFs have a strong preference for the light sweet contract for that reason.
While forwards contracts can write in whatever options they want, futures contracts usually don’t include optionality. The ETF managers arrive in the oil pit (80% of the futures USO holds , for example, are traded on the floor) and roll the contracts before settlement. Since the future is so liquid and the fund only holds about 12,000 contracts, they are never afraid of being forced to hold to settlement. So, I think you may be conflating monetizing a contract before settlement with an option to settle for cash.
You were bang on correct that the managers persistently overpay for contracts. They don’t care if they overpay for contracts and they don’t bother working the trade to get the best prices. It's one of the reasons the funds underperform and I don't think they're particularly well run, but that's a different discussion. Managers stomp into the pit to roll the contracts and are arbed by the pit every month in basically the way I described in the email I sent to Don Boudreaux and which he posted on the CH wall on FB since it wouldn't post into the blog( I wasn't sure what you were talking about when I read your first comment there, btw. I wasn’t sure you were talking about the ETFs as I was thrown off by your talk of forwards).
However, once the contracts are rolled, the managers evaporate and the arbitrage opportunities are gone. There is no lasting effect. Contango is actually quite nuanced and we could spend all day talking about it, and it’s very interesting (to me alone maybe) but the main take-away is that it doesn’t represent a sustained arbitrage opportunity for shorts.
My personal guess is that more than buying oil to hedge against inflation, people realize that as consumers of oil they are by definition short oil. So, they try to hedge their personal commodity exposure by buying oil ETFs. I don't know for sure, but then I don't think it's correct to say one knows
Karl,
Those comments wouldn't post. It's a facebook issue, I'm told. Frustrating.
Here's a link to the contract specs for the light sweet contract so you can examine it for yourself:
http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
What you're interested in is "settlement" on the left hand side (unless you're dying to know all the trading rules).
Futures and forwards are both binding contracts. Both specify every detail of quantity, quality of the commodity, price and delivery. The difference is that futures are standardized contracts that lend themselves well to trading on exchanges where they benefit from the clearing process (eliminating counterparty risk). Forwards are OTC negotiated contracts and the lack of standardization makes them unsuitable for trading in a secondary market and counterparty risk is retained. Some ETFs allow themselves the option of buying forwards in their OAs, but don't prefer them because of the liquidity issue. You’ll find that the ETFs have a strong preference for the light sweet contract for that reason.
While forwards contracts can write in whatever options they want, futures contracts usually don’t include optionality. The ETF managers arrive in the oil pit (80% of the futures USO holds , for example, are traded on the floor) and roll the contracts before settlement. Since the future is so liquid and the fund only holds about 12,000 contracts, they are never afraid of being forced to hold to settlement. So, I think you may be conflating monetizing a contract before settlement with an option to settle for cash.
You were bang on correct that the managers persistently overpay for contracts. They don’t care if they overpay for contracts and they don’t bother working the trade to get the best prices. It's one of the reasons the funds underperform and I don't think they're particularly well run, but that's a different discussion. Managers stomp into the pit to roll the contracts and are arbed by the pit every month in basically the way I described in the email I sent to Don Boudreaux and which he posted on the CH wall on FB since it wouldn't post into the blog( I wasn't sure what you were talking about when I read your first comment there, btw. I wasn’t sure you were talking about the ETFs as I was thrown off by your talk of forwards).
However, once the contracts are rolled, the managers evaporate and the arbitrage opportunities are gone. There is no lasting effect. Contango is actually quite nuanced and we could spend all day talking about it, and it’s very interesting (to me alone maybe) but the main take-away is that it doesn’t represent a sustained arbitrage opportunity for shorts.
My personal guess is that more than buying oil to hedge against inflation, people realize that as consumers of oil they are by definition short oil. So, they try to hedge their personal commodity exposure by buying oil ETFs. I don't know for sure, but then I don't think it's correct to say one knows
Karl,
Those comments wouldn't post. It's a facebook issue, I'm told. Frustrating.
Here's a link to the contract specs for the light sweet contract so you can examine it for yourself:
http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
What you're interested in is "settlement" on the left hand side (unless you're dying to know all the trading rules).
Futures and forwards are both binding contracts. Both specify every detail of quantity, quality of the commodity, price and delivery. The difference is that futures are standardized contracts that lend themselves well to trading on exchanges where they benefit from the clearing process (eliminating counterparty risk). Forwards are OTC negotiated contracts and the lack of standardization makes them unsuitable for trading in a secondary market and counterparty risk is retained. Some ETFs allow themselves the option of buying forwards in their OAs, but don't prefer them because of the liquidity issue. You’ll find that the ETFs have a strong preference for the light sweet contract for that reason.
While forwards contracts can write in whatever options they want, futures contracts usually don’t include optionality. The ETF managers arrive in the oil pit (80% of the futures USO holds , for example, are traded on the floor) and roll the contracts before settlement. Since the future is so liquid and the fund only holds about 12,000 contracts, they are never afraid of being forced to hold to settlement. So, I think you may be conflating monetizing a contract before settlement with an option to settle for cash.
You were bang on correct that the managers persistently overpay for contracts. They don’t care if they overpay for contracts and they don’t bother working the trade to get the best prices. It's one of the reasons the funds underperform and I don't think they're particularly well run, but that's a different discussion. Managers stomp into the pit to roll the contracts and are arbed by the pit every month in basically the way I described in the email I sent to Don Boudreaux and which he posted on the CH wall on FB since it wouldn't post into the blog( I wasn't sure what you were talking about when I read your first comment there, btw. I wasn’t sure you were talking about the ETFs as I was thrown off by your talk of forwards).
However, once the contracts are rolled, the managers evaporate and the arbitrage opportunities are gone. There is no lasting effect. Contango is actually quite nuanced and we could spend all day talking about it, and it’s very interesting (to me alone maybe) but the main take-away is that it doesn’t represent a sustained arbitrage opportunity for shorts.
My personal guess is that more than buying oil to hedge against inflation, people realize that as consumers of oil they are by definition short oil. So, they try to hedge their personal commodity exposure by buying oil ETFs. I don't know for sure, but then I don't think it's correct to say one knows for sure that all those people are hedging against inflation either. And that effect would be spread among all storable commodities anyway, I would expect.
Karl,
Those CH comments wouldn't post. It's a facebook issue, I'm told. Frustrating.
Here's a link to the contract specs for the light sweet contract so you can examine it for yourself:
http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
What you're interested in is "settlement" on the left hand side (unless you're dying to know all the trading rules).
Futures and forwards are both binding contracts. Both specify every detail of quantity, quality of the commodity, price and delivery. The difference is that futures are standardized contracts that lend themselves well to trading on exchanges where they benefit from the clearing process (eliminating counterparty risk). Forwards are OTC negotiated contracts and the lack of standardization makes them unsuitable for trading in a secondary market and counterparty risk is retained. Some ETFs allow themselves the option of buying forwards in their OAs, but don't prefer them because of the liquidity issue. You’ll find that the ETFs have a strong preference for the light sweet contract for that reason.
While forwards contracts can write in whatever options they want, futures contracts usually don’t include optionality. The ETF managers arrive in the oil pit (80% of the futures USO holds , for example, are traded on the floor) and roll the contracts before settlement. Since the future is so liquid and the fund only holds about 12,000 contracts, they are never afraid of being forced to hold to settlement. So, I think you may be conflating monetizing a contract before settlement with an option to settle for cash.
You were bang on correct that the managers persistently overpay for contracts. They don’t care if they overpay for contracts and they don’t bother working the trade to get the best prices. It's one of the reasons the funds underperform and I don't think they're particularly well run, but that's a different discussion. Managers stomp into the pit to roll the contracts and are arbed by the pit every month in basically the way I described in the email I sent to Don Boudreaux and which he posted on the CH wall on FB since it wouldn't post into the blog( I wasn't sure what you were talking about when I read your first comment there, btw. I wasn’t sure you were talking about the ETFs as I was thrown off by your talk of forwards).
However, once the contracts are rolled, the managers evaporate and the arbitrage opportunities are gone. There is no lasting effect. Contango is actually quite nuanced and we could spend all day talking about it, and it’s very interesting (to me alone maybe) but the main take-away is that it doesn’t represent a sustained arbitrage opportunity for shorts.
My personal guess is that more than buying oil to hedge against inflation, people realize that as consumers of oil they are by definition short oil. So, they try to hedge their personal commodity exposure by buying oil ETFs. I don't know for sure, but then I don't think it's correct to say one knows for sure that all those people are hedging against inflation either. And that effect would be spread among all storable commodities anyway, I would expect.
Karl,
Those CH comments wouldn't post. It's a facebook issue, I'm told. Frustrating.
Here's a link to the contract specs for the light sweet contract so you can examine it for yourself:
http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
What you're interested in is "settlement" on the left hand side (unless you're dying to know all the trading rules).
Futures and forwards are both binding contracts. Both specify every detail of quantity, quality of the commodity, price and delivery. The difference is that futures are standardized contracts that lend themselves well to trading on exchanges where they benefit from the clearing process (eliminating counterparty risk). Forwards are OTC negotiated contracts and the lack of standardization makes them unsuitable for trading in a secondary market and counterparty risk is retained. Some ETFs allow themselves the option of buying forwards in their OAs, but don't prefer them because of the liquidity issue. You’ll find that the ETFs have a strong preference for the light sweet contract for that reason.
While forwards contracts can write in whatever options they want, futures contracts usually don’t include optionality. The ETF managers arrive in the oil pit (80% of the futures USO holds , for example, are traded on the floor) and roll the contracts before settlement. Since the future is so liquid and the fund only holds about 12,000 contracts, they are never afraid of being forced to hold to settlement. So, I think you may be conflating monetizing a contract before settlement with an option to settle for cash.
You were bang on correct that the managers persistently overpay for contracts. They don’t care if they overpay for contracts and they don’t bother working the trade to get the best prices. It's one of the reasons the funds underperform and I don't think they're particularly well run, but that's a different discussion. Managers stomp into the pit to roll the contracts and are arbed by the pit every month in basically the way I described in the email I sent to Don Boudreaux and which he posted on the CH wall on FB since it wouldn't post into the blog( I wasn't sure what you were talking about when I read your first comment there, btw. I wasn’t sure you were talking about the ETFs as I was thrown off by your talk of forwards).
However, once the contracts are rolled, the managers evaporate and the arbitrage opportunities are gone. There is no lasting effect. Contango is actually quite nuanced and we could spend all day talking about it, and it’s very interesting (to me alone maybe) but the main take-away is that it doesn’t represent a sustained arbitrage opportunity for shorts.
My personal guess is that more than buying oil to hedge against inflation, people realize that as consumers of oil they are by definition short oil. So, they try to hedge their personal commodity exposure by buying oil ETFs. I don't know for sure, but then I don't think it's correct to say one knows for sure that all those people are hedging against inflation either. And that effect would be spread among all storable commodities anyway, I would expect.
Karl, the comment won't stick here. Only half will now stick on CH. I posted it on your FB wall instead.
Is anyone else having trouble pasting text from MS Word into the comment boxes. It seems anything I type in sticks and anything I paste in doesn't. I wonder if it's a spam blocker issue.
Here's an interesting story from the Wall Street Pit: Speculators Now Driving Down Oil Futures Prices
By 'Mark J. Perry' Apr 23, 2012, 3:52 PM
From Bloomberg for those (and you know who you are) who think the federal government needs to lead for a solution to a NON problem: Scapegoating Oil Speculators Won’t Ease Pain at the Pump
By the Editors Apr 17, 2012 6:00 PM CT
No one, least of all President Barack Obama, should expect oil or gasoline prices to fall because of the five-point plan he unveiled at the White House yesterday...
Is that the five point plan where the POTUS puts a bullet through both hands, both feet and the forehead of every speculator he catches?
Ben,
the Fed study is not bought and paid for, as the Fed has piles of its own money.
Fed governors are as self interested as the AEI and has more reason to be biased. Fed actions directly affect prices and since Bernanke has been using focused actions, rather than the typical broad actions of the Fed, he is affecting some sectors more than others.
Simply put, the Fed is not some unbiased third party in all this. They have direct influence and are anxious to throw off blame directed at them.
I remain deeply skeptical about oil futures markets, and the role of large, hugely powerful players.
The Fed is the most powerful financial actor in the world. Why don't you have more skepticism for them?
"Is that the five point plan where the POTUS puts a bullet through both hands, both feet and the forehead of every speculator he catches?"...
Yeah methinks if the Kenyan Komie Klown can get his way...
Ben,
You are right; many studies are flawed.
This is not what I was saying at all. Even studies that don't have any flaws and have made perfect assumptions will be wrong 10% of the time because they use a p-value of 0.1 for statistical significance. Since all statistical studies are based on probabilities, many without knowing the population distribution, techniques have been developed to deal with this making modest assumptions (like only finite expectation and finite variance). Because statistical studies by their very nature are not deterministic and are based on probability assumptions, the wrong conclusion will be reached 10% of the time, even when the probability assumptions are perfect.
See this and this. I should point out that while these are fundemental to statistics, it is not easy. In fact it's very hard.
Ben,
For example, I have perfect knowledge of the probability distribution of a flipped coin (.5 for heads and .5 for tails). To verify this, I start flipping a coin and use a p-value of 1/16 (to make the calculations easy). I make the hypothesis that I will flip a coin 4 times in a row and conclude that it is biased towards heads if I get 4 heads in a row.
Well, 1 out of every 16 studies will conclude that I am not flipping a fair coin, even when I am.
Larry, let me suggest that YOU reread the post, or have someone read it to you and then explain what it means. Here's a key part.
"This survey reviews the evidence supporting this view. We identify six strands in the literature corresponding to different empirical methodologies and discuss to what extent each approach sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets.""
That may be to much for you to digest, but there is no opinion there, only a conclusion based on an exhaustive study of research by others, that there is no evidence that speculators can manipulate prices.
Sorry, no matter how much you want to believe it, it just ain't so.
How about providing something to support your view, other than just YOUR opinion?
You seem dissatisfied with the work of serious academics, and dismiss the views of others who, umlike you, actually know what they're talking about. Whatchu got that's better, bubby?
Starting at page 9 is the conclusion.
read it and get back to me.
this is a survey of literature and much of it basically involves "models" of the activity as opposed to real empirical, quantifiable evidence.
A "real" model CAN ...PREDICT - with some degree of accuracy.
I'd be much more interested in charts showing the price of oil verses - other factors that affect supply and demand.
that would impress me much more than some academic blather about models besides are you not one of those who seriously doubts so-called scientific "models" anyhow?
:-)
"how can you talk about good and bad data when you totally disbelieve verifiable facts because they mess up your deepy-held beliefs?"
What verifiable facts are those?
Methinks: "Is that the five point plan where the POTUS puts a bullet through both hands, both feet and the forehead of every speculator he catches?"
Is there a bounty offered for scalps? I could use a little extra cash, and anyone who buys oil futures is, by definition, a speculator. I could do quite well.
" What verifiable facts are those? "
got a specific ?
in general .. I'm not impressed with folks that insist that what's in a book or a theory - describes real world actions and if the real world varies that it must be a mistake.
:-)
thus.. supply/demand, "free markets", etc, et al.. are what really exists in the wild not what someone believes they should be instead.
good enough?
Ken,
I just wanted to say that's an excellent explanation. Well done.
Larry,
You have to read past page 9 to get to the graphs. Also, you may want to go to some of the cited research. Waddaya know, one of the papers cited is the one I brought to your attention on the previous thread. It's got graphs, tables, math - the whole shebang. There's plenty of stuff for you to not understand in David Jacks's paper.
Is there a bounty offered for scalps? I could use a little extra cash, and anyone who buys oil futures is, by definition, a speculator. I could do quite well.
Were you going for irony? "Scalping" is a trading strategy :)
Yup... I saw he graphs.. they seemed to be not really relevant to the written conclusions..of which were very heavily caveat ed...almost defensive.
I think ANY study should START with saying they want to FIND OUT - not prove or disprove something.
"I'd be much more interested in charts showing the price of oil verses - other factors that affect supply and demand."
Like what?
You still have trouble with that supply/demand/price thingy, I see.
You can change any of them, while holding another one constant, and the third one will change to reflect your action. Works every time.
Me: "What verifiable facts are those?"
You: "got a specific ?"
That's MY question, Larry, you mentioned verifiable facts. What specifically do you have in mind?
Methinks,
"Were you going for irony? "Scalping" is a trading strategy :)"
No, to be honest, I wasn't. But I wish I had been. :)
get the specific context guy and I'll comment.
in general.. I find slavish adherence to theories that don't "agree" with realities to be particularly troublesome.
I don't have trouble with the supply/demand "thingy" if the reality of it is recognized/embraced and obvious conflict between it and the theory sought out for answers.
It's when someone swears that supply/demand represents something and it's obvious that it does not that I find their logic wanting.
and of course trying to undermine the person who actually challenges and questions those who seem to have slavish devotion to theory over reality.. further undermines their credibility.
The problem with communism is that it believes in keeping supply and demand constant while mandating lower prices.
Methinks: "There's plenty of stuff for you to not understand in David Jacks's paper."
Larry: "Yup... I saw he graphs.. they seemed to be not really relevant to the written conclusions..of which were very heavily caveat ed...almost defensive."
Boy, can you call them, or what?
"in general.. I find slavish adherence to theories that don't "agree" with realities to be particularly troublesome."
Boy, I couldn't agree more. Global warming comes to mind right away.
If you consider supply and demand to be only theory, and know of reality that departs from that law, please point it out. No one else in the world is aware if.
this chart is as relevant or more so than the charts in the so-called "study".
http://gasbuddy.com/Retail_Price_Chart.aspx
there was one chart in there graphing trades vs price which would have been relevant had they defined what trades where...and when....
the graphs were associated with "models".
as soon as I see the association, I expect to see some validation.
Otherwise, you may be looking at academic hand-waving.
yeah I don't understand this..RonH can tell us all about this if we get into climate science, eh?
I find Larry fascinating. It's almost like banging your head against a brick wall, but the wall talks back. And it speaks gibberish - not quite as fluently as Bunny, but fluently enough.
Lar, you said the same thing about David Jacks's paper without even looking at it. In fact, Jacks does just that - test the theory by looking at what actually happens in practice. Yet, you moronically drone on about theory this and theory that and where's the math and how about the empirical data and where did I put my brain and what's for dinner. Thread after thread after thread.
What do you want Larry? I'll tell you whatever it'll take to plug this river of crap.
what I tell you?
:-)
" If you consider supply and demand to be only theory, and know of reality that departs from that law, please point it out. No one else in the world is aware if."
it's not the only by a long shot and I fundamentally believe in the basic tenets of supply/demand but I also know that pure supply/demand is not usually in the "wild" except in 3rd world type places.
I point out that if the govt can manipulate supply/demand with things like commodities policy that it would be dumb to think that ONLY the govt can (or would) do that.
speculation happens.
look at that gas price chart and explain the difference between oil and gas prices in 2008.
I'm not saying it was. I'm saying the chart proves there is not a perfect relationship between supply/demand but even that chart lacks specificity because we cannot see how the aggregate demand is structured and that is important (in my mind).
Methinks gets down in the weeds over trading as if complexity negates the basic idea that markets can or can't be manipulated.
bottom line - markets CAN be manipulated AND HAVE - by BOTH govt and private sector.
tell me your electricity provider is working on a pure supply/demand basis and the price "floats" accordingly.
it don't. It's one of hundred of examples of "manipulation" of a "market" and we KNOW that private companies like Enron got into that game also.
" What do you want Larry? I'll tell you whatever it'll take to plug this river of crap"
Methinks.. move your cursor down.
got it or do you need a theory?
re: the study
in the graphs:
" Source: Computations of the authors based on data in the IEA Oil Market Report, March 15, 2011."
uh huh... If you want to make a claim, you have to disclose how you get there and while saying you did calculations is better than not... NOT showing a direct link to your sources and explaining what you did and why is a warning sign.
34 pages of literature review with every other sentence in the conclusion a caveat does not convince me.
If it convinces you, I'd say they were just parroting something they and you believed from the start.
A valid study seeks to actually find out - not prove or disprove one side or the other of an issue.
and it is scrupulous in methodology and seeks to have others, particularly those who might disagree - review and agree with the conclusions.
Larry: WTF are you talking about? Stringing random words together do not a sentence make.
Abir - kindly move your cursor down dude. Imitating these cretins does not become you nor them.
:-)
Larry: You need to see a psychiatrist. You have become incoherent from merely nonsensical.
Abir - move you cursor down the page dude.
it'll make you feel better ...and me too.
:-)
Larry: Just curious, is English your second language?
I'll tell you if you also answer Abir.
deal?
Larry: No it's my first.
mine too Abir..
Abir, English is clearly not the issue. It's logic and reason that Larry doesn't speak.
Methinks: I was hoping he just could not explain clearly because of a language problem. I guess he just has commititis in his brain.
see Abir..you're all wet guy.
get on the right track here.
Alright, so I shouldn't have given you the benefit of doubt. You clearly suffer from commutitis.
Abir - could you define it please?
thanks.
Someone who doesn't understand how supply and demand set prices.
thank you.. I never knew. geeze.
"it's not the only by a long shot and I fundamentally believe in the basic tenets of supply/demand but I also know that pure supply/demand is not usually in the "wild" except in 3rd world type places."
No, Larry, that's not good enough. What you "know" isn't enough. You must cite examples of supply/demand/price not being connect by immutable law. As I said, if you change one, you affect the other two.
If you change supply while demand remains steady, price changes inversely.
If you change demand while supply remains steady, price changes in the same direction.
If you are government, and mandate price changes, supply will follow the direction of that change, or demand may change inversely.
You can figure out the other combinations yourself.
Please provide real world examples of this relationship not working as described. Your entire argument that theory doesn't always reflect reality depends on your next response, so think carefully before you hit that enter key.
Methinks,
"I find Larry fascinating. It's almost like banging your head against a brick wall, but the wall talks back. And it speaks gibberish - not quite as fluently as Bunny, but fluently enough."
You really have a way with words. Where's that book?
"so think carefully before you hit that enter key."
That would change him into a capitalist.
" If you are government, and mandate price changes, supply will follow the direction of that change, or demand may change inversely."
Can you explain how that works for sugar and other products that the govt has established restrictions on?
how about for electricity?
how about for ag commodities that the govt manages - like tobacco or wheat allotments?
ag products whose price is not established by commodity trading like dairy?
I do not pretend to understand it all but it seems clear to me that supply and demand is not a pure function in a lot of cases.
you say..that it WILL through other circuitous means achieve parity anyhow.
I'm not smart enough to understand how so you'll have to help out here.
it appears to me that the govt commodities program for one evades supply/demand consequences.
what the govt does - has a direct and intended effect on commodity prices.
"That would change him into a
capitalist."
Not much chance of that. I just like to say "think carefully", but I know he won't.
Larry cannot be labelled. He is neither a capitalist, socialist, liberal, conservative, keynesian, austrian, monetist...nothing fits. Larry just...IS.
Statist comes close, but I think that results from his awareness that he needs someone to take care of him, rather than any real coherent ideology he might have.
basically I eschew ideology of any color unless it accepts the real world as it is.
in terms of care.. some folks can guide a boat through life threatening rapids - many times over many years and still be around.
some folks can drive for 30-40 years and never have an auto accident
some folks can survive in wilderness environments for weeks.
so you'd not characterize such folks as "needing care" or not able to think clearly.
but what you'd also find is that theory and ideology does absolutely nothing for you in the middle of a class 4 rapid... that ends in a waterfall. At the end of the day.. it's up to you - and the reality - not your beliefs.
OK I give up.
Larry,
Are you really claiming that supply and demand is an ideology? Because it's been proven using experimental economics. Vernon Smith devised experiments to test the hypothesis of supply and demand with the intent of disproving it. To his shock, what he discovered is that prices are predicted by what would be expected using supply and demand curves. In other words, due to Vernon Smith, supply and demand curves moved from a hypothesis to a theory, meaning that all available scientific data supports the theory. Additionally, it can be falsified, which no one has yet to do.
You ask for an explanation of all sorts of things from sugar to electricity, to dairy. You say that "what the govt does - has a direct and intended effect on commodity prices" as if anyone at all is disputing that. The government tinkering with price floors and ceilings directly affects demand and supply. With price floors, you get an over supply because at higher prices producers produce more than people are willing to buy (sugar, the excess sugar is bought by the government and sold on the global markets at ghastly losses). With price ceilings you get shortages because producers produce less than what people want to buy (the gas shortages in the 1970's were a direct result of price ceilings. When Reagan got into power, he ended these price ceilings. Prices spiked for a brief time, but the shortage ended overnight).
The consequences of supply and demand are relatively easy to understand, as are the government tinkering with price controls and quota systems. I'm not sure why you think the government could " evades supply/demand consequences", since the consequences of supply and demand as it relates to government policies are pretty straight forward to see.
" Are you really claiming that supply and demand is an ideology"
it's a theory - that I do subscribe to but it does not describe real world conditions in every case and it can and is used wrongly to describe things.
for instance, it is "explained" that because of supply and demand more drilling in the US will lower gas prices - i.e. more supply - lower prices.
but the folks who make this claim are treating the US as a closed market with regard to supply/demand when, in fact, the market is the world market and reduced demand for gas in the US does not have the same supply/demand effect as increased demand in the world.
some folks make this argument knowing full well that it's incorrect, others believe it because they don't really appreciate the real world factors involving drilling for oil domestically and exporting it internationally.
The questions about ag commodities and electricity were proffered because it was claimed that supply/demand ALWAYS works and ultimately if it is restricted, it will essentially find a way around the restrictions.
So I asked about electricity ag commodity prices to get an explanation of how supply/demand finds it's way around these real world impacts to supply/demand.
I find that this kind of thinking is almost a theme at times in CD when, for instance, the argument is made that something like the Keystone Pipeline will INCREASE supply and thus lower prices.
the dynamics and interactions between domestic and international supply/demand is virtually never offered as further explanation because if was - the premise that Keystone will lower prices would be directly rebutted.
but then that would violate the whole ideological supply/demand concept - premise that is being claimed.
I think when you stuff like that - instead of increasing economic literacy - you are promoting and fostering economic illiteracy by wrongly using pure supply/demand arguments that are ideological rather than real - and practical.
this is not just me despite the hits I take here in CD.
Will the Keystone XL pipeline lower gasoline prices?
did this make any sense to you?
re: " The consequences of supply and demand are relatively easy to understand, as are the government tinkering with price controls and quota systems. I'm not sure why you think the government could " evades supply/demand consequences", since the consequences of supply and demand as it relates to government policies are pretty straight forward to see."
maybe to you and others but not to me.
explain the consequences of govt control of electricity and ag commodities.
to the average person - they believe that electricity prices are kept lower than if the govt regulated.
explain what happens when the govt does not regulate electricity. Give some real world examples.
Ditto ag commodities.
It appears to many that we do not have ag shortages and that in times of surplus then subsequent shortage (due to weather/crop failures/bumpers) - the govt policies actually mitigate the impacts.
The govt seems to be successful on these things without obvious adverse impacts - show me otherwise
And my thesis asks that if the govt can manipulate a market acceptably to meet their goals - so can probably can speculators using similar techniques in the market place.
For my earnest efforts here to seek answers and yes assert my views - the dog packs of CD can't resist a good old fashioned chew-em-up brawl.
I am routinely (along with other favorite victims) depicted as ignorant, stupid, benefit of logic and reasoning and a Obama-loving "statist' to boot!
:-)
oops:
" to the average person - they believe that electricity prices are kept lower BECAUSE the govt DOES regulate".
And my thesis asks that if the govt can manipulate a market acceptably to meet their goals - so can probably can speculators using similar techniques in the market place.
That's because you don't understand how markets (or, really, anything) works.
Unlike government, speculators can't tax, print money or change the rules of the game. Government manipulates markets using all of those techniques.
Government doesn't care about the losing money. Those of us who daily commit our own capital to these endeavors do not enjoy such luxury. We'd get knocked out of the market quickly if we lost.
So, yes, Larry, if you're willing to lose gobs of money in an effort to temporarily push prices around for shits and giggles, then I suppose you could do that. You'll be bankrupt, of course, so you can imagine how popular that strategy is among traders.
And this isn't "theory", Larry. You may not have guessed already but I am a trader and I commit mine and my investors' capital in the market every single day. Unlike you, I can't afford the luxury of confirmation bias.
" That's because you don't understand how markets (or, really, anything) works."
" You may not have guessed already but I am a trader and I commit mine and my investors' capital in the market every single day. Unlike you, I can't afford the luxury of confirmation bias."
Methinks - you are yet another arrogant blowbag who thinks they know more than they really do,
the private sector CAN - Manipulate the market even if they cannot print money.
the term "corner the market" does apply ....
Standard Oil and the Railroads both were very good at that.
the folks who sell diamonds and precious metals seems to believe it.
less hot air and and little more thought from you would be nice at times.
so go do your trades now...and give me a break from you bloviating.
I see you know as little about diamonds and metals as you do about anything else, Lar.
So, let me ask you a question: If you are so incredibly knowledgeable about markets and how to manipulate them and there are such riches to be had, why aren't you doing it?
@methinks - you are worse than an insufferable bag of hot stink!
I NEVER claimed to be particularly knowledgeable about most of these issues.
I have more than once admitted I am largely ignorant on many aspects (but I do point out we ALL share the ignorance - just on different topics and the air bags have particular trouble admitting that they are ignorant about ANYTHING)....
but I digress...
what I've said and continue to say is that I am a skeptic on quite a bit of the ideas here that supply and demand and market forces ALWAys perfectly describe what ought to be when there are plenty of counter-examples that call that into question.
So I ask questions and I'm blunt at times and I do not abide insults and personal attacks but at the core I'm after knowledge and others considered viewpoints.
A "considered viewpoint" is not some strident yahoo spouting dogmatic ideology .....
Be polite. Be patient. Be tolerant.
swinging one's virtual male member to and fro is boring... stuff...even for women Methinks.
:-)
I NEVER claimed to be particularly knowledgeable about most of these issues.
Yet, you feel compelled to critique academic papers you have neither read nor understood.
You feel compelled to make patently false statements about things you have zero understanding of - namely markets and "cornering" and the nature of speculation in general.
You feel compelled to take issue with laws of economics that are no less real and fundamental as the law of gravity.
Yet you fail to realize this makes you a clown, not a skeptic. Sadly, the rats living in my palm trees have a much better understanding of markets than you do. You're such a disappointment, Larry.
Yet, you feel compelled to critique academic papers you have neither read nor understood.
I've read quite a few academic papers my dear and I know the difference between a principled approach and a biased approach and 34 pages of literature review does not a good academic paper make.
"You feel compelled to make patently false statements about things you have zero understanding of - namely markets and "cornering" and the nature of speculation in general."
maybe in your view but you never seem to be able to do much other than pronounce them unfit for your or your partners-in-mischief here in CD crime.
I gave you PLENTY of opportunities to actually respond to queries like the electricity question and your response is to gin up the hot air machine. So much for YOUR understanding.
"You feel compelled to take issue with laws of economics that are no less real and fundamental as the law of gravity."
I take issue with zealots and "true believers" who refuse to deal with realities that contradict their precious theoretical beliefs.
"Yet you fail to realize this makes you a clown, not a skeptic. Sadly, the rats living in my palm trees have a much better understanding of markets than you do. You're such a disappointment, Larry."
disappointing a pontificating bag of hot air?
:-)
no.. the honor is all mine Methinks.
no go run off and play...
I can trade insults as long as you wish Methinks.
keep going.
you know a "smart" person just moves the cursor and goes on with their day.
so why are you not so smart, Methinks?
some secure in their own knowledge does not need to call others clowns now do they?
so we kinda know who you really are.. and how you deal with others in general.... when you don't like them.
seen your type.. before..you know. you see them talking berating street bums and lecturing others on bad habits.
is this personal enough for you or should I work on my technique ?
Larry, I don't consider my time reading your increasingly bellicose drivel a waste of time, actually.
It allows me to probe just how impenetrable the stupidity is of people who demand their representatives pressure regulators to write market destroying regulation.
That in, turn, allows me to more accurately assign a probability to changes in regulation and I can better plan my business.
My FINOP is convinced that if we just inform the public better, then we can avoid stupid regulation. His hypothesis is that it's all about education. But, as you and Bunny have proven, those in the public who are most certain and most likely to support counter-productive regulation are also the dumbest and least educable.
That's valuable information for me.
@methinks.. ha ha ha
Obviously your role in "education" consists of insults and hot air.
eh?
people who truly know their stuff AND want to help others who don't - don't act the way you do.
bellicose? by outing you as an arrogant bag of hot air?
so be it then!
explain the electricity or ag commodity issue to me to prove you actually mean what you say.
here's your chance to prove you are not an arrogant bag of hot air.
is it really beneath you to do this?
pretend you're actually sharing your view rather than lecturing others on their ignorance if you can.
Larry,
It is simple human nature. In a free market, people will make buy/sell decisions based on the price signals they get from the marketplace. The higher the price the less they will buy and/or the more they will sell. Hence the supply/demand/price law. How else does it work in the real world?
The examples you are citing are not free markets. The government is changing the rules, unleveling the playing field and interfering with the price signals that people are getting. This does not change the fact that people still react to price in their buy/sell decisions. All it does is change one or all of the variables of demand/supply/price because the government has intervened.
My question to you is, who should set the demand/supply/price levels? we as individuals who are free to make our own decisions and decide what is best for each of us in a free market place or the government who desires to make those decisions for us?
" How else does it work in the real world?
The examples you are citing are not free markets"
true. and that's what I point out. that we do not have a pure, free-market system for many things.
and the folks that say that this is bad - at least in CD seem loath to "explain" the repercussions of the govt "interference" ( of which I DO AGREE that the govt DOES "interfere").
What I point out is that the govt "interferes" with the free market on electricity and I ask the folks who say this is bad and that the "free market" will find a way around it and the displacements themselves will be bad.
so I ask from the folks who say they are convinced of this - to show how this actually works.
and when I do.. I get insults about my ignorance but almost never a principled attempt to really explain it.
In other words, the "education" here in CD consists mostly of insults and Ad HOminems from many of the regulars who seem loath to really deal with substantive discussion on the merits - just insistence that it has to work accord to theory or it's bad,
Clearly the majority of governments in the world do not subscribe that - in all cases of products and services.
they do discriminate.
so what do the pro-free-market folks do here in CD? Well, of course they question the legitimacy of govt and attack the leaders - no matter who they are except for their mythical heroes.
All I'm trying to do is get different views and validate those views with some realities.
I do not buy something just because someone 'trades' commodities and insists on a theoretical viewpoint.
I like to see them actually apply that knowledge in real world scenarios - like a govt controlled electricity market or the govt ag commodities program or for that matter domestic drilling of oil vs the price of oil.
questions along these lines seem to cause not a reasoned discussion but a rain of demeaning insults which I take umbrage to.
does this make any sense to you?
Larry G said...
" How else does it work in the real world?
The examples you are citing are not free markets"
true.
So you do agree with the supply/demand/price law because it is too basic to dispute, great.
But you didn't answer my other question, who should set the supply/demand/price levels?
" So you do agree with the supply/demand/price law because it is too basic to dispute, great.
But you didn't answer my other question, who should set the supply/demand/price levels? "
in all cases - ONLY the free market?
is that the answer you are looking for?
how realistic is that answer given how many countries do not subscribe to it?
Do you really want electricity that varies in price by hundreds of dollars between bills?
do not want nutrition labels on food?
do you care how much mercury or other poisons / contaminates are in your food?
see there is the theoretical world of undisturbed and unfettered free markets and then there is the real world.
do you insist that the real world is wrong unless and until everything goes back to a totally free market without any govt "interference"?
these are (I think) very legitimate issues in any discussion of supply/demand ..how it is and what it ought to be.
I believe fundamentally in the basis of free markets and that the best economy is one that works according to supply/demand.
but I also know what is real and what is not.
I have no clue what the downsides is of govt-controlled electricity but the folks are are opposed to it seem quite convinced that it is bad, bad, bad.
and what I do is ask for some explanation of their beliefs and what I get is what you see here in CD which says much more about those who engage in it that my own questions.
Can you imagine how many folks would willingly attend a class in economics if the instructor routinely berated and ridiculed questions and insulted those who ask them?
so some of the regulars here fancy themselves as "learned" .. but I have to tell you that I'm not impressed at all.
those who take the time to insult and launch Ad Hominems are not "learned" in any way, shape or form IMHO of course.
Larry,
I have not attacked you personally, nor would I. That would be stupid since for all I know, Methinks and you could be the same person and your split personalities are on here battling it out.
But you did say, "I believe fundamentally in the basis of free markets and that the best economy is one that works according to supply/demand."
Great so we have established that you believe in free markets and in supply/demand. So do most of the posters here.
My next question is, who should decide what markets are to be free?
@givemefreedom
you have not and it IS refreshing!
"who should decide"
well.. gfree, you basically have two choices - right?
Kings or the folks who participate in the free market and vote.
do you see others ?
if people want the govt to restrict mercury in tuna is that the govt deciding a free market issue?
HEY - and THANKS for a substantive APPROACH to THE Question. Kudos.
"Kings or the folks who participate in the free market and vote."
Okay Larry, now we are getting somewhere. I take that to mean that you say there are 2 choices to who decides which markets are free, a dictatorship or a democratic approach.
I'll assume you prefer a democatric approach. Then my next question is, do you think that the decisions the government makes as to which markets are to be free are truly democratic in that they reflect what we the people believe would be best for all of us?
" I'll assume you prefer a democatric approach. Then my next question is, do you think that the decisions the government makes as to which markets are to be free are truly democratic in that they reflect what we the people believe would be best for all of us? "
the plot thickens... :-)
short answer = no.
long answer - not so easy.
If you ask the same person about regulations that increase the cost of tuna they'll ask "where is the ballot box" but if you ask them if they need nutrition labels on food.. you start to separate out the herd a bit.
agree?
do you believe in the right of the populace to initiate referenda (questions) or do you think that is "dangerous"?
If California citizens voted for disclosure of mercury in tuna but the Feds nixed it - do you view that as the Feds defending the free market or is it govt overreach?
of course if you don't believe in the right of the populace to be "who decides" then the question is superfluous anyhow, eh?
silly question: if the populace kills the local butcher for selling bad meat that killed is that a violation of his property rights? If that strikes fear in the heart of other butchers.. is that wrong?
:-)
govt solves these issues - right?
Okay Larry, you and I have basically the same beliefs. We believe in free markets and in supply/demand/price laws. We beleive that an economy works best when the above are allowed to operate unhindered. We believe that the government doesn't always act in the best interests of the majority of people. Most of the people here believe the same thing.
My next question is, if the above is true, then why do governments invariably move away from free markets and try to subvert the supply/demand/price laws?
Shouldn't we as rational people, want more free markets? Should we want supply/demand/price to be as unhindered as possible?
I'm not talented enough to feign stupidity this impenetrable. And my love of emoticons and two word sentences doesn't run that deep either.
My money's on Larry rinsing and repeating the same tired drivel on the next thread despite Givemefreedom's best efforts.
" My next question is, if the above is true, then why do governments invariably move away from free markets and try to subvert the supply/demand/price laws?"
there are a lot of reasons ...when you have an elected govt.
many of them are not good.
many are enacted to benefit special groups of people - to the detriment of other groups.
If this was a US-only problem, I might be convinced that we have a bad govt but this seems to be the way that all govts go.
the most "free market" govts tend to be 3rd world or developing which does not mean they are "enlightened" ..it just means they are younger/earlier in the govt continuum.
Other regulation comes because people's property rights are harmed.
One guy profits - at the direct expense of another and the "outrage" gets a regulation.
@Methinks.. you are a lovely person. Now hush up.
"the most "free market" govts tend to be 3rd world or developing which does not mean they are "enlightened" ..it just means they are younger/earlier in the govt continuum."
Again Larry, you and have many of the same beliefs. There are alot of reasons for government actions that don't benefit the majority.
Where we differ greatly is the belief of what we as a people can do about it. The "gov't continuum" does not mean that as a government matures, we need to give up individual freedoms. Our founding fathers based our country on protecting our individual freedoms from an overvealous gov't.
Why can't the "gov't continuum" be toward more freedom? If an equilibrium exists between individual freedoms and the need to restrict those freedoms for benefit of the majority, why can't that equilibrium be found by moving toward more free markets?
I, for one, don't believe the equilibrium exists in the other direction......give me freedom.
Good luck with this hot mess, Givemefreedom.
Larry,
it's a theory
Do you even know what this means? Electricity is a theory. Gravity is a theory. Layman use the word "theory" when they mean "hypothesis". These have two different meanings. "Hypothesis" means a conjecture made to explain some phenomena, but has not been sufficiently tested to see if it's true. A "theory" is no longer a hypothesis; it has been confirmed emperically with falsafiability tests not falsifying it.
This is why there are things called the Riemann Hypothesis, rather than the Riemann Theory. Many believe it to be true, but haven't proven it.
that I do subscribe to but it does not describe real world conditions in every case and it can and is used wrongly to describe things.
This is incorrect. Supply and demand explains very well the effects of supply and demand on prices and the effect of prices on supply and demand.
the folks who make this claim are treating the US as a closed market
How? Supply and demand are global. But most importantly supply and demand curves are multidimensional, with time and space, so different locations at different times will have different supply and demand curves.
the market is the world market and reduced demand for gas in the US does not have the same supply/demand effect as increased demand in the world.
No one is saying that US demand and supply is the end of the story. But US supply and demand contribute to the story. Yes, US production of oil contributes to the supply, particularly to where it's produced. Shipping costs money.
The questions about ag commodities and electricity were proffered because it was claimed that supply/demand ALWAYS works and ultimately if it is restricted, it will essentially find a way around the restrictions.
Over time that's true. Prices are ALWAYS elastic over time, as people find ways to get around restrictions imposed by governments. But this "getting around" doesn't mean that things are as efficient as they could be. "Getting around" something takes effort, which is lost productivity when what's to be gotten around is artificial impositions of government dictates.
the dynamics and interactions between domestic and international supply/demand is virtually never offered as further explanation because if was - the premise that Keystone will lower prices would be directly rebutted.
This is patently false. The interaction between domestic and internationsl supply and demand is almost always offered as further explanation because it directly supports the theory of supply and demand.
Larry,
Will the Keystone XL pipeline lower gasoline prices?
It actually changes the supply curve, which will ultimately change the demand curve. Which further directly supports the theory of supply and demand.
maybe to you and others but not to me.
Crack a book, then. The book I used is Economic Principles. It's got a clear explanation of all the basic terms of economics.
explain the consequences of govt control of electricity and ag commodities.
I did. Did you not read fully my comment above? Or did you just not understand?
to the average person - they believe that electricity prices are kept lower than if the govt regulated.
Where did you get this information about the "average person". Additionally, price controls can easily keep prices low. This doesn't violate the laws of supply and demand. But what you WILL get if prices are kept artificially low through price controls is many people going without electricity who would otherwise buy electricity.
And my thesis asks that if the govt can manipulate a market acceptably to meet their goals
They can easily manipulate markets, but they usually do not meet their goals. The gas shortages in the 1970's were certainly not one of the government's goals, only lower prices.
I am routinely (along with other favorite victims) depicted as ignorant
Because you are if you think that the government routines achieves its goals through its market manipulations.
"Can you explain how that works for sugar and other products that the govt has established restrictions on?"
That's what I said. Read my previous comment.
If you are government and raise the price of sugar through a tariff, demand will be lower. In the case of soft dirnks, for example, high fructose corn syrup, a cheaper sweetener, is substituted for sugar.
"how about for electricity?
how about for ag commodities that the govt manages - like tobacco or wheat allotments?"
I have explained how supply and demand work, and worked one of your 6th grade test questions for you. You can do the same with the rest. It's good for you to practice thinking, rather than relying on others to do it for you.
All of your "how abouts" can be explained as I explained the sugar question, by applying the supply/demand/price rules. Try it for yourself.
Supply or demand or price will always change based on a change in one of the other two, whether due to market forces, or government interference in the market.
You have provided no examples of the laws of supply and demand not working, and have cited nothing. Is it time to admit you were wrong?
"so you'd not characterize such folks as "needing care" or not able to think clearly."
Yes, I'd characterize anyone guiding a boat through a class 4 rapids that ends in a waterfall as not thinking clearly.
By the way, Larry, the following two sentences make opposite claims.
1. "it appears to me that the govt commodities program for one evades supply/demand consequences."
2. "what the govt does - has a direct and intended effect on commodity prices."
Which of your own statements do you believe to be true?
[reference to a Fact Checker article]
"Will the Keystone XL pipeline lower gasoline prices?
did this make any sense to you?"
The article you cite questions the veracity of statements made by a politician. It is always correct to be very skeptical of any and all political speech. In fact, ignoring everything politicians say isn't a bad idea.
As to the underlying pipeline issue, the question is whether lowering the transportation cost of oil could lower gasoline prices, and the answer is yes.
You frame your questions incorrectly, and make an incorrect claim about supply and demand with your nonesence about world vs domestic prices and other unrelated junk.
"I am routinely (along with other favorite victims) depicted as ignorant, stupid, benefit of logic and reasoning and a Obama-loving "statist' to boot!"
And for good reason.
"Methinks - you are yet another arrogant blowbag who thinks they know more than they really do..."
But you have no way of making that comparison. She certainly knows more than you do.
Your refusal to learn from those who do know more after asking questions and getting correct answers from them causes people to give up on you, and exhibit the snarkiness you find so puzzling.
"I've read quite a few academic papers my dear and I know the difference between a principled approach and a biased approach and 34 pages of literature review does not a good academic paper make."
Oh! Larry, your so impressive when you get into a manly huff like that. I got me a thrill up my leg.
"I take issue with zealots and "true believers" who refuse to deal with realities that contradict their precious theoretical beliefs."
You haven't presented any of those "realities", Larry, even tough you've been asked for them repeatedly.
Larry: "I NEVER claimed to be particularly knowledgeable about most of these issues."
Methinks: "Yet, you feel compelled to critique academic papers you have neither read nor understood."
Larry: "I've read quite a few academic papers my dear and I know the difference between a principled approach and a biased approach and 34 pages of literature review does not a good academic paper make."
Q.E.D.
Case closed.
Ken: "The consequences of supply and demand are relatively easy to understand, as are the government tinkering with price controls and quota systems."
Larry: "maybe to you and others but not to me."
Bingo!
And that's the problem in a nutshell.
But what's worse is your refusal to improve on that condition.
"so I ask from the folks who say they are convinced of this - to show how this actually works.
and when I do.. I get insults about my ignorance but almost never a principled attempt to really explain it."
But that only happens after folks have taken the time to carefully explain things to you, often in several different ways, and you still don't get it, or pretend not to get it, and continue to tell them tell them they are wrong.
You get what you ask for.
"but I also know what is real and what is not."
That's just not true, Larry.
^@Ron: LOL.
It's OK to be stupid like Larry and Ben. It is dangerous when such people don't realize it.
"Can you imagine how many folks would willingly attend a class in economics if the instructor routinely berated and ridiculed questions and insulted those who ask them?"
Is that the instructor who lost patience after repeated explanations to that one student who just never seemed to get it and repeatedly asked the same questions without ever any hint of improved understanding?
What happened here? Did Larry wander off again or was he filled up with knowledge, reason and logic and he's just assimilating it all to return a new man?
If I were a betting woman....wait, I am a betting woman. I bet it's the former and I know that nobody here is crazy enough to take the other side of that bet.
And, excuse me...since when is a blog comment section a classroom where those of us who are neither insane nor completely ignorant of elementary principles of economics burdened with the obligation of patiently spoon feeding google-able facts to resistant ignoramuses who reject them like a toddler force-fed mashed broccoli?
wow.go away for a couple hours and all hell breaks loose!
" Why can't the "gov't continuum" be toward more freedom? If an equilibrium exists between individual freedoms and the need to restrict those freedoms for benefit of the majority, why can't that equilibrium be found by moving toward more free markets?
I, for one, don't believe the equilibrium exists in the other direction......give me freedom. "
I have the same question and believe it or not the same frustration as many.
If you believe in representative govt over dictatorship - then you're pulled along by the majority.
I think we've gone to the 10,000 level here, eh?
" The questions about ag commodities and electricity were proffered because it was claimed that supply/demand ALWAYS works and ultimately if it is restricted, it will essentially find a way around the restrictions.
Over time that's true. Prices are ALWAYS elastic over time, as people find ways to get around restrictions imposed by governments. But this "getting around" doesn't mean that things are as efficient as they could be. "Getting around" something takes effort, which is lost productivity when what's to be gotten around is artificial impositions of government dictates."
with electricity.. all I am asking is for the folks who say that govt control of the price is wrong/bad runs counter to supply/demand - tell me how this manifests itself in our current system.
Larry: That's why the US is a republic, governed by the constitution that guarantees rights to individuals, the smallest minority.
I'm skipped the many comments.. if you have a really important point to make.. repeat it.
otherwise - thank you!
Methinks - CD is a classroom of sorts. There is a mixture of background and experience including some of you guys who actually deal with economic issues in your job.
but see.. you don't have to be rude, insulting, asinine to talk to others "beneath" you... that's not a requirement you know.
It's not just me. I've watched how you and some of your cohorts deal with others and it's a game to see just how insulting and mean-spirited you can be... it's a contest and extra points are award for really good Ad Hominems.
it does not impress me sweetie.
it just lets me know who you really are ... and how your co-workers probably view you.
you'll get better as you get a little age on you...and start to understand that you are just as ignorant - just on different subjects.
So challenge yourself.
go to blogs where you don't know shit from shinola and no.. don't tell me you're not ignorant.
I KNOW you are.. we all are.
if you got a butt and I know you do.. you're ignorant.
you just don't know it yet.
Larry,
all I am asking is for the folks who say that govt control of the price is wrong/bad runs counter to supply/demand
You are fundamentally confused about what supply and demand is. Regardless of government intervention, supply and demand exists. In a free market, prices are exactly where the supply and demand line intersect, which maximizes efficiency (meets the most demand at the best cost for producers).
For electricity, the government sets the price (the vertical axis), rather than the market to find the price. Also, the government sets quantity to be sold/bought (the horizontal axis), rather than letting the market find the quantity to be sold/bought.
The demand curve, D, will NEVER have a postive derivative (This means that as you move further to the right of the curve, the curve will get lower, or at least never get higher, so that as prices drop more electricity will be sold) and the supply curve, S, will NEVER have a negative derivative (as prices drop, less electricity will be produced). Note further that over time and varying by geographic locations, the demand and supply curves themselves will change, and usually change due to technological innovation.
Since the government sets the price at P, find P on the vertical axis and draw a horizontal line to see where it intersects D at DP = (xD,yD). The quantity xD is the amount of electricity consumers will buy at price P. Additionally, SP = (xS,yS) be the point at which the horizontal line going through P intersects S and xS is the amount of electricity producers will produce at price P. Note that it is unlikely that xD=xS (by construction yS=yD=P).
If xS > xD, there will be an oversupply, since producers produce more than consumers purchase (all around the country there are many places with enormous excess supply, so all that electricity and work is being wasted). If xS < xD, this means there will be a shortage because consumers consume more than producers supply (the most obvious examples are the rolling brown outs and black outs in southern CA).
You can do the same sort of analysis with quotas by finding Q on the horizontal axis and drawing a vertical line. Using this and the above you can see the dual mismatching the government creates causing ever more waste.
You can read all about it in Chapter 2.
Larry, what makes you an idiot is that when you don't know shit from shinola, you dig in, refuse to learn anything and challenge everyone trying to help you with a barrage of irrelevant questions in order to prove you're right about something you know nothing about. And you're a grown man, not a hormonal teenager. Now, what do you call that?
When normal people don't know shit from shinola, they don't do that. They don't dig in and defend their priors from their position of pure ignorance and people don't throw up their hands and just call them an idiot and move on.
You don't have to be a fool, you know. As a grown man, that's a choice you make. You could, for example, go read up on these subjects, educate yourself, grow. But you don't. In all the time I've read this blog, your tedious posts have been the same. Most of the time I don't read yours or Bunny's productions. They're just content and fact-free, illogical spew. But when I do, it's the same uninformed drivel. You are no more educated about anything now than you were two years ago.
This is not a classroom. You haven't paid anybody and nobody has come here with the understanding that they are meant to educate an ineducable adult man. You are identified as an idiot (whether they say it or not) because you behave like one. Instead of pouting, try learning something.
"
all I am asking is for the folks who say that govt control of the price is wrong/bad runs counter to supply/demand
You are fundamentally confused about what supply and demand is. Regardless of government intervention, supply and demand exists. "
I AGREE with that.
I am asking YOU to EXPLAIN the bad effects of the govt involving itself in the supply/demand of the electricity market.
SHOW ME the bad stuff that happens because of the govt.
I'm not asking that the theory be recited.
I'm asking you to tell me in practical terms why the govt's role in the electricity market is BAD - specifically in real impacts - not theoretical ones.
I'm asking a simple question here about the PRACTICAL impacts of what I essentially agree with you - is not a good govt policy.
I do not see huge bad impacts.
Do you?
If you do .. tell me what they are.
methinks - you have no excuse for your behaviors in CD.
you come across as an arrogant and mean-spirited shrew.
not unlike some of our opposite gender cohorts.
CD is led by a Professor. It's a place to discuss issues. Not everyone is an expert.
But you act like an arrogant dumbass who suffers no fools.
there are about 5 or 6 or you here.
you know who you are.
ya'll squash others from participating so many just lurk.
I can live with you.
Just keep to yourself and move on.
otherwise if you insist on tangling..so be it.
your choice.
Here, lar. From Strike at the Root. So much has been written about this since the Enron collapse, I'm just astounded you haven't found anything yet. Do you not know how to google things?:
First, the government grants a monopoly to a single energy provider for each geographic area, eliminating competition.
Second, there have been government price controls on energy since the beginning of the industry. Freely fluctuating prices are the single most important aspect of a market, because prices send vital information to both producers and consumers. Artificially controlled prices send false information, and this creates a harmful misallocation of resources.
Third, the government prevents an increase in the supply of electricity by blocking the construction of new generators. Nuclear power is a clean, cheap and viable method of electricity production, yet there has not been a new plant built in California in over 30 years. This shifts the burden onto natural gas, which is more expensive and more dangerous. We are left with no alternative but to import electricity to meet the ever-increasing demand.
Now, supposedly to remedy this situation, the California government under Pete Wilson imposed yet another intervention, calling it 'Deregulation.' It's hard to imagine a more misleading term. They allowed the wholesale price of energy to fluctuate, while continuing to fix the price at the retail level. Anyone with an understanding of economics could have (and did) predict the outcome: Massive shortages of electricity, and a taxpayer rip-off. Unable to increase supply, unable to lower demand by raising prices, the local utilities were stuck. This made them eligible for taxpayer bailouts, always more fun than earning a living on the market. Enron, being both a supplier of natural gas and an energy broker, and enjoying government monopoly contracts in these areas, was poised to exploit the situation.
The government then lifted the retail price control in one small area, San Diego and South Orange County . This meant that the power supply there was suddenly opened up to the desperate demand of the entire Western United States . Surprise! The price of electricity skyrocketed. That one little area had to absorb the price shock generated by an entire region. Blackouts and brownouts would follow, because if you don't allow the market to work, resources must be rationed by politicians, i.e., force. This was enough to frighten the people into losing what little common sense they might have had left in the matter.
So, here came the government again. With willing accomplices in the ignorant media, new California Governor Gray Davis was able to pin the blame on, of all things, the free market! (Redefining words is a very useful tool.) Next came the final dagger, with Davis and the legislature entering into long-term energy contracts at high prices, and borrowing huge amounts of money. The taxpayers are on the hook for all this, of course. This then led to the political demise of Davis , but the damage was done.
Mission accomplished. The California Government now has license to extract untold billions of dollars from its productive workers indefinitely. As if that weren't bad enough, voters replaced Davis with Arnold Schwarzenegger, who promptly passed a bond measure and refinanced the debt even further. Do not be misled into thinking that government was harmed by the whole fiasco. It has benefited greatly, despite the change of figureheads.
http://www.strike-the-root.com/4/baker/baker3.html
you come across as an arrogant and mean-spirited shrew.
Larry, you can stop trying. I don't care how I come across to you or what you think of me. Your pleas are falling on deaf ears.
Try to learn something. Look at what Ken wrote for you. At least makes some noises of appreciation for the help people offer you. You're an adult, for Pete's sake.
Larry: "explain the consequences of govt control of electricity and ag commodities."
givemefreedom: "I did. Did you not read fully my comment above? Or did you just not understand?"
Ah. It's starting to unravel. Patience is wearing thin.
Larry,
SHOW ME the bad stuff that happens because of the govt.
I'm not asking that the theory be recited.
I'm asking you to tell me in practical terms why the govt's role in the electricity market is BAD - specifically in real impacts - not theoretical ones.
Seriously? Are you just not reading my comments? Did you not read the parts about rolling brown and black outs in Southern CA? Your own house is likely a great example of oversupply. At any given time, you are probably supplied with close to 10000W, but are consuming far less than this. If you think this is wrong, start adding more and more appliances and find out how many you can add till you finally trip the main breaker.
Do you not think the rolling brown and black outs are bad?
To explain to you that the oversupply to your house is bad is as simple as thinking about opportunity costs. Think about the other productive things the electric companies could be doing instead of producing all this extra electricity that is a result of price floors. Do you understand what opportunity costs are?
And if you don't understand the theory, how the hell could you possibly understand the real world effects?
re: rolling blackouts.
I've not seen any in the East or much of the rest of the country that is also regulated.
Besides rolling blackouts - that are not occurring in most of the country, what else do you see as the bad effects of govt interference in the electricity markets?
I know the theory Ken. I don't dispute the theory.
I'm asking for real impacts that would cause people to demand that the govt let the market work and not interfere.
Can you make that case?
I cannot - that's why I'm asking.
capiche?
Larry,
Besides rolling blackouts - that are not occurring in most of the country, what else do you see as the bad effects of govt interference in the electricity markets?
All right, Larry, I can only conclude that you are deliberately ignoring the part about oversupply. How can you expect an honest debate, when you so clearly ignore such an important part of the negative aspect of government.
But I will ask again, do you understand what opportunity costs are? Do you really not understand that every hour electric company worker works at the electric company is an hour not doing anything else!? If there is plenty of electricity and a butt load to spare, then this is definitely the case that over supply is occuring.
By ignoring this, what you are doing is equivalent to putting a car up on blocks and stepping on the gas and saying all the gas being burned isn't being wasted.
Larry,
Can you make that case?
I am making the case. You are simply ignoring it, then acting dumb.
"All right, Larry, I can only conclude that you are deliberately ignoring the part about oversupply. How can you expect an honest debate, when you so clearly ignore such an important part of the negative aspect of government."
Ken, I'm NOT ignoring it. I'm asking you to specifically include any/all info you think is relevant to the discussion.
"But I will ask again, do you understand what opportunity costs are? Do you really not understand that every hour electric company worker works at the electric company is an hour not doing anything else!? If there is plenty of electricity and a butt load to spare, then this is definitely the case that over supply is occuring."
yeah.. I DO understand the concept of opportunity costs. I also like specific examples of it when identifying it as an issue in the subject - like electricity.
We are "over supplied" as a direct result of govt regulation?
okay. how does that cause harm?
"By ignoring this, what you are doing is equivalent to putting a car up on blocks and stepping on the gas and saying all the gas being burned isn't being wasted."
okay.. I take your word.
how does this affect people who need electricity?
see..what I am getting at is that you really can't change govt on these issues unless the public knows what is at stake and demands change.
at this point, I just don't see how the average Joe is being harmed - at least in his own eyes.
it could well be that the harm is more insidious and not apparent.
If the price goes up - we know that both residential and business considers it a disaster .... essentially lost dollars and lost productivity.
but I do not see a Prima facie for the govt getting out of electricity. In fact, I think there is a fear that if they did, the price would go up and/or become unstable.
Virginia looked into this a couple years back and a state-sponsored study indicated that rates would go up substantially if it was de-regulated so they bailed on the idea.
"Virginia looked into this a couple years back and a state-sponsored study indicated that rates would go up substantially if it was de-regulated so they bailed on the idea."
LOL
And what would you expect a state sponsored study to conclude about the need for state regulation?
Ken - here's a WaPo article on the subject:
http://www.washingtonpost.com/wp-dyn/content/article/2006/03/11/AR2006031101603.html
another:
http://www.usatoday.com/money/industries/energy/2007-08-09-power-prices_n.htm
and another:
http://www.pewstates.org/projects/stateline?siteNodeId=136&languageId=1&contentId=13635
so my question is always - why does the reality contradict the theory?
I'm truly trying to understand what appears to be the exact opposite of what the theory says.
and I'll admit, I am not smart or knowledgeable enough to untangle it so I ask folks who seem to know more ... in hopes of learning.
but it's a rough crowd here in CD.... it's like the bar scene in Star Wars.
eh?
Larry: Here is one example where govt interference caused shortages in California.. solved by, you guessed it, more govt interference. It is logical that any government interference only causes more harm than good, unless externalities (defined very narrowly) are involved.
http://business.baylor.edu/Tom_kelly/Californial%20Power.htm
thanks Abir...
here's another:
The Failure of Electricity Deregulation
Larry: Have you even read that paper? Its premise is not what you think it is. It actually supports the view that too much government is bad. Perhaps you should try again.
At some point, Ken, you have to ask yourself if he's merely acting dumb.
Abir, I know. I found it worthy of reading and sharing ....
Larry,
We are "over supplied" as a direct result of govt regulation?
okay. how does that cause harm?
This is right after you claimed you understood opportunity costs, right? If you claim to understand something, you should, you know, actually claim to understand something. Not demonstrate clearly that you in fact have no understanding of opportunity costs.
see..what I am getting
I'm beginning to. You don't understand what over supply entails and why it's bad. You see that shortages are bad, but don't understand how oversupply could be bad. Did you know that one of the leading causes of the current economic depression is because of the oversupply of housing? Because government intefered in the market so badly in the 90's and 00's, housing prices boomed, causing housing to be over supplied. People finally realized what was happening, now people are afraid to spend money because nearly a quarter of mortgages are underwater.
How does this relate to electricity? It's an example of supply and demand, which you insist is an ideology and not proven science. You say you understand opportunity cost, but refuse to understand that if electricity is oversupplied, this means that there are other products that are being undersupplied. The people oversupplying electricity are doing so because the government is keeping the price of electricity artificially high, so with all the money to be made generating electricity that isn't justified by demand (dumping gas into a car that is spinning it's wheels up on jacks), why do anything else? The price signal being (falsely) sent to them tells them they are doing the right thing. The reality is that they should be working in another field. One where supply is lower than it should be and there is more want because demand can't be met.
I'm sure you think this is just theory because I can't tell you which field the electric workers should be in. But that's the point. The government doesn't have any better information as to what field people should be working in, yet they intervene constantly despite massive amounts of emperical data demonstrating conclusively that they doing more damage than good. It's the difference betweent what is seen and what is unseen.
Larry,
I live in Maryland and can tell you conclusively electricity is not deregulated and this article is a clear demonstration of the poor quality of the press corp. In Maryland, the electrical markets remain some the most regulated in the state.
In Illinois the price spikes are yet more examples of supply and demand. I really don't understand how you can say that government holds prices artificially low, then allows markets to determine prices and the prices increase because prices were previously kept artificially low by government as proof that supply and demand doesn't match reality. Is it really so hard to understand that low supply keeps prices high?
Your third link looks simply to be a front page with links to various news stories. I'm not sure which one you are referring to.
You seem to think that rising prices debunks the idea of supply and demand, when in fact those rising prices can be explained clearly through the application of supply and demand. Additionally, if the "deregulation" that you keep talking about doesn't result in a free market, but still has an enormous government presence, you are lying to yourself when you say "why does the reality contradict the theory?"
Methinks,
At some point, Ken, you have to ask yourself if he's merely acting dumb.
I like to give people the benefit of the doubt. Economics isn't easy. And certainly not when our education system is filled with teachers who have no idea about economics. I remember one of my teachers in college, not just the fools in K-12 education, actually lecturing the class that it's better to have a job paying $15/hour plus health insurance benefits, rather than get paid $20/hour with no health insurance benefits.
She clearly had no idea that $5/hour equates to $10,000/year, nor did she seem to understand that there are good health insurance policies to be had for less than $2000/year. Nor did she understand anything about trade offs. To some it really might have been worth it to be paid $15/hour plus health insurance, rather than $20/hour with no health insurance. To claim that it is true for all people is simply absurd (not too mention arrogant).
So I may be talking to a brick wall when talking with Larry. But on the other hand, I think it's more likely he doesn't understand even the basics of economics (as is clear from his claims about opportunity costs).
Ken - you are totally full of it guy.
" How does this relate to electricity? It's an example of supply and demand, which you
insist is an ideology and not proven science.
You say you understand opportunity cost, but refuse to understand that if electricity is oversupplied, this means that there are other products that are being undersupplied."
I ALSO said that I BELIEVE in supply and demand guy - more than once but pointed out that the theory often does not perform as advertised.
I also understand opportunity costs such as oversupply but do you really think Joe Sixpack does?
but WHAT I asked YOU - HOW oversupply manifested itself into something that is perceived as harmful to Joe SixPack and you backtrack to the totally false idea that I "refuse" to "understand".
I'm not refusing to understand, I'm asking WHY we can't see obvious harm that would convince us to get the govt to stop doing that harm.
Most folks outside of Calif are actually GLAD that the govt controls electricity prices and are fearful that deregulation would lead to higher prices and volatility in prices - like we see with gasoline prices.
Larry,
more than once but pointed out that the theory often does not perform as advertised.
Not once did you do this.
I also understand opportunity costs such as oversupply but do you really think Joe Sixpack does?
What does this have to do with what we've been disucssing?
but WHAT I asked YOU - HOW oversupply manifested itself into something that is perceived as harmful to Joe SixPack and you backtrack to the totally false idea that I "refuse" to "understand".
I explained this to you and you do in fact refuse to understand.
WHY we can't see obvious harm that would convince us to get the govt to stop doing that harm.
I see you didn't both to read the this. Or did you not undertand it?
Most folks outside of Calif are actually GLAD that the govt controls electricity prices and are fearful that deregulation would lead to higher prices and volatility in prices - like we see with gasoline prices.
"Most"? Do you have proof of this? It could be true, but more likely this is just projection.
But, even if it is true, so what? How does this relate to what we've been talking about? The discussion we've been having is about the reality of supply and demand and how it explains much of the harm done by government. Now twice in one comment, you seem to be wanting to change the topic to the fact that many people don't understand economics or that it's difficult to convince people of the reality of economic principles, like supply and demand. No argument here. You are a good example of someone who doesn't understand.
Ken, as the daughter of people who spent their lives in the academy, I'm not surprised by economic illiterates there. Neither Larry nor Benji have been able to grasp basic concepts like supply and demand for years. Basic economics is not that hard.
Although, I certainly enjoy your posts. They're remarkably clear, exceptionally good explanations, punctuated by particularly simple and easy to understand examples. So, do your thing. I just wouldn't expect much return on your investment if I were you. I don't think Larry or Benji want (can?) learn. They're very comfortable with their priors.
more than once but pointed out that the theory often does not perform as advertised.
Not once did you do this.
I've said it over and over. you can check the logs here.
I also understand opportunity costs such as oversupply but do you really think Joe Sixpack does?
What does this have to do with what we've been disucssing?
because until/unless enough people can actually "see" the harm you are talking about - how would you expect the public to put pressure on the govt to get out of markets?
but WHAT I asked YOU - HOW oversupply manifested itself into something that is perceived as harmful to Joe SixPack and you backtrack to the totally false idea that I "refuse" to "understand".
I explained this to you and you do in fact refuse to understand.
we'll agree to disagree.
WHY we can't see obvious harm that would convince us to get the govt to stop doing that harm.
I see you didn't both to read the this. Or did you not undertand it?
I read it but I do not think most folks - voters would - enough for them to demand the govt get out of the market. the harm is not obvious and it does not directly impact electricity users adversely.
Most folks outside of Calif are actually GLAD that the govt controls electricity prices and are fearful that deregulation would lead to higher prices and volatility in prices - like we see with gasoline prices.
"Most"? Do you have proof of this? It could be true, but more likely this is just projection.
it's what happened in Virginia when they were going to deregulate and more than a few other states.
But, even if it is true, so what? How does this relate to what we've been talking about? The discussion we've been having is about the reality of supply and demand and how it explains much of the harm done by government. Now twice in one comment, you seem to be wanting to change the topic to the fact that many people don't understand economics or that it's difficult to convince people of the reality of economic principles, like supply and demand. No argument here. You are a good example of someone who doesn't understand.
you can keep saying that if it makes you feel better .....seems to help others here...when challenged on theory vs practice.
so all the ranting and raving about it here does what in terms of getting the govt out of markets?
nothing? so you're doomed to the govt doing harm and CD is just one gigantic bitching-fest?
yeah... pretty much....
hey... enjoyed it... thanks for the explanations....
Methinks,
The main reason I comment on something is because I think I have something to offer. And every time I write something, I get better at it. Writing helps clarify things and I've had many of my logical and factual flaws pointed out to me many times in the past (so hopefully I am making fewer of the same mistakes). It took me a long time to figure out a lot of this stuff. I've worked hard to think about these things and try to figure out ways to best explain things.
Thank you for your compliment. I'm glad to see my hard work has been paying off.
Methinks,
What I was trying to say was that I many times, I write for my sake, to see if I can muster a clear logical argument that can be followed and easily understood.
now..don't you two start slobbering all over each other.. it's already getting disgusting here.
Larry,
so all the ranting and raving about it here does what in terms of getting the govt out of markets?
Do you think I would spend my time in the comments section of Carpe Diem as an effort to get government out of markets? Is this why you think I was commenting?
I was responding to your statement that you think supply and demand is an ideology. This is clearly false and did my best to explain.
Now for the second comment in a row, you try to change the subject.
That's fine. Have fun.
And lastly, there are easy ways to separate out what you are cutting and pasting to separate out what your new comment is. The HTML tags to use are just below the "Leave your comment" box and you can google them to figure out exactly how to use them. If you don't want to use them, use quotes. Separating the comments you are responding to from your response is much clearer.
Larry,
don't you two start slobbering all over each other.. it's already getting disgusting here.
Offering a compliment and graciously accepting it is "slobbering" and "disgusting"? What type of person are you? Do you lack basic manners and humanity?
are you 13?
Larry,
I'm 37; old enough to learn, understand, and apply basic manners. Thirteen year olds have a hard time with them. You?
I'm soooooo relieved...
good for you.... and Methinks..
Good bye, Larry.
good by, Ken Farewell
Ken,
What I was trying to say was that I many times, I write for my sake, to see if I can muster a clear logical argument that can be followed and easily understood.
I got that without the clarification because you have succeeded in your quest. Lost causes notwithstanding.
Larry,
I said that I would not attack you personally but it seems that you are actually attempting to entice people on here into attacking you. That is stupid.
You agreed with me that basic human nature is what is behind supply/demand/price. You agreed with me that the economy works best when we have free markets that allow supply/demand/price to be determined by individuals freely deciding what is best for themselves.
But then you continually demand of posters that they explain certain markets that are not free, stating that supply/demand/price laws do not apply or do not seem to be working. Is that logical? Do you think that basic human nature changes just because the government has decided to intervene in a market and change one or all of the variables of supply/demand/price? Are people in that case not going to make decisions based on price signals in the same way that they would in a free market?
The reason free markets work best it that they find the most efficient supply/demand/price level, you agreed with me on that. When governments intervene it is to change that supply/demand/price level and then by definition it is less efficient.
To continually ask posters to explain what happens when governments change one of those variables and thereby ask them to defend supply/demand/price laws is just you being difficult, maybe as Methinks said, because you are toying with people.
If you can't see the logic of the above then perhaps you should refrain from posting on this site as you are not adding to the discussion.
GMF - I do appreciate your view to not engage in Ad Hominems. It's a refreshing change in CD.
My view about supply/demand and the Govt is that the Govt will not stop it's interference with the market until voters insist that they do and voters will not insist if they themselves do not see for themselves the harm that comes from govt actions.
Otherwise, all we end up with is a bunch of folks bitching about the govt but the vast majority of voters who actually good cause changes are not engaged in forcing change.
It's one thing to fervently "believe" but I guess I'd ask what is the purpose of believing if you don't really care about change?
Does it then just become an academic exercise for your own edification?
I consider the reality more important than the theory.
just the way I roll....
I think if the reality is that the govt is doing bad stuff that the way you change it is by enough people recognizing it as bad stuff that needs to change.
In terms of no posting because others don't agree.. forget it guy.
I'm not "toying" with folks guy.
I'm asking a pretty serious question about how govt changes when it becomes too intrusive and my premise is that if people do not see the harm that is said to be the result of bad govt policies, then they won't act.
if you don't like my posts - move your cursor and find something you do like.
Prof. Perry is helping to change perceptions with this blog and doing an excellent job. If that is your goal, then phrase your comments differently so that others see you are trying to add to the discussion. Because from what I see, some very knowledgeable people don't see you as adding to the discussion. You are not helping clarify the issues nor are you making it easier for people to see the harm that results from bad government policies.
See GMF that's my essential disagreement.
He's not really talking to average guys.
He's talking to a select group of folks who are economically literate and already true believers.
"very knowledgeable" people who freely engage in mean-spirited Ad Hominems is not something I particularly value.
I actually think I AM contributing judging from the inability for these "knowledgeable" people to do anything other than name-calling when someone challenges the status-quo.
you're free to your view guy but don't try to engage in censorship.
The IS a difference between economic theory and the way it works in the marketplace.
If govt economic policies are wrong, it will take more than a few 'knowledgeable' people calling people they don't agree with names... to fix.
I take extreme umbrage to the mean-spirited he inhabit this place and will work to rebut them at every opportunity and that includes you if you cannot also behave.
Okay, I give up. I only discuss important issues with people who behave properly.
Regards.
givemefreedom
On Blogger since April 2012
hmmmm.... Morg is that YOU!
:-)
Larry: if you are economically literate, we need to redefine the term literate.
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