Tuesday, July 08, 2008

More Evidence: Speculators Don't Cause Volatility

Prices were outrageously volatile. While traders attributed the sharp market movements to supply and demand, most politicians in Washington were sure that speculation was the culprit. The U.S. public became incensed.

The year was 1958, the commodity in question onions. Congress held long and sometimes tumultuous hearings in which Everette Harris, then president of the Chicago Mercantile Exchange, tried to convince lawmakers that the futures market for onions was not the cause of the volatility.

“We merely furnish the hall for trading . . . we are like a thermometer, which registers temperatures,” Mr. Harris told a hearing. “You would not want to pass a law against thermometers just because we had a short spell of zero weather.” But such arguments were ignored and in August of that year the Onion Futures Act was passed, banning futures trading in the commodity.

Exhibit A: Notice in the top chart above that the price volatility for onions looks greater AFTER futures trading was banned than it was before.

Exhibit B: The same patterns exists for the second chart of wheat futures - there was greater price volatility WITHOUT futures trading than with futures.

Exhibit C: Research by Lehman Brothers shows that prices for metals that are not traded in exchanges, such as chromium, molybdenum or steel, have risen faster than prices for metals traded in exchanges, such as copper or aluminium (see bottom chart above). In addition, some of the commodities markets in which pension funds hold the largest share of outstanding contracts, such as hogs, have seen price drops.

Source: Financial Times


At 7/08/2008 3:06 PM, Blogger das Kapitalist said...

Oil inventories are in the low average range so I doubt the current price increase is caused by speculation - there is every indication it is caused by demand. I expect oil prices will fall as demand drops - if it drops.

At 7/08/2008 3:52 PM, Blogger bobble said...

prof perry, you have convinced me. its not speculation, its supply and demand.

so the blame goes to globalization. just another 'benefit' of the new flat world, i guess.

so lets examine the record.

my pay has been reduced by global wage arbitrage

the price of food and energy is going thru the roof

global trade and bush's tax cut have failed to create new, better, higher paying jobs

what good news will be next, i wonder?

At 7/08/2008 4:15 PM, Blogger K T Cat said...

Bah! We all know you're in the pockets of the ferrochrome lobby.

At 7/08/2008 4:24 PM, Blogger juandos said...


"my pay has been reduced by global wage arbitrage"...

No bobble, its probably been reduced by the fact that you don't have a marketable skill that's really needed...

Let Dr. Walter Williams explain the facts of life to you regarding speculators...

At 7/08/2008 4:28 PM, Blogger Bill L said...

Oil falls $9 in two days on easing of middle east war fears and falling U.S. demand. http://money.cnn.com/2008/07/08/markets/oil/index.htm?section=money_topstories

At 7/08/2008 4:30 PM, Blogger SBVOR said...


So, you perceive (correctly or not) that you are failing to outperform others when it comes to competing in the global economy. And, your first impulse is to blame Bush?

You sound like a typical Democrat.

Competition, producing winners and losers, is a Natural Law. No politician or ideology can repeal that law. Any attempt to do so produces economic perversions which prove devastating to all.

Another Natural Law is “adapt or perish”. If your current adaptation strategy is not meeting your expectations, try another one. Don’t expect Obama to “make it all better”. Once upon a time, your momma might have done that, Obama cannot.

If you want to ever have a prayer of paying less for energy, click here, learn the facts and sign the petition. If, like me, you object to paying more for food, blame the Dems for their energy policy obstruction and their Ethanol fantasies.

At 7/08/2008 4:35 PM, Blogger SBVOR said...

Mr. Linstrom,

This link may better explain the recent drop in the price of crude.

Prices may continue to fall in the near term.

However, they may well be higher one year from now.

At 7/08/2008 6:23 PM, Blogger bobble said...

juandos:". . bobble, its probably been reduced by the fact that you don't have a marketable skill that's really needed..."

not exactly. the skill is still highly needed, it's just that i now have to compete with billions of folks from the third world who will do the same thing for a lot less money. as time goes on you too will find that these folks are capable of *much more* than assembling big screen TV's. they want to come to the united states and replace you at *any* job, no matter what the level of education needed.

luckily, i made my money *before* i had to compete with the third world. i saved my money and i'll be retired soon. good luck to the rest of you on your race to the bottom of the wage scale.

At 7/08/2008 7:00 PM, Blogger bobble said...

sbvor:" You sound like a typical Democrat."

actually, i always voted republican until 2004.

sbvor:". . . paying less for energy, click here, learn the facts and sign the petition."

ok i signed the petition. i'm certainly not opposed to drilling. but you are deluding yourself if you think it will make much differance.

from the white houses own Energy Information Agency

ANWR "Additional oil production resulting from the opening of ANWR would be only a small portion of total world oil production, and would likely be offset in part by somewhat lower production outside the United States. The opening of ANWR is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light crude oil prices of $0.41 per barrel (2006 dollars) in 2026 for the low oil resource case, $0.75 per barrel in 2025 for the mean oil resource case, and $1.44 per barrel in 2027 for the high oil resource case, relative to the reference case."

offshore "any impact on average wellhead prices is expected to be insignificant"

At 7/08/2008 8:25 PM, Anonymous Anonymous said...

Don't forget the effect of the U.S. Dollar.

From Steve Hanke at the Cato Institute:

"..if the greenback had held its January 2001 value against the euro, oil would have traded at about $76 a barrel in May 2008. This is almost $50 below the price that crude oil was trading at in May 2008. Accordingly, the decline of the dollar’s value accounted for a whopping 51% of the $97 a barrel increase in the price of oil from May 2003-2008.

You can read the entire article here

At 7/09/2008 6:16 PM, Blogger Unknown said...

"From Steve Hanke at the Cato Institute:"

No such cause and effect relationship is justified. Basic questions: why should the value of dollar must have any effect on the demand or suppy of a commodity whethe commodity is priced in dollars in the first place?

Actually, I believe it is the opposite than Steve Hanke argues:

It is the rising oil prices that pushed dollar down. Not the other way. But I do not have time to explain it now. I will upon request. It is simple, if you understand global money dynamics.

At 7/12/2008 9:21 PM, Blogger SBVOR said...


1) Thank you for signing the petition.

2) Thank you for substantiating your assertions.

3) The EIA is independent from The White House.

4) Even if little price reduction (from current levels) were realized by opening access to ANWR and the OCS, how much higher might prices rise without opening ANWR and the OCS?

5) Remember, just opening ANWR and the OCS would, according to mean estimates, give us more reserves than IRAQ!

6) My position is that we need to do anything and everything we can to increase the future world supplies of oil. Failing to do so could have an enormously destructive impact on world economies for a very long time. And, that economic destruction could dry up the venture capital which will be necessary to fund the entrepreneurs who will move us beyond petroleum (as a fuel).

P.S.) If the Iraq war contributed to your vote in 2004, consider this.

At 7/29/2008 10:42 PM, Blogger Curls said...

Typical Socialist Attitude. It's the evil speculators. Never its the evil pensionable time bureaucrats and the mind boogling laws and regulations.


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