Wednesday, July 23, 2008

Staggering Ignorance

THERE ARE many other topics which I should be addressing here, but I have to comment about this week's column in Metro Times by Jack Lessenberry, which shows staggering ignorance about how commodity futures markets operate. (The problem with too many liberals like himself is that they spout off about subjects with which they have no knowledge whatsoever.)

The speculators he knocks, yes, are a way for producers to lessen risk, and therefore make necessary investment to increase supply of a good.

Farmers, for instance, are more likely to expand the amount of acreage devoted to growing corn, if they can sell that future crop far in advance, to ensure proper return; and guard against drought, storms, disease, and so on.

Speculators betting on the future price of corn allow the farmers to do this.

Futures prices move based on the underlying supply-demand fundamentals. Speculators can't go against the real situation without facing ruin.

If anything, their actions usually reflect the actual situation-- how the fundamentals play out. Speculators are individual investors who most often bet AGAINST the producers; against the oil companies, if you will, and are guarantors against price-fixing.

The idea that the "real" price of oil is $65 a barrel, as Lessenberry affirms, is nonsense. No, the real price is the market price-- the spot price; what is actually paid to the suppliers. All speculators have to eventually get in line with the real price, as futures contracts near expiration. They can't fight reality. All they are doing is expressing the actual reality. And so, if four months ago they were betting that $140 barrel oil reflected the actual supply-demand situation, they were absolutely correct. If the price should be $65, the futures price, if anywhere, would show this. Speculators would be pushing the price down.

If speculators are wrong, all the producers need to do is call their bluff-- by selling their oil. As I'm sure they're doing to every extent possible.

What the futures price also allows producers to do is to drill in areas previously unprofitable-- and thereby bring more supply to the table, which is the way (along with decreased demand) to bring down the price of oil.

This is basic stuff.

Yes, the price of oil has exploded far greater than wages, inflation, The reason for this is the REAL story which Lessenberry misses.

What happened in the interim?

Only a costly war that needs to be paid for. Financing the war has caused the value of the U.S. dollar to plummet. Since foreign oil producers receive payment in U.S. dollars, this means the cost per barrel, for U.S, buyers, has to increase to a corresponding amount. If the dollar drops by half, the price of oil for us doubles. Duh!

This happened once before-- in the 70's when the dollar was greatly devalued by Nixon to pay for the Vietnam War. History has repeated itself, that's all-- with the added factor of increased subsidized demand by countries like China. So the price went up. Markets are self-correcting. As people drive more fuel-efficient cars, and more oil supply is brought on-line, the price will go down. This is certain. Markets are living organisms which have to be allowed to move, to breathe, to fluctuate. Speculators, greasing the machine, allow this. The other option, to allow government or big business to determine the price, free of the markets, will lead only to economic disaster.

This is a very brief explanation of a complex situation. Unfortunately, economics is a complex subject-- and shouldn't be approached from a total lack of knowledge, as in this case.

Many of my ideas could be considered to come "from the Left," but at the same time I loathe most liberals because of their dishonesty and inconsistency. Lessenberry is a good example, and lately he's been blundering to an abnormally high extent-- as in another column where he claimed to be a defender of civil liberties while arguing for the banning of cigarettes and firearms. Uh, liberty is liberty. Either we have Big Brother regulating us or we don't.

(As for the oil companies, what we should be arguing against is the government subsidies they receive, over and above wind, solar, We should argue AGAINST government intrusion into the marketplace which allows the dominance of big oil, which in fact has an incestuous relationship with government which has nothing whatsoever to do with speculators. We should also be arguing against currency manipulation, the lack of a stable currency-- the ability of the Fed to print money at will, which enables the fighting of foreign wars; is the only way to enable such wars.)