Another Debate: Global Warming/Climate Change

[RoyalShock]

What people are going to need to realize is that we are probably going to have to deal with higher energy costs if we want to continue moving to alternatives. Wind turbines have only been proliferating due to subsidies. They can't pay for themselves right now. I have no problem with continuing to advance them, but we should be paying more to cover the costs, not getting taxed to do it.

The costs of these "alternate" energies are being hidden through taxation, which I don't like. I'd much rather know where my money is really going.

As for oil, I would like to see the speculators cracked down on. If you are going to buy oil, you should have to take delivery of it, not just transfer funds and file some paperwork. They are also making huge profits through manipulation of the market. The oil companies are largely forced to react to them.

[Maggie]

As for oil, I would like to see the speculators cracked down on. If you are going to buy oil, you should have to take delivery of it, not just transfer funds and file some paperwork. They are also making huge profits through manipulation of the market. The oil companies are largely forced to react to them.

A relatively simple way to "deal" with speculators would be to lift the ban on offshore drilling. Lifting the ban on offshore drilling won’t increase supply right away, but would signal to oil speculators that the U.S. is serious about increasing domestic production, long smothered under regulatory and tax practices that discourage exploration and the expansion of our refining capacity. That could immediately put downward pressure on the price of oil and alone would do more to reduce the price at the pump than anything else at this point.

There is a populist notion, recently endorsed by McCain calling for more regulation to combat “speculation.” Unfortunately, McCain is endorsing Carter-esque restrictions on energy markets. Adding another layer of bureaucratic oversight of energy markets will dampen the price signals upon which investors, producers and consumers all depend and, if anything, make energy markets less efficient and keep gas prices higher than they need to be.

This kind of shows me that McCain doesn’t know anything about speculators or investors or commodity trading or any of that stuff. The reality is, should Congress overturn its offshore-drilling moratorium, those very same speculators will start selling crude-oil futures contracts and price declines will filter backwards from the longer-term contracts to the cash market. In other words, what can be bought will be sold. If drilling expectations change on the hope that future oil supplies will rise, prices will adjust lower and it will happen fast.

This is what McCain doesn’t understand. It’s also what Obama doesn’t understand. Price changes are pulled forward in response to shifting oil-supply policies.

[1979Shocker]

I don't buy into global warming but I'm all for other energy sources when they become cost efficient and can be used on a wide scale basis. But some of the "green" people like Gore trying to scare everyone into doing this stuff really annoys me. Especially when they don't practice what they preach. As I've read in previous articles, Gore is doing this to try and make a butt load of money for himself. That's all.

There is global warming. There is also global cooling. I believe we're currently in the global warming cycle.

The main question is, Are human causing the global warming or is it a natural cycle? I tend to believe that it's a natural cycle and that humans add to it some. Whether we can remove our part of global warming out of the equation, I don't know. And even if we could, will the earth still continue to warm in this particular cycle?

[RoyalShock]

But once the market begins to consume, through demand, the extra supplies, won't the speculators be right back into a position to manipulate?

[engrshock]

But once the market begins to consume, through demand, the extra supplies, won't the speculators be right back into a position to manipulate?

Extra supplies does not mean extra gasoline until it is refined. I have read that the refineries have cut back production to keep supplies lower and prices up.

My fear with the speculators is that if the oil prices drop dramatically that our government will bail them out to save the economy just like is being done with the sub-prime lending fiasco. In fact that may be the reason the government is not really trying to regulate the speculators in the oil market.

As a note I recently drove west from Salina on I-70 and was amazed at the large wind farm that has blossomed along there. There must be at least 100 wind turbines along I-70 now with more going up. I am not sure how many are up and running but it was windy and I would estimate less than 10% were actually spinning like they were producing electricity.

[RoyalShock]

But once the market begins to consume, through demand, the extra supplies, won't the speculators be right back into a position to manipulate?

Extra supplies does not mean extra gasoline until it is refined. I have read that the refineries have cut back production to keep supplies lower and prices up.

I was referring to all oil consumption, not just gasoline.

Here's an interesting proposal from T. Boone Pickens (I don't think it's been posted here yet).

http://wichita.bizjournals.com/wichita/stories/2008/06/16/daily24.html?surround=lfn

[Maggie]

Royal & Engrshock:

I have to apologize – this ended up being much longer than I expected. But I typed it so I might as well post it. I don't work on Wall Street but I am surrounding by those that do – and frankly I don't have a high opinion of most of them.

There are a lot of factors driving up the price of oil, not just speculation (the weak dollar certainly doesn't help) and I agree that the increased speculation has had an impact on oil prices. I am simply adverse to and generally have a knee jerk reaction when it comes to increased government regulation. I was just attempting to suggest a way the free market could help with this problem.

That being said: When commodities trading began, it was designed for farmers, ranchers, slaughterhouses, and food producers to be able to flatten out cyclical and seasonal fluctuations while locking in prices months out. This made it easier for them to run their businesses. However, today a very small percentage of oil contracts are being bought and sold by oil companies or end-users looking to hedge against future price movements. Most sales and purchases are coming from traders with exclusively one goal: to make money on oil’s rise or decline. If the US sends a clear message that it intends to seriously increase its oil output, I think that will have an effect their willingness to purchase future contracts with the expectation that the price of oil will rise. That was my suggestion.

However, despite my initial reluctance, I might consider a couple of regulations designed to discourage speculation: (1) Increase the margin requirement for speculators. To purchase stocks on margin, investors must put up 50 percent of the purchase price. In the commodities market, investors are only required to put up 10 percent. In oil contracts, this can be as low as 7 percent. And hedge funds might only have 1 percent of their money on the line — or even less — allowing them to purchase significantly more contracts. If margin requirements for traders and investors were raised, the amount of contracts they could hold for a given dollar of their own money would decline, reducing the demand for contracts; and (2) Reduce position limits for speculators. Each commodity future traded on an American exchange has a fixed limit as to how many you can own or be short. This is designed to prevent someone from cornering the market. However, this limit is the same for everyone — whether you are a supplier, an end-user, or just a speculator. Maybe this is the problem. Reducing the number of contracts on which a speculator is allowed to be long or short would drastically reduce trading volume and the upside pressure on prices.

Engrshock actually made a legitimate point: Simply waiting for the bubble to bust is not really sound policy. Speculation is an integral part of the free-market economy. However, speculation in inelastic commodities — the things we all need every day in order to survive, like food and energy — can have enormous impacts on our personal finances as well as the economy. If you believe connection between the recent explosion in oil prices and speculation on futures exchanges is clear: it is both logical and salutary to reduce or prevent such non-essential price pressures. To be sure, the pure anti-regulation capitalist might argue that doing such could end up having unintended consequences — and that the bubble will burst on its own, moving prices dramatically lower. That is true — proven by precedent time and again. But how high will it go before it crashes — and at what cost to the economy and the consumer? This is especially important given the amount of money financial institutions currently have at risk, and the possibility of future government bailouts like the one that followed the sub-prime mortgage collapse earlier this year.

That pretty much all I have boys and girls.

[RoyalShock]

Thanks, Maggie. I appreciate the lesson on commodities trading. Now that I work in the ag industry, I'm a little more curious about how those things work.

I'm going to think out loud a moment and invite correction if I'm off base. I know that when a "bubble" collapses, it can adversely affect a lot of private citizens, such as with real estate and mortgages (home owners), food commodities (farmers), etc. But other than those, are there that many whose livlihoods depend on oil (they are the ones extracting it)?

I guess what I'm wondering is whether a collapse in the oil market would really hurt the average (lower to middle-class) citizen? As long as the government doesn't bail anyone out, would it really be a bad thing?

[engrshock]

As Maggie indicated a few pages back the problem is the special interests and their impact on controlling the actions of our elected representatives. I was watching C-Span a week or so ago and one of the Senators was stating that in 2002 a provision was added to a non-related bill that essentially deregulated all controls on speculation in the oil markets. He was indicating that provision needed to be changed back so that there was some oversight. However, I think the special oil interests and the current administration that seems to look out for those special interests will not change.

As to the sub-prime lending fiasco the government is bailing out the real estate speculators to save the overall economy which trickles down and generally affects the common people. In my opinion this is typical of bail-outs. The time to regulate (within reason) before the bubble forms. Maggie's suggestions with respect to making speculators pony up more capital sounds reasonable and lets the markets be buyers markets rather than sellers and speculators markets.

Wasn't the Hunt Brothers buying up the silver a means to push silver prices sky high and dealt with? Would that not work for other commodities and controlling prices.

[Maggie]

Off the top of my head and to add to Egnrshock's comments – Also remember, that pensions, retirement benefits and other investments could take a hit as many have stakes in commodities.

I think the Hunt brothers were able to corner the market on silver because they were able to physically take it off the market. I doubt that is possible with oil.

[SubGod22]

http://independentthinking.wordpress.com/2008/06/18/rasmussen-oil-industry-results/#respond

[engrshock]

Off the top of my head and to add to Egnrshock's comments – Also remember, that pensions, retirement benefits and other investments could take a hit as many have stakes in commodities.

I think the Hunt brothers were able to corner the market on silver because they were able to physically take it off the market. I doubt that is possible with oil.

But oil speculators are able to force the price of oil futures up by purchasing control of gasoline etc. with only expending 10% of the actual cost. If the oil does not stay up those speculators will be bankrupt or out a lot of money. If it stays up they and others make a lot of money.


You may be right on the Hunt Brothers but isn't speculation on oil really doing the same thing without having to actually buy the oil right now. I do not claim to understand all of the ins and outs with oil futures and hedge funds but I thought the purpose was to gain a supply of a commodity in the future at a set price so that it would be available when it was needed in the future and not to drive the prices up and artificially cause high prices. There is a difference. One is to protect oneself from supply and market fluctuations and the other should be illegal and is based upon greed.

[Maggie]

Look – I am no expert either. I think you are essentially correct. What these hedge funds are doing is purchasing contracts to sell oil at X date in the future– it is all paper; however, they have to sell at a certain time in accordance with the contract so they can’t really keep the oil off the market.

The Hunt brothers, I believe and I could be wrong, purchased actual physical silver – the equivalent would be purchasing an actual barrel of oil – and then attempted to artificially drive up the price of silver (attempt is actually wrong – they succeeded) by limiting and controlling the supply. They actually stored the silver in their own warehouses. You can’t really do that with oil – plus any where you would store oil would be owned by the oil companies anyway.

In short, I don’t think you will see an investor or group of investors be able to corner the market in oil like the Hunts did in the silver market.

[rrshock]

I sure wish I had a spare 1000 large crude tanks just sitting there unused. I'd sure try to influence it then. Anyone willing to lend me a few so that I can start on that endeavor? :)

[Ixiah]

Look – I am no expert either. I think you are essentially correct. What these hedge funds are doing is purchasing contracts to sell oil at X date in the future– it is all paper; however, they have to sell at a certain time in accordance with the contract so they can’t really keep the oil off the market.

The Hunt brothers, I believe and I could be wrong, purchased actual physical silver – the equivalent would be purchasing an actual barrel of oil – and then attempted to artificially drive up the price of silver (attempt is actually wrong – they succeeded) by limiting and controlling the supply. They actually stored the silver in their own warehouses. You can’t really do that with oil – plus any where you would store oil would be owned by the oil companies anyway.

In short, I don’t think you will see an investor or group of investors be able to corner the market in oil like the Hunts did in the silver market.

The Hunt brothers took delivery of the silver and then used airplanes to haul it out of the country in the middle of the night. There plan didnt work though because of government intervention.

As far as oil goes - there is a ton of trading that is done away from the eyes of the regulators. There is speculation they are doing a bunch of trades to artificially manipulate the price of oil.

http://www.cbsnews.com/stories/2008/06/17/broadcasts/main4188620.shtml