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Every boom (90's internet, 2000's housing, oil, eventually China) always seems to be wrought with fraud and held together by matchsticks and glue. People though

Every boom (90's internet, 2000's housing, oil, eventually China) always seems to be wrought with fraud and held together by matchsticks and glue. People thought oil prices were purely demand driven until we found out they were being bid up traders.

cturner 16y ago
> People thought oil prices were purely demand driven > until we found out they were being bid up traders. Do you mean "bid up by traders"? You're suggesting that oil prices are high because of a conspiracy? If so - no. That's a "turtles all the way down" argument. Prices need to be sustained by demand. Traders may make money via moves on the fluctuation. But buying a lot of oil in order to push the price up is not a business model. You have to store it (expensive), transport it, and then when you come to sell it the price will decline again. Not to mention the risk you incurr by holding it, and the opportunity cost of not using that money to do something else at the time. An idea that does the rounds regularly is that a conspiracy of evil speculators permanently distort markets. I've never seen a situation where that was true. There may be periods where the market does odd things, and market manipulation does exist, but unless it's a locked-up market (like diamonds) or a true conspiracy of all the players (can't think of an example) it will eventually have to revert to the mean because the traders will start calling bluff. Usually when you see people blaming speculators it's someone trying to cover up ineptitude or corruption by picking an easy target. When this kind of talk gets momentum the results can be bad. A common target during collapsing bubbles is short-sellers (people who borrow stock, and sell it, with the promise to re-buy it and give it back to its original owner at another time, possibly tomorrow). Short-sellers contribute to price discovering in markets, and this is a good thing. But during bubbles, people who know about shorting can do well when others are doing badly, so they're an easy target. US regulators stroked this theme during the economic crisis and introduced measures that limited short-selling for a period. In doing so, they contributed to the crisis because short-sellers provide a lot of the liquidity behind money markets. Cuffing short-sellers removed their liquidity pool from money markets, which was already under strain.
- entangld 16y ago
  >Usually when you see people blaming speculators it's someone trying to cover up ineptitude or corruption by picking an easy target.< I lived through the California energy crisis and there was no crisis. It was a gigantic manipulation. Videos of energy traders laughing their butts off at grandmothers dying of heatstroke. Oil doesn't need to jump into the hundreds every time someone screams in the Middle East. Analysts in every profession know the whims of their markets. Some of the movements are reality based, some are based on perceptions. Commodity trading (specifically oil) is highly profitable. It can be hacked by the people who know the ins and outs. They'll never tell you, but it can. Most everything can be hacked in some way. I highly doubt the few who are able to profit from the ignorance of millions will confess that some troubles in the Middle East don't significantly impact the supply chain. Or that the price of oil shouldn't jump as wildly as it does. Or even that the oil price seems to reflect the greed of traders chasing historical highs. Not buying it.
  - cturner 16y ago
    I don't know about the Californian energy crisis, but maybe this is an example of a situation where the players are in alignment. Spikes in oil prices can be caused by panic in an industry. For example, if I ran an airliner maybe I'd seek to lock in fuel prices via forward trades. There's a risk I'd pay a high premium for the period, but I'd judge that as being bettter than the risk that I'd go out of business. And spikes can be caused by speculators. But my point was that in liquid markets things will revert to a mean that is backed by whatever the real demand is. Pushing prices up by buying and holding oil is not in itself a business model.
    - danssig 16y ago
      >For example, if I ran an airliner maybe I'd seek to lock in fuel prices via forward trades. I was under the impression that airlines are already always buying fuel via futures regardless for planning purposes.
  - dantheman 16y ago
    In california you had traders turning off power plants so that energy had to be purchased from other places at higher price. That is not speculating, that is blatant abuse and lack of properly written contracts. They exploited a loophole in a newly created market, this would eventually be fixed as the contracts would have provisions so that what they were doing would be prohobited.

cturner 16y ago

> People thought oil prices were purely demand driven > until we found out they were being bid up traders. Do you mean "bid up by traders"? You're suggesting that oil prices are high because of a conspiracy? If so - no. That's a "turtles all the way down" argument. Prices need to be sustained by demand. Traders may make money via moves on the fluctuation. But buying a lot of oil in order to push the price up is not a business model. You have to store it (expensive), transport it, and then when you come to sell it the price will decline again. Not to mention the risk you incurr by holding it, and the opportunity cost of not using that money to do something else at the time. An idea that does the rounds regularly is that a conspiracy of evil speculators permanently distort markets. I've never seen a situation where that was true. There may be periods where the market does odd things, and market manipulation does exist, but unless it's a locked-up market (like diamonds) or a true conspiracy of all the players (can't think of an example) it will eventually have to revert to the mean because the traders will start calling bluff. Usually when you see people blaming speculators it's someone trying to cover up ineptitude or corruption by picking an easy target. When this kind of talk gets momentum the results can be bad. A common target during collapsing bubbles is short-sellers (people who borrow stock, and sell it, with the promise to re-buy it and give it back to its original owner at another time, possibly tomorrow). Short-sellers contribute to price discovering in markets, and this is a good thing. But during bubbles, people who know about shorting can do well when others are doing badly, so they're an easy target. US regulators stroked this theme during the economic crisis and introduced measures that limited short-selling for a period. In doing so, they contributed to the crisis because short-sellers provide a lot of the liquidity behind money markets. Cuffing short-sellers removed their liquidity pool from money markets, which was already under strain.

entangld 16y ago
>Usually when you see people blaming speculators it's someone trying to cover up ineptitude or corruption by picking an easy target.< I lived through the California energy crisis and there was no crisis. It was a gigantic manipulation. Videos of energy traders laughing their butts off at grandmothers dying of heatstroke. Oil doesn't need to jump into the hundreds every time someone screams in the Middle East. Analysts in every profession know the whims of their markets. Some of the movements are reality based, some are based on perceptions. Commodity trading (specifically oil) is highly profitable. It can be hacked by the people who know the ins and outs. They'll never tell you, but it can. Most everything can be hacked in some way. I highly doubt the few who are able to profit from the ignorance of millions will confess that some troubles in the Middle East don't significantly impact the supply chain. Or that the price of oil shouldn't jump as wildly as it does. Or even that the oil price seems to reflect the greed of traders chasing historical highs. Not buying it.
- cturner 16y ago
  I don't know about the Californian energy crisis, but maybe this is an example of a situation where the players are in alignment. Spikes in oil prices can be caused by panic in an industry. For example, if I ran an airliner maybe I'd seek to lock in fuel prices via forward trades. There's a risk I'd pay a high premium for the period, but I'd judge that as being bettter than the risk that I'd go out of business. And spikes can be caused by speculators. But my point was that in liquid markets things will revert to a mean that is backed by whatever the real demand is. Pushing prices up by buying and holding oil is not in itself a business model.
  - danssig 16y ago
    >For example, if I ran an airliner maybe I'd seek to lock in fuel prices via forward trades. I was under the impression that airlines are already always buying fuel via futures regardless for planning purposes.
- dantheman 16y ago
  In california you had traders turning off power plants so that energy had to be purchased from other places at higher price. That is not speculating, that is blatant abuse and lack of properly written contracts. They exploited a loophole in a newly created market, this would eventually be fixed as the contracts would have provisions so that what they were doing would be prohobited.