If not, why is it okay for him passively (and speculatively!) to buy, say, a few dozen shares of Microsoft "hoping to make a buck when their prices rise" but not okay for other persons to speculate in oil for the very same reason?

Great question. I wonder what his response would be.

If you were just funning and I am walking into your trap, so be it.

The price you negotiate with the refinery for the oil produced from the well in your backyard is an individual transaction and has no commodities market dictates contained in that deal. The commodities market prices could be used by the two of you as a guideline, advice as to worth of your oil at the current time, if you will; but, nothing prevents you from selling above or below that price, and of course nothing prevents the refinery from beating you down in price as much as they can.

So, going into the negotiations you might be advised to check the market prices just so you know what your starting place in the negotiations is going to be.

I am sorry, I forgot to mention that the thoughts I just expressed did not include the obvious.

Your ability to negotiate your own price for your own deal, just as all other buyers and sellers, is why the prices in the commodities market flucuate. Otherwise they would just remain stagnant.

From your perspective, I don't see what it matters who buys your oil, as long as you negotiate the price you can be happy with. It might be a third party, it might be the refinery, but the speculators are simply the people that buy the stored oil, oil in transport, or I would suppose oil still in the ground; and, then resell that oil at the best price they can get at the time they believe will bring them the maximum return on their investment.

When a speculator sells, it may be to another speculator who thinks the price is going to benefit him, or it could be to an actual refinery. Either way, we see movement in the price reflected in the commodities market.

Like Don pointed out, there are speculators to line up on either side of any negotiation, some will make money on a price increase and some will make money when the price drops.

Also as Don has pointed out, speculators can be subject to the same vagrancies of fate as you and I. Oil may be scarce, so a speculator buys with the expectation that the scarcity will drive the price even higher; yet be caught out badly when a new oil field is brought on-line, or some country unexpectedly releases oil from a national reserve to drive the price down. When such a thing happens, the speculator either takes a loss, or he holds on with his money tied up until the price comes back up. Not an enviable position to be in.

I'll let someone else address your comparison to 3rd parties and healthcare. I have to go shoot a couple of doctors…..with my camera, of course.

I hope that I will be corrected by someone with real actual hands-on knowledge if I made statements in error, but I believe I was accurate in at least the broad sense.

Your question only makes sense if the refinery were the ultimate consumer of the oil from your backyard or if your backyard was the only available source of oil.

If you negotiate a certain price with the refinery and they found another source that was cheaper, they wouldn't buy any oil from you at all.

So, you either go with the market, or you wait until the market price matches your negotiated price.

The price of oil is a reflection of perceptions of future supply and demand, not negotiations with refineries.

Refineries buy oil at the going rate, which is set by the market. "Speculators" make decisions about the prices they are willing to buy and sell oil based on their perception of future supply and demand.

Futures, along with options, are important hedging instruments for end users and producers alike as both use those contracts to hedge their price exposure. The more deep and broad the market (the more participants), the more reliable and less volatile the price and the lower the risk that large positions will move the market. Punishing speculators will only reduce the number of participants, sucking liquidity and its associated benefits out of the market. All we will end up with is a more volatile and less efficient energy market.

As a side note, it's interesting that the government is trying to make it as hard as possible to short stocks and as hard as possible to buy oil. So, government is engaging in price manipulation that would be illegal if you were doing it. It's baffling that in the face of this massive manipulation by government anyone can blame markets for anything since markets are now more rigged than I've ever seen them in the two decades I've been participating.

Supposedly then there are two kinds of speculators, good and evil, the good, the ones who buy for their own consumption and end use and, the evil, those who prey upon them, buying for resale at a profit.

But they can profit only if the price goes up, meaning that they are serving the ultimate end users by withholding the item from current consumption for the sake of consumption at a later date when there will be a greater demand for it. And it is that service to the ultimate end users for which they are paid and deserve to be paid.

Could the speculator do more than just anticipate the market, could he alter its course? No, for no part of the market is bigger than the market as a whole. And if anyone is foolish enough to think that he is bigger than the market as a whole, there is no need for the "government" to remove him from the market, for the market itself will do so by the losses that it inflicts upon him.

Variability is not as good as a known tax on oil, but it is better than nothing at driving the consumption down. If you know that oil prices can change by factors of 3 or more without warning, your decision making on your next car will be different than if our president says that he won't let the price go up by that speculative amount.

Posted by: Methinks | Jul 9, 2009 10:43:00 AM
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Only the Fed Chair should be allowed to legally hammer the closing tick, the Chairman or those who pull his string. Fight fair plebs.

Grazia

Spot prices may be less stable than they would absent an active futures market. But the existence of that active futures market enables firms – and individuals – to remove the variability in commodity prices. Firms which consume commodities in production of goods and services can – through heding – reduce greatly their exposure to commodity price fluctuations. Doing so allows those commodity-consuming firms to sign long term price contracts with their customers.

If Obama reduces the liquidity of commodity futures contracts, he will succeed in driving up prices of goods and services which consume those commodities.

Why is this evil?

"But they can profit only if the price goes up"

Really? Well, I suppose this is true on many stocks since Obama has banned their short sale, but this is certainly not true in general.

They add demand to the market when prices are lower and add supply to the market when prices are higher.

There will always be those who complain about the profitable activities of others, to matter the benefit to everyone.

I'm not sure how a JD and a tenured professorship entitles one to determine the validity of private activities more than any other occupation, and clearly this is an example of how our public finance of the academy has created a parasitic leisure class that seems to not understand that it lives off value it contributes precious little to its creation or maintainenance.

How so? An active futures market adds liquidity and a benefit of liquidity is lower volatility.