Oily Witch Hunt

by Don Boudreaux on May 12, 2011

in Economics, Energy, Hubris and humility, Politics, Prices, Reality Is Not Optional

Here’s a letter to Washington, DC’s, WTOP Radio:

Mark Segraves reports today that Maryland Attorney General Doug Gansler, having received complaints about rising gasoline prices, “sent a letter to [gasoline wholesaler] Empire requesting documentation to justify the spike in prices.”

Here’s how I hope Empire will respond to Mr. Gansler’s letter:

“Mr. Gansler: We’re in receipt of your request for us to justify our decision to raise the prices we charge for our products.  Because Empire is a private firm with no government-granted protection from competition, our pricing policies are none of your business.  But we’ll humor you this once: our ‘justification’ for raising prices is that we believe the market will bear these higher prices.

“Being experienced in this industry (unlike you), we believe that over the next few days, weeks, or months, gasoline supplies (relative to demand) will be unusually low and, hence, unusually valuable.  If our belief is correct, we’ll earn profits for helping to bring gasoline prices into line with these prevailing market conditions.  The higher prices will give oil producers and gasoline refiners incentives to work extra-hard to bring more supplies to market.  These higher prices will also prompt consumers to conserve today on their use of gasoline.  You would agree, no doubt, that both of these responses are appropriate when gasoline supplies are tight.

“If our belief is incorrect, however, we’ll lose market share – and, hence, lose profits – to rival gasoline wholesalers who are better than we are at reading prevailing conditions in the market.

“Either way, we gain nothing at the expense of consumers who (especially if our assessment of market conditions is correct) are made better off than they would otherwise be over the long-run by having prices rise today so that gasoline will be more abundant tomorrow.”

Sincerely,
Donald J. Boudreaux

FYI, I defend oil “speculators” tonight on Stossel (Fox Business; 10pm EDT).

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{ 127 comments }

tw May 12, 2011 at 8:31 pm

I will tune in to Stossel tonight just to watch you – hope it goes well!

Marcus May 12, 2011 at 8:47 pm

When will these people learn that it is BUYERS who bid up prices?

Methinks1776 May 12, 2011 at 10:04 pm

No problem. Kill the buyers.

Now, in the stock market, it’s an entirely different story. There we need to kill the sellers.

In fact, anywhere we discover prices we don’t like, we need to throttle the market.

Marcus May 13, 2011 at 7:54 am

Absolutely! After all, we know what the right price should be. ;)

Anotherphil May 15, 2011 at 8:56 pm

And if they buy too much at too high price.. they lose their posterior…so they guess right…

Totally an Official Blog Commenter for Empire May 12, 2011 at 8:52 pm

Dear Professor Boudreaux,

Thank you for showing interest in our affairs and defending us from criticism. We cordially invite you to send us money. However, our actual response was slightly different from the one you envisioned. It is reprinted below.

“Dear Mr. Gansler,

“Although we do not want to raise prices and aggravate the already difficult life of the general voting public, stiff market competition has squeezed our profits so that we are left with no choice but to raise prices if we are to survive.

“However, we at Empire are reasonable people, and we understand that the median voter’s life is unjustly worsened by our decision. Alas, there is nothing we can do about the matter–as long as we face stiff market competition.

“We leave the proper response entirely in your hands.”

Scott G May 13, 2011 at 12:15 am

Dear Fake Empire Representative,

“Alas, there is nothing we can do about the matter–as long as we face stiff market competition.”

For someone who isn’t used to competition or who hasn’t experienced it before, it can be kind of scary sounding, but really it’s not that bad. Here’s a short pep talk to get you moving.

Many companies thrive in sectors with stiff market competition. Those that do are one’s that innovate and cut costs. Put on your thinking cap and get to work. If you’re a hard worker and reasonably intelligent you’ll be fine.

Scott G

SheetWise May 13, 2011 at 7:12 am

“Many companies thrive in sectors with stiff market competition. Those that do are one’s that innovate and cut costs.”

Cutting costs is unacceptable — you must cut price. The Presidents today has set the agenda — corporations must begin hiring employees that they don’t need. It’s important that corporations take a more altruistic role in the economy, providing jobs for those who need work, and lowering prices for those struggling with the difficult economy.

He did this with a straight face.

Tim May 13, 2011 at 1:31 am

I, for one, am becoming increasingly irritated with this nonsense that higher prices are all about profits.

Price controls create shortages. This is true of government mandated price controls, but it would be just as true as these altruistic choices not to raise prices which libs want corporations to make.

There only exists so much oil on the market. If, at the current price, people would buy more oil than exists for sale, the price needs to go up so that people don’t try to consume more of a resource than can be provided.

Daniel Kuehn May 13, 2011 at 8:04 am

*like*

It’s amazing to me how often appreciation of market efficiency and the value of the price mechanism obscures a simple acknowledgement of how things like gas hikes impact people’s lives. I’m not calling for immediate action against speculators and oil companies, personally. I understand that market allocation of oil is the only way to do it efficiently (even things like carbon taxes rely on an appreciation of market efficiency). But my first reaction to these price spikes isn’t to defend the oil companies, it’s to think “gee, that sucks for people on tighter budgets than I am”.

Don Boudreaux May 13, 2011 at 8:08 am

Yep – reality sometimes is painful.

Daniel Kuehn May 13, 2011 at 9:12 am

Which is not to say your imaginary letter wasn’t making a good point too of course – just that I liked the relative emphasis of this other proposed imaginary letter :)

Scott G May 13, 2011 at 12:25 pm

Good point. We’re in agreement that rising gas prices are tough on some people and prices are generally going to rise if supply diminishes. Basic economics.

You did pick up on something that causes me to have less empathy towards others in regard to rising gas prices, however your generalization “of how often appreciation of market efficiency and the value of the price mechanism obscures a simple acknowledgment of how things like gas hikes impact people’s lives” ignores a great deal of information which is difficult and nearly impossible to obtain.

Your observation is, that there is a strong correlation between individuals who appreciate market efficiency and those who find it difficult to make “a simple acknowledgment of how things like gas hikes impact people’s lives.”

It may be true that my enthusiasm and appreciation for markets and prices obscure me from seeing the painful impact of rising prices on individual’s lives, however I’m not sure if you appreciate all of the other factors which also generate this obscuration which you refer to. Your explanation is interesting, but how accurate it is, I can’t say.

For example, I ride my bicycle to work 4 days a week and when I do drive to work it’s in a 30+ mpg Honda Civic. The fraction of my income spent on gas is very small.

Further, one of the biggest complaints I have about my government is the centrally-planned, congested, car-centric roads that it has provided me with. Our constitutional republic has failed to allow a private market for roads and other private market forms of transportation.

The thought of gas prices rising causes me to both empathize with drivers and provides me with hope that more people will start riding a bicycle to work. A larger voting population of bicyclists means more bike-oriented roads and safe roads for bicyclists for me.

The full explanation for my feelings about the impact of rising prices on individual’s lives is extremely complex.

I also admit that I can not fully explain my own feelings. Feelings are like prices: they contain an immense amount of information and emerge spontaneously. The explanation that I’ve provided here for the obscuration that you mention is only a summary of a fraction of the explanation that I’m conscious of.

This gets to an important point about: the human mind and the extended order are too complex to be fully understood. To get a sense of this one has to look within oneself. The reason being is that one can not know more about someone else’s thoughts than they can about their own thoughts. And, if one tries to understand their own feelings, one quickly realizes that a particular feeling one has, is generated from too many subtle factors to be modeled by an economist. Further, the idea of a single feeling existing in isolation from other feelings is a false one. Feelings it seems are mixed with other feelings, and the reasons that explain one dominant feeling are sometimes too complex to understand.

If you can’t explain feelings, then you can’t explain actions and thus can not accurately model an economy.

Sam Grove May 14, 2011 at 12:05 am

Scott, we can observe some things abut human mentality, and one of these is the feelings of entitlement humans experience when threatened with change.

Gas has gone up? But I’m used to the old price, I’m entitled to that price, etc.

txslr May 13, 2011 at 1:02 pm

I’m so sensitive that I actually felt bad for people before the spike because prices weren’t even lower. Sometimes, when I’m well-rested, I can feel bad that gasoline isn’t free. Be careful, though. This type of sensitivity requires special skills. Don’t try it, you might sprain something.

John V May 13, 2011 at 1:22 pm

Yes. Acknowledging pain at the pump goes without saying. However, this is about people in high places (Attorney General) sending a silly and pointless letter to the oil company when he should know better.

It’s not so much about defending the oil companies as it about saying what should be said to foolishness about high gas prices to people who shouldn’t be making such inquiries.

After all, Don didn’t defend the oil companies until somebody made a silly gesture to “try and get to the bottom of it”. So his defense was hardly unwarranted and unprovoked.

Daniel Kuehn May 14, 2011 at 2:18 pm

re: “However, this is about people in high places (Attorney General) sending a silly and pointless letter to the oil company when he should know better. “

Right. Note that both this fictional response letter and Don’s initial fictional response letter mocked the AG for that and defended the market. I would not have like it if it didn’t.

John Dewey May 13, 2011 at 4:58 pm

gee, that sucks for people on tighter budgets than I am

Most people on tighter budgets can find ways to reduce gasoline consumption. Car pooling is not difficult to arrange. But few people already on tight budgets can reduce food consumption. If you are truly concerned about such people,Daniel, you should be more upset about ethanol mandates and Federal Reserve inflationary policies than about gasoline prices.

Methinks1776 May 13, 2011 at 5:58 pm

*like*

Daniel Kuehn May 14, 2011 at 2:19 pm

You ought to know by now what I think of ethanol mandates.

I would take issue with your characterisation of what is driving the gas prices, though.

John Dewey May 16, 2011 at 2:34 pm

Where did I say anything about what is driving gasoline prices?

Observer_Guy1 May 12, 2011 at 9:50 pm

Perhaps Empire should respond back with only a $5 gas card in an envelope.

nailheadtom May 12, 2011 at 11:24 pm

Gasoline prices could be lowered substantially by rescinding the federal and state taxes on the product.

Tom May 13, 2011 at 12:02 am

Eh….better to eliminate tax loopholes for big oil.

Tim May 13, 2011 at 1:35 am

Everyone with a semester’s worth of economics knows that will raise the price even higher.

Tom May 13, 2011 at 8:05 am

Wow, thanks! That was amazingly productive to the conversation.

Tim May 13, 2011 at 12:46 pm

Hey, when you’ve got things so backwards you think taxing oil companies more will *lower* prices, there really isn’t any discussion to be had.

Tom May 13, 2011 at 2:15 pm

Amazing! Absolutely brilliant! But oh wait….I never made that claim.

Tim May 13, 2011 at 3:28 pm

Sorry, but when someone says X can be done by doing Y, and one simply responds that Z would be better, one is making the argument that X is better accomplished by Z. As that is the format of your response above, you did in fact make that argument.

JJ May 24, 2011 at 11:24 am

“and one simply responds that Z would be better, one is making the argument that X is better accomplished by Z”

This is not necessarily true. Tim could have meant that accomplishing Z would be better than accomplishing X.

The implication in such an argument would be that lowering gas prices (X) is less worthy a goal than forcing oil companies to get off the public teat (ignoring Y, accomplishing Z)

Scott G May 13, 2011 at 12:18 am

Mark Perry at Carpe Diem had a post recently that put gas tax at 62 cents per gallon.

http://mjperry.blogspot.com/2007/05/gasoline-taxes.html

Tom May 13, 2011 at 12:44 am

Greg Mankiw at Greg Mankiw’s Blog discussed why they should be even higher.

http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html

Anotherphil May 15, 2011 at 9:06 pm

The whole notion of Pigouvian taxes is great idea if you really think the government will dispassionately levy taxes on “public bads” and not just use the power as a way to pick winners and losers, who will of course be determined by political bidding..

Dan May 13, 2011 at 1:18 am

Opening up drilling, increasing supply would likely decrease price more than anything. End tax deductions for oil companies? Sure, but end deductions for all businesses. No subsidies or deductions for the inefficient and unreliable wind and solar companies. And certainly, no subsidies for turning food into fuel ( ethanol).

But, lower the overall corporate tax rate to a flat rate.

Tom May 13, 2011 at 2:47 am

Good plan…won’t happen. The Economist just had a story about licensing restrictions in Florida. Even in a statehouse controlled by Republicans, the protected-by-licensing business cartels effectively killed the bill. So long as gains are concentrated and costs widely diffused, the current system won’t be going anywhere anytime soon.

Methinks1776 May 13, 2011 at 2:24 pm

Yep. Why would politicians do any of that if by doing so politicians become less relevant?

Dan May 13, 2011 at 9:46 pm

I agree, that it is unlikely to occur so long as voting public is under the impression that officials are supposed to bring home the bacon.

txslr May 13, 2011 at 1:05 pm

I think we should lower corporate income taxes to a flat 0%.

gregworrel May 12, 2011 at 11:40 pm

Great letter Don. You had me at “none of your business.”

I might have added:

“We always charge as much as the market will bear, which is almost always less than we would like it to be. We have this pesky problem called competition. Funny thing is, If we price our products too high, our customers, the gas stations, will buy from one of our many competitors.
They tell us that even a few cents are enough for their customers to drive down the street and buy from a different gas station.

Perhaps if the legislature could pass a few more laws and regulations they might succeed in driving a few more of our competitors out of business. There already are enough regulations to drive a sane man to drink, but you know what they say about that last straw. Maybe if you could send a few more of these annoying letters, some of our competitors might decide they would rather do something less stressful. I hear they are always looking for new bomb technicians in Iraq. At least people thank them when their job is done. Thanks for anything you can do to help.

Scott G May 13, 2011 at 12:20 am

Yep. This was the highlight for me too:

“Because Empire is a private firm with no government-granted protection from competition, our pricing policies are none of your business.”

Mao_Dung May 13, 2011 at 2:32 am

The government response should be obvious. An additional $100 per gallon tax should be applied immediately, excepting emergency vehicles, such as the paramedics, and public transportation, such as buses. This would accomplish a few things some important others more symbolic. Fossil fuel consumption is melting mother earth and must be drastically reduced – NOW. The working class person would be up in arms, but that is a good thing, from an environmental and a revolutionary standpoint. They would have to car pool, take public transportation, etc. to and from work until they adjusted to the change.

The streets and highways would be mostly used by rich people driving very expensive cars, such as Lexus, Roll Royce, and Mercedes Benz. A hundred dollar a gallon wouldn’t faze them in the least.Tea Party clowns would be stuck on a crowded bus looking out the window at the rich driving around in the lap of luxury laughing at them on the sardine can, B.O. bus. This would promote class warfare which would be a beneficial by-product of the high tax, a positive externality, if you will.

The planet will be saved (maybe) and the profligate, ridiculous rich will be taxed and expropriated back into seeking employment like everyone else.

I will only get scolds for my correct views, but that says more about libertarians fascist capitalists than it does about reasonable, thoughtful counter-arguments.

dsylexic May 13, 2011 at 2:51 am

i would start by stripping the POTUS of his cavalcade.he can drive his own smart car.or ride a bus.no senator or congressman or president should be paid a dime.they should work for the welfare of the people for free.they can live on solidari-tea if they want.

brotio May 13, 2011 at 1:28 pm
Chris May 13, 2011 at 3:48 am

Dude, you cannot be a real person. I really hope you are just being facetious, but the amount of time you spend on here makes me think otherwise.

What about a poor person that drives 10 miles to work everyday. Many cities don’t have effective mass transit, If somebody makes 100 dollars a day, you just taxed them out of a job. What about rural workers who must drive quite a bit to put food on their and the nation’s table? You realize our cities are not dense and are based on the car economy.

A sudden 100 dollar tax would cripple our economy more quickly than any other idiotic policy you could come up with (ok, maybe I’m not giving you enough credit). What about all the products delivered by truck, or boat? How would you get pizza delivered?

Unless you grow all your own produce, walk everywhere, cut your grass with scissors, etc etc.
You don’t think about consequences, just pie in the sky, unrealistic and pointless things that have no basis in sound economic reasoning. Wow. I know 6 year olds with a higher level of economic literacy than you.

Mao_Dung May 13, 2011 at 11:07 am

http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html

I guess you won’t be joining the Pigou club anytime soon.

brotio May 13, 2011 at 1:29 pm

Good Grief!

Even when he writes something that over-the-top, he’s still not taken as a satirist?

yet another Dave May 13, 2011 at 3:48 pm

Yeah – I though for sure the “reasonable, thoughtful counter-arguments” line would have given her away. I was wrong.

Peter McIlhon May 13, 2011 at 4:07 am

Not to mention that you can forget about sending a package ANYWHERE that you can’t walk to. I’m pretty sure people won’t pay $200 for a $15 package. You imagine that companies like FedEx will charge prices like that for their trucks and plane delivery services. But that’s cool, I live in South Korea and it already costs people about $60 dollars to send me something, I’ll be cool with reimbursing them the 300% increase in mailing charges.

Michael May 13, 2011 at 8:07 am

An additional $100 per gallon tax should be applied immediately

LOL!!

geoih May 13, 2011 at 8:45 am

Why only $100? Why not $1,000,000? Why bother with these half measures? Why not simply destroy the whole oil supply infrastructure, so as to eliminate any chance of cheating or black markets.

Why not destroy all of our modern technologies? These only consume more and more energy? (Maybe you could start with your own computer?)

T Rich May 13, 2011 at 10:04 am

“Maybe you could start with your own computer?”

Of all the excellent comments and policy discussions on this website, I think that this is the one I would most like to see enacted.

Doubleplusgood idea, don’t you think Dung? Get on it!

Slappy McFee May 13, 2011 at 9:04 am

Two quick things:

1) It’s “exempted” — “excluded” is also acceptable

2) It’s Mother Earth or, if you prefer, Gaia. It should be capitalized.

Ken May 13, 2011 at 9:35 am

Dung,

“This would promote class warfare which would be a beneficial by-product of the high tax, a positive externality, if you will.”

Why do you always promote violence? And why do you hate rich people?

” will only get scolds for my correct views, but that says more about libertarians fascist capitalists than it does about reasonable, thoughtful counter-arguments.”

It’s also pretty cool how you use the term “libertarians fascist capitalists”. I mean the only way you can do that is if you don’t understand the basic definitions of the english language.

Rock on fool. Keep putting on display what a violent little creep you are.

Regards,
Ken

Sam Grove May 13, 2011 at 9:47 am

And why do you hate rich people?

Because he’s not and has a small heart.

Sam Grove May 13, 2011 at 9:45 am

I will only get scolds for my correct views,

Proclamation of correctness indication of weak argument.

Ken May 13, 2011 at 10:21 am

Sam,

Not to mention that it’s very unclear how a government policy of selling gas at $100/gallon will enrage the public at rich people. Like people are just dumb asses and don’t understand that their lack of gasoline is due to tyrannical government as opposed to rich people.

But the meandering mind of Dung is truly meandering, completely incapable of mustering even the weakest of logical arguments.

Regards,
Ken

Rugby1 May 13, 2011 at 10:58 am

@ Mao.

I totally agree. But why stop at $100 per gallon, why not $1000 per gallon. At that point only the very rich would be able to drive.

Now you have mentioned exemptions. Outside of police and fire, what other exemptions would you grant? How would you determine who gets those exemptions? We could set up special licensing boards that have “hearings” on whether or not to grant “fuel licenses” that of course grant people the right to purchase untaxed fuel. I am sure these will all be staffed by the most just of individuals so there will be “special exemptions” given to service providers of local license holders, or government family members, or otherwise politically connected individuals.

Now those are set up. What do we do about food, packaging, and electricity? I assume you understand that most plastic based products are made from oil based compounds. And you do know most power plants use some kind of fuel to produce and distribute electricity along a grid? Would you knock out those as well, that would definitely help the environment, or would you want to set up special licensing board for those as well?

I am in total agreement with you dead communist leader poop, but I am just not understanding the details. I freely admit my intellect may be limited in comparison to your own so help me, walk me through the “best” way to re-order society.

chris May 13, 2011 at 1:11 pm

Dung, I’d like to see your point of view, but I can’t quite shove my head that far up my own ass.

What’s the color of the sky in your reality?

Dan May 13, 2011 at 9:49 pm

I would start by rounding up all filthy marxists and communists and sending them to detention camps for re-education. Since these camps are the hallmark of these filthy, vile regimes and they so desperately want that society…….. Here ya go!

Sam Grove May 14, 2011 at 12:08 am

If you want to stop petroleum consumption, the price should be set to 0, then no one will supply any.

Dan May 14, 2011 at 11:20 pm

Ha! Good point!

Bill May 13, 2011 at 4:01 am

No where to boot in this was Bernanke’s enjoyment with his printing toy?

Surely inflation affects gasoline prices as much as everything else.

I would have responded with “While we’re at it, who will investigate the government for its out of control printing which are driving up prices across the board – not just in gasoline.”

Peter McIlhon May 13, 2011 at 4:09 am

While I agree that the Fed has printed a disgusting amount of money, it hasn’t been released by the banks yet so technically we haven’t seen a significant inflation of average prices.

Marcus May 13, 2011 at 9:02 am

It can be hard to distinguish real demand from artificial demand created by the Fed. Speculators speculate by borrowing money. The lower the interest rate the better the spread. So maybe some of the rise in oil prices can be attributed to the Fed.

The Fed ‘prints’ the money and the speculators focus it into commodities.

Dan May 13, 2011 at 9:50 pm

They don’t have to put the printed dollars into circulation for the inflationary measures to take root.

Gil May 13, 2011 at 4:50 am

Rising real prices are important, rising nominal prices less so.

no one important May 13, 2011 at 11:03 am

The economy is not homogenous. Inflationary policy will not cause merely nominal price increases across all title and services. Right now it’s going back into oil and food because those are the “sure things” that will be in demand even while “aggregate demand” is still relatively weak.

This was very easy to anticipate.

KD May 13, 2011 at 5:12 am

Don,

Here’s the real question: Would you write that same letter if you were hired to run that firm? Well, you might do so, but the stock holders would freak out and fire you immediately. However, Senator so-and-so says that Don’s company is un-american (After all, Don’s letter does not support what I support).

Therefore Senator so-and-so appropriates funds and carefully explains how to take advantage of an innocuous change in the tax code to your competitor. By the way, your competitor donated $10,000 to so-and-so’s campaign. You did not.

KD May 13, 2011 at 5:19 am

“After all, Don’s letter does not support what I support” spoken from the perspective of a legislator.

kyle8 May 13, 2011 at 2:03 pm

I totaly disagree, any CEO now in days who gets in a public spat with a politician will reap lots of good publicity. People hate politicians perhaps moer than ever before. Look at how much approval even that idiot Trump got for going on the attack against politicians.

Martin Brock May 13, 2011 at 8:12 am

Empire’s price increase is Gansler’s business, because Gansler will choose to buy at Empire’s price or not. He may also choose to buy a competitor’s gasoline, or he may choose to buy an alternative source of energy. Either way, he needs to know Empire’s price. If he’s an established customer of Empire, Gansler might inquire about the reasons for Empire’s increase, since this information could be relevant to his decision to continue the business relationship or seek other suppliers.

Empire can gain at the expense of its customers insofar as countless statutory monopolies and other privileges, all defended by Gansler in his professional capacity, decrease the options of Empire’s customers. Countless statutory monopolies certainly do exist, including forcibly exclusive rights to the use of parcels of land, and Gansler lives to serve the monopolists, because he and they are both part and parcel of the state.

muirgeo May 13, 2011 at 10:18 am

It is just pitifully ridiculous to claim speculations as it is currently set up does not add to the price we pay at the pump.

It’s funny… actually sad, to see Stossels audience upset with taxes included in the price of oil but apparently OK with similar amounts in the price being reflected in speculators fees. Literally people in the audience were clapping because they are happy to be ripped off by speculators.

The lady made the rational point that there are two types of speculation . One that is based on reality and one that is based on casino economics that Don apparently supports. And Bill O’Reilly is right. Simply raise the margin requirements and most of the problem would be solved.

http://www.youtube.com/watch?v=-M4e9vgOFTQ

crossofcrimson May 13, 2011 at 11:11 am

“It is just pitifully ridiculous to claim speculations as it is currently set up does not add to the price we pay at the pump.”

Hmmm….the argument is a little more subtle. At any given single point speculation could be raising what would otherwise be the current price. On the other hand, past speculation is working to lower it. And, of course, current speculation (which artificially raises demand and price now) will artificially raise supply and lower price in the future. I think the more sophisticated argument is that it doesn’t, by itself, raise or lower prices, over time, on net. In fact, all it really does is impede price volatility – which could certainly be considered a worthwhile service in many respects.

In all honesty, I don’t think most people who bust on speculators have it %100 wrong (speculation NOW raises prices NOW), but I think they have an inadequate understanding of how speculation functions over time.

Sam Grove May 14, 2011 at 12:10 am

Speculators dampen price fluctuations.

Slappy McFee May 13, 2011 at 1:00 pm

Shall we raise the margin requirement in regards to government debt?

txslr May 13, 2011 at 1:19 pm

I think O’Reilly (who understands these things a poorly as you) got the timing a little wrong. The margins on silver were raised in response to the drop in prices. The drop caused historical volatilty estimates to increase, which caused the exchange to bump their margin requirements.

kyle8 May 13, 2011 at 2:09 pm

speculators set prices based on their perception of future supply and demand. If you believe anything else you just show how ignorant you are. Any speculator who did not use supply and demand clues would be bankrupt in a short while.

Any group of speculators who tried to conspire to drive up the price of a commodity artificially would soon end up like the Hunt Brothers did when they tried to set the price for silver. And with oil it is even worse since it is entirely too big a market for even a large cabal to have much influence.

Opec is large enough, since it consists of some of the largest producers, to fix prices. However, even there, the reality is that Opec members often cheat on their own agreements and sell at reduced prices so that they can gain market share over their Opec allies. Opec unity only lasted about seven years in the 1970′s before widespread cheating.

Frankie Barbella May 13, 2011 at 3:27 pm

Remember, speculation is a two way street in regards to price. How many people were upset when those evil speculators were out shorting crude? Answer… none!

muirgeo May 13, 2011 at 10:24 am

Please respect FT.com’s ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article – http://www.ft.com/cms/s/0/54791486-1dd9-11e0-badd-00144feab49a.html#ixzz1MF4XqsLY

Some have argued that speculation cannot drive up futures prices over the long run, because, ultimately, betting against supply and demand fundamentals is a losing strategy. Yet, when speculators control more than 50 per cent of the market, as they do in many commodities today, it is the producers and consumers who lose out to the speculators, not the other way around.

So again today Don when you fill up your tank I and America thank you for the 50 cents a gallon going to the government to help with all the regulatory and infrastructure needs that keeps the oil flowing. Also the guys on Wall Street thank you for the other 50 cents a gallon you are donating to their Casinos and Mansions and abilities to lobby politicians NOT to oversee their activities… Oh and they also thank you for shilling for them on shows like Stossel. With out the media and academia support and the right wing think tanks and stuff like that their Casino’s might be shut down.

muirgeo May 13, 2011 at 10:33 am

The argument in support of oil speculation is a little like saying, ” Hey look at the housing market..see… eventually the price mechanism works.”

crossofcrimson May 13, 2011 at 11:17 am

When you give people (on every level) artificial incentives to consume more that what the natural price mechanisms would otherwise tell them you eventually get shortages (busts).

This is kind of the primary insight Austrians bring to the table. So I’m not sure how your comparison holds up or even applies.

muirgeo May 13, 2011 at 1:08 pm

Markets are quite capable of producing artificial incentive. In the modern era of nanosecond trading they can be manipupated such that the finance industry can go from 15% of all corporate profits to more than 40% with out adding anything productive to the economy and in fact destroying it for most of the world.

Adam Smith was talking about buying apples or bananas and he would be disgusted with the cult mentality the modern neoliberal economist have created in his name.

Methinks1776 May 13, 2011 at 1:26 pm

“manipupated”

I can’t figure out what you’re trying to say.

Were you going for “amputated”? As in “Hi, I’m Muirdiot and somebody amputated my frontal lobe.”?

Or were you going for “manipulated”? as in “Hi, I’m Muirdiot and I manipulated the dimwitted nurses working the mental ward where I am locked up to let me use their computer again.”?

brotio May 13, 2011 at 1:36 pm

Ah! A successful muirbotomy!

Considering where they had to go to get to that frontal lobe, it had to be an unusual use of a colonoscope as well.

muirgeo May 13, 2011 at 1:57 pm

“manipupated”

I can’t figure out what you’re trying to say.

That’s because you are really f’ing stupid because 99.9 % of people on the street would clearly know the appropriate word.

And it’s also why you avoid discussions of substance because you have nothing but liquid diarrhea for counterarguments. You are not a serious person… just a fifth grader with a faith based ideological belief.

Methinks1776 May 13, 2011 at 2:14 pm

Is there non-liquid diarrhea? huh.

So, you meant that you had a lobotomy. Thanks for the confirmation, Muirdiot.

muirgeo May 13, 2011 at 1:58 pm

And brotio you the 5th graders flunky or groupie or toady….. a moron with likewise nothing to say or to defend yourself with.

brotio May 13, 2011 at 3:53 pm

Sorry for using medical terms in my previous post, Yasafi. I didn’t mean to confuse you.

crossofcrimson May 13, 2011 at 2:09 pm

“Markets are quite capable of producing artificial incentive.”

That doesn’t make any sense in context. It’s like saying that the human body can grow artificial organs. If it’s artificial in reference to markets, then it’s an exogenous factor. Otherwise it’s just part of the market (even if it’s something you find fault with).

“In the modern era of nanosecond trading they can be manipupated such that the finance industry can go from 15% of all corporate profits to more than 40%”

Fast != artificial. There’s nothing “artificial” about such transactions, by definition.

“with out adding anything productive to the economy”

If you think investment adds “nothing” to the economy then, all joking aside, you really do need to peruse through a basic econ textbook.

“and in fact destroying it for most of the world.”

No, quite the opposite in most cases if you’re speaking strictly economically.

“Adam Smith was talking about buying apples or bananas and he would be disgusted with the cult mentality the modern neoliberal economist have created in his name.”

I’m not sure where you get the idea that Adam Smith would reject moder economics. Have you asked him his opinion lately? This might come as a shock to you but the basic axioms of economics don’t simply fall apart when trading new or complicated things – that’s actually one of the benefits of being grounded in the field. Crusoe analogies, as a matter of logic, work whether we’re talking about contemporary public trading or an actual island. That’s why they’re often used….

Joshua May 14, 2011 at 8:33 am

I thought gluts we associated with busts, not shortages, unless you mean a shortage of employment and income

Slappy McFee May 13, 2011 at 12:57 pm

Actually the pricing mechanism was working during the housing bubble. People were responding to the incentives available. Unfortunately, the unseen is very real, as many people like yourself have discovered over the past 4 years.

muirgeo May 13, 2011 at 2:05 pm

99% of the bubble was enabled by the market that was supposed to allocate resources and reduce risk but instead chose to invent CDO’s and CDS’s. It was by definition a bubble because the pricing mechanism was broke and the private markets have shown they are capable of this. There is no invisible hand god. Reality and fact have proven this over and over but a desire by true believers to keep their world simple … along with their personalities allowing easy manipulation and avoiding deeper thought make them cling to their faith beyond all reason.

“Ideas are inherently conservative. They yield not to attack of other ideas but to the massive onslaught of circumstance with which they can not contend.”

J K Galbraith

kyle8 May 13, 2011 at 2:15 pm

I don’t know of any economist who denies that bubbles occur.

Observation shows that actions of government often make them far worse. In this case pushing sub prime loans, soft interest rates, and otherwise propping up the home building market made the bubble far far worse than it would have been.

Then bailing out financial companies, spending enormous sums of borrowed money, while attacking business right and left has prolonged and exacerbated the recovery process.

Joshua May 15, 2011 at 11:56 pm

You can claim that the Fed made the recovery worse, however nearly everyone commenting on Bloomberg, WSJ, Financial Post, The Economist and other mainstream financial media belive that a depression was instead prevented. It is a counterfactual to claim this or the opposite, just like wether you believe in God or don’t. I would, though, point to strongly related data showing greek and british austerity causing recessions at the moment, not helping.

Methinks1776 May 13, 2011 at 2:17 pm

Please, allow me to translate this hot mess:

“I am an unbearable failure. There is literally nothing in the world that I’ve managed to comprehend in my long life as a boil on the ass of humanity. Signed, yours forever (for I cannot bear to tear myself away), Muirdiot.”

Slappy McFee May 13, 2011 at 2:27 pm

Interesting, “there is no invisible hand God”. Would you say there is a visable hand God? If people only act on the instructions of others, who are the ones giving the instructions being instructed by?

Methinks1776 May 13, 2011 at 3:16 pm

Oh great. Thanks a lot, Slappy. Next you’ll tell him there’s no Santa Claus and Easter Bunny. Must you stomp out all of his delusions?

crossofcrimson May 13, 2011 at 2:46 pm

“99% of the bubble was enabled by the market that was supposed to allocate resources and reduce risk but instead chose to invent CDO’s and CDS’s.”

Enabled by a market operating under exogenous influences – that’s the point we’re making. Artificially lowering interest rates, just one example, can cause markets to react DRASTICALLY differently than they otherwise would. Interest rates are a price – they reflect the availability of money. Setting artificial ceilings on real prices will surely benefit some in the short run, but it has consequences in the long-run. Such artificial ceilings, by definition, again, are not endogenous market forces. The whole Austrian thrust is that prices are signals, and that you can’t artificially adjust those signals without dis-coordination and loss. You can argue to what extent government institutions artificially affected incentives and prices (by all means, make the arguments) but don’t pretend like incredibly regulated, taxed, and subsidized markets are open and free; they are not.

“because the pricing mechanism was broke”

Explain to us HOW (explicitly) the pricing system is/was broken. I’m starting to think you’re referring to something else entirely.

“There is no invisible hand god.”

Apparently metaphor is lost as you lean leftward.

Either people are selfishly serving others (by providing goods and services) or they are doing so for free, altruistically – in which case we have no need for your over-arching authoratarian plans. So which is it?

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

– M.N. Rothbard

Dan May 13, 2011 at 9:55 pm

Good lord. Muirgeo is the mean little Marxist.

Sam Grove May 14, 2011 at 10:54 pm

There is no invisible hand god.

But there is a democracy god?

Sam Grove May 14, 2011 at 10:52 pm

The price mechanism always works, it just doesn’t work the way some people would like it to work.

The world is cause and effect, not intention and effect.

Thomas A. Coss May 13, 2011 at 11:31 am

One must be careful for what one wishes. The increase in the nominal price of gasoline at the pump will bring in an additional $1.22Billion in tax revenue to the state of California, and they didn’t have to do a thing.

If we were only fortunate enough that they (California’s state legislature) would seek to do less.

Slappy McFee May 13, 2011 at 3:10 pm

Doesn’t California tax gas by the gallon? Or is the increased revenue due to income taxes?

Tim May 13, 2011 at 3:31 pm

Either way it’s nearly impossible to predict what a tax is going to yield because it’s nearly impossible to predict the size of the deadweight loss.

Joshua May 14, 2011 at 12:27 am

It’s a percentage of the price of a gallon of gasoline. Gasoline goes up, taxes also go up.

Dan May 14, 2011 at 11:18 pm

Revenue from gasoline taxes are down. Substantial enough to draw Obama out to consider taxing mileage as an alternative to gasoline taxes. No thank you.

Joshua May 15, 2011 at 1:13 am

He is not! How would you tax milage?! Thats bananas! You just hate Obama for whatever reason.

Revenue from gasoline – was – down, when both the price and the volume of sales were down in the depths of the resession.

Dan May 15, 2011 at 2:19 am

You don’t pat much attention.

Dan May 15, 2011 at 2:49 am

Got you attention. What would be the problem?

Actually, Ray Lahood, transportation sec. Offered it up in 2009. The proposal was included on an informal Bill put together by dept of transportation.
The CBO was asked to score it.
Now the Obama admin has distanced themselves from it. But, a budget bill from trans. Dept that is ready for submission has not yet been officially submitted.
We should all know by now how the game works. One party puts forth an idea to see the response and the other party demagogues it.
But, the fact that govt is spending money to see what kind of projected revenue can be expected is yet another example of our govt crossing lines.

DR NV May 13, 2011 at 11:52 am

Witch hunting isn’t the quaint practice it is commonly thought to be. It’s the modus operandi and quite profitable. What you’ve just described may indeed be some kind of sorcery. I motion we form a congressional committee to determine if you or your familiars are involved in any kind of heresy.
It’s not like any old yokel can be trusted to poke around in the Earth until he finds crude oil. Only a certified, licensed, regulated, and taxed petroleum priest can be permitted to perform such sacred acts.

txslr May 13, 2011 at 1:12 pm

Years ago, when the elder Bush was president, there was a similar oil price spike. The president (who should have known better) has for forbearance from the oil companies – he asked them to hold the price of gasoline steady. Of course, he was roundly ignored, but one company heeded the call. I worked there; it was ARCO. Our management agreed to hold the price of gas constant. The day following that announcement every ARCO station ran out of gasoline and had to shut down. Brilliant!

Jeff Neal May 13, 2011 at 3:22 pm

Mr. Gansler is running for governor, using the office of attorney general and it’s resources as his campaign headquarters. Sound like a familiar pattern?

I’m ashamed that not one of the oil company executives who were grilled by the US Senate had the courage to tell the truth about the proceedings in that hearing room. Asking those honest business men to defend themselves against false charges, asking them to sanction their own public humiliation in front of a bunch of spineless politicos is disgusting . . . but so is not defending oneself when unjustly attacked.

I know they think that their public/investor relations team is right when they are advised to bite their tongue and take it, but in the long run, they do a disservice to their shareholders when they let the companies’ assets be confiscated by the government – little-by-little-by-little – and stand by and watch, so long as their salary isn’t at risk. . . They should all be fired immediately, if not sooner.

Seth May 13, 2011 at 4:37 pm

Here’s my version:

Mr. Gansler: We consider ourselves leaders in social awareness, so we raised our prices to ensure gasoline users cover all their costs of using gasoline, including the damage they cause to the environment. The higher prices will lead to a more efficient and desirable market outcome.

Unfortunately, this is just a test for now. Please do not be disappointed if we decide to conclude our Pigovian test and lower our prices in the future.

Joshua May 13, 2011 at 6:10 pm

Libertarian or Liberal, fuel and energy will be increasingly expensive and out of reach for more and more folks as we run out of easy to mine stored energy souces and switch to renewable energy. No economic escape hatch here. The only question is to the timeline.

Methinks1776 May 13, 2011 at 6:21 pm

I have news for you: petroleum is renewable. The only question is the timeline.

What is considered easy to drill today was unimaginable when I covered the industry 15 years ago and the stuff that was easy to drill then was unconsidered out of reach five years before then, etc. As long as the chimps in Washington keep their paws out of the industry, that timeline will keep growing.

muirgeo May 13, 2011 at 8:33 pm

Well in that case we should confine ALL our drilling to Texas since they have an unlimited supply. Yes and petroleum is now renewable… as long as you are using the Methinks dictionary and don’t care about things like real definitions and other things like the real world. But yeah let keep drilling in Texas.

Methinks1776 May 13, 2011 at 8:53 pm

What will we find if we drill your skull? I’ll bet there’s a significant reserve of natural gas.

Dan May 13, 2011 at 10:02 pm

It’s all renewable. Again, methinks outsmarts you. There is tons of fuel.
It’s not complicated. Muirgeo and other ‘ the sky is falling obamamaniacs’ drive your junky solar cars, and leave everyone else alone. I want tons of cheap gas on my car with no catalytic convertor and a huge engine to burn down the forest dirt road…… No muffler either. Chop down a few trees for fire wood and then kill some forest animals…… Eat one and leave rest for fertilizer. Oh yeah…… Will be doin that in a couple of weeks in Arizona. It’s grand to still be free…………

Joshua May 14, 2011 at 12:20 am

You’ll wish gas was only 4 bucks this time next year

carlsoane May 14, 2011 at 8:11 pm

Joshua: If it is above 4 bucks, it will more likely be because of a surfeit of dollars than a shortage of fuel.

Methinks1776 May 13, 2011 at 11:10 pm

OMG. I just saw the Stossel segment. Painful. Just painful.

Somebody (Muirdiot?) Botoxed what’s left of that dumb blonde’s brain. I don’t think it was the pit traders who were inebriated.

Don said it in the segment, but I’ll go further – the amount of margin is irrelevant to O’Reilly’s and O’Dummy’s argument. No matter how small the required margin, the trader is on the hook for all losses. Thus, “they never have to put up any money” is just plain wrong. The lower the margin, the higher the leverage, the more risk and the faster the trader can blow up. The only entity that cares about the level of margin is the clearing firm (the institution extending the loan to the trader) because if it can’t collect, it’s out the money the trader borrowed. If those institutions are happy to allow traders to put up 2.5% margin, on what basis does O’Dummy argue for 50% margin?

Not so incidentally, different traders are allowed different margin. Clearing firms usually carefully review trading strategies, run their own risk tests and meet with a million committees and internal risk managers before deciding how much leverage it is willing to extend to a trading company. The more easily hedged the product traded, the more leverage the clearing firm will allow. Since equity options and futures contracts can be perfectly hedged with the underlying, the clearing firm will generally allow higher leverage. Thus, 30x leverage is not at all unusual or particularly risky for options traders but it’s virtually unheard of for stock trading firms.

Increasing the margin only serves to make the market less liquid and more volatile. That is all it will do.

muirgeo May 14, 2011 at 7:40 pm

Yeah she confused the heck out of Don with something called logic. Don likes lots of middle men in his markets with special privileges and monopolies and access not allowed for the common man.

methinks and Don have NO internally consistent guiding principles based on market concepts. They supposedly are guided by market fundamentalism and the price of everything yet they repeatedly show tolerance for price manipulators, fraud, rent seekers, insider trading and paper speculation…. all this would be OK if only the government would go away. No useful tools is apt here… it really is.

I am FAR more a supporter of competitive markets than either of you two.

“We have clear evidence the fund flow pushed prices up and the fund flow pushed prices down,” said Michael Masters of Masters Capital Management, calling the amount of money moving into oil futures markets by large institutional investors in the early part of the year “way off the scale.”

http://www.msnbc.msn.com/id/26641528/ns/business-oil_and_energy

Dan May 14, 2011 at 11:16 pm

Define competitive? The liberal theology of govt competing to keep business fair? Who will keep govt honest? They are already corrupt as hell.

muirgeo May 15, 2011 at 6:02 am

A reasonable set of rules that doesn’t allow cheats, thieves, frauds, charlatans, a privileged class, the unscrupulous, monopolist and other unproductive thugs to gain profits without really producing.

Joshua May 14, 2011 at 12:25 am

How do you prevent someone from buying something being sold on the open market? Speculate/invest in a house, speculate/invest in oil, or gold or whatever. 76% of people out there though believe this is a conspiracy against them. When some oil companies break even at 30 dollars/barrel something seems wrong. But, I guess it is whatever somone will pay. I heard that we are going to go from 350 million cars world wide today to 2 billion by 2020. Hold on to your wallets.

nailheadtom May 14, 2011 at 7:34 pm

Everybody seems to forget that each morning for years Dick Cheney called up every service station in the country and told them how much to charge for gas that day. Maybe he’s still at it.

Kerub May 21, 2011 at 4:30 am

it is clearly not a problem of price spike but an anti-trust issue.
Mr. Boudreaux will agree with me that if competition is “fixed” that is a fraud against the public. So please: no more request of price justification but instead wide anti-trust and pice-fixing investigation in all the markets.

Then we will see all this bla-bla about how to be liberist with someone else’s wallet.

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