I could vote for Donald Trump

[BigRob]

Do you remember when you believed in Santa Claus and Christmas was so simple? Then you learned the truth, and everything became complicated?

The same thing is happening in the oil markets. You must educate yourself about the commodities market, but let me give you a quick example.

Suppose you are president of Air BigRob. Suddenly you see something that makes you believe the price of aviation gas will go up in the future. To protect yourself against a future price rise, you go to the commodity exchange and buy 100,000 barrels of aviation gas to be delivered in two months. Fortunately for you, the price of oil is the same on the future's market as it is today. In other words, nobody else is worried about a future price hike in oil.

In two months, war has broken out in Mexico, Brazil, in the Middle East, and a hurricane is threatening to blow through the Gulf of Mexico. The price of oil has tripled. At the same time all the airlines are paying higher prices for aviation gas, and airplane ticket prices have doubled.

Because you were clever, and bought oil in the past, you are taking delivery of aviation gas at low prices. You are rich.

Now suppose you are somebody who has no need for oil, but is simply a trader. That means you are a gambler. You buy and sell oil because you have inside information that Obama is going to send in troops to Libya soon.

So, you buy 10,000 barrels of oil to be delivered in two months at a low price.

As expected, Obama expands the war with Libya and oil goes up in price. You don't want all that oil, so after 1 1/2 months you sell that oil contract to someone who needs it soon. You will make a big profit on your oil because we are now at war.

Now envision thousands of traders who all think war is going to break out in two months. And they all rush in to buy oil at a low price. But after the first few hundred traders buys oil, the price of oil delivered in the future starts to go up. The next week, more traders buy oil and the prices rise even faster.

Finally, the local gas station is seeing prices rise and he raises the price of gasoline. And the Oil Companies are in hog heaven because they can sell their oil at higher prices!

But look. This all happened because of speculation. Oil is still being pumped in at its regular schedule, storage tanks are moderately full, NOTHING HAS CHANGED! But the price has doubled!

That is why the future's market and the traders have such an impact on prices. A lot more going on than "consume it, or store it."

In your own example, you openly admit that demand has risen (ie traders want more) while supplies remain constant (oil is pumped at its regular schedule)...basic economics tells you that when demand increases and supply remains constant, prices rise.

No matter how you want to explain it, at its core, you can do two things with oil....store it, or consume it. Even if a trader buys 1000 barrels for delivery two months from now, and then sells that to someone who needs it, the options remain the same....store it, or consume it.

If the trader is unable to sell his contract, then it is a clear indicator that the demand is not present, and the price is inflated...if he is able to sell his contract, then there is a demand for oil at that price.

 

[Dr.Who]

as someone who has written buisness plans and taking classes on owning your own buisness....I can only guess at what the start up cost would be to make a oil company that was non profit and big enough to make a difference...and I am willing to bet the bank is not going to loan me anything to get started on that.

Of course not. But then I was not suggesting that. I was suggesting that you and six thousand like-minded people all pool your retirement funds into a company that would drill for oil as a non-profit.

 

[GenSeneca]

In your own example, you openly admit that demand has risen (ie traders want more) while supplies remain constant (oil is pumped at its regular schedule)...basic economics tells you that when demand increases and supply remains constant, prices rise.

Demand vs Consumption. Those speculators who bid up the price of oil, aren't consuming the oil. So as you admit, supply remains relatively constant. Now you need to recognize that consumption - true demand - also remains relatively constant.

This is why I thought it was important to impress upon you the difference between speculative demand and actual demand. Actual demand comes from the consumer, the end user, they drive actual demand by consumption of the product. Speculators artificially drive up demand by bidding against not only the actual consumers but their fellow speculators.

By bidding in an auction for a product you have no intention of consuming, you're only making the acquisition of the product more expensive for the actual consumers who need it.

If the trader is unable to sell his contract, then it is a clear indicator that the demand is not present, and the price is inflated...if he is able to sell his contract, then there is a demand for oil at that price.

Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity.​

Speculators are not consumers, they are middlemen between the supplier and the consumer, and therefore should have no seat at the supply and demand table.

Free markets are more efficient because they operate on the basis of actual supply and demand. This system of matching consumption with supply leads to an efficient use of capital because there is very little money wasted on non-productive expenditures.

In a speculative market, the increase in demand is artificial because the consumption of the product has not risen beyond supply. So while it's true that some people will profit off the artificially inflated demand, it is still an unnecessary and inefficient use of capital that acts as a drag on productivity by diverting capital to these non-productive expenses.

 

[BigRob]

Demand vs Consumption. Those speculators who bid up the price of oil, aren't consuming the oil. So as you admit, supply remains relatively constant. Now you need to recognize that consumption - true demand - also remains relatively constant.

I assumed supply remained constant, based on the example from Hobo...but we can assume that supply does remain constant.

This is why I thought it was important to impress upon you the difference between speculative demand and actual demand. Actual demand comes from the consumer, the end user, they drive actual demand by consumption of the product. Speculators artificially drive up demand by bidding against not only the actual consumers but their fellow speculators.

By bidding in an auction for a product you have no intention of consuming, you're only making the acquisition of the product more expensive for the actual consumers who need it.

Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity.​

Speculators are not consumers, they are middlemen between the supplier and the consumer, and therefore should have no seat at the supply and demand table.

Free markets are more efficient because they operate on the basis of actual supply and demand. This system of matching consumption with supply leads to an efficient use of capital because there is very little money wasted on non-productive expenditures.

In a speculative market, the increase in demand is artificial because the consumption of the product has not risen beyond supply. So while it's true that some people will profit off the artificially inflated demand, it is still an unnecessary and inefficient use of capital that acts as a drag on productivity by diverting capital to these non-productive expenses.

I think you have not addressed the central issue of my argument...

Even if a speculator bids up the price of oil, if they are able to find a buyer at that price, then actual demand exists at that price...correct?

If they are not able to find a buyer, then actual demand does not justify the price, and the market corrects itself...causing speculators to lose money.

 

[GenSeneca]

I assumed supply remained constant, based on the example from Hobo...but we can assume that supply does remain constant.

I think you meant to say consumption in the second sentence.

I think you have not addressed the central issue of my argument...

Even if a speculator bids up the price of oil, if they are able to find a buyer at that price, then actual demand exists at that price...correct?

If they are not able to find a buyer, then actual demand does not justify the price, and the market corrects itself...causing speculators to lose money.

Justify: To prove or show to be just, right, or reasonable.​

I do not consider an artificial increase in price to be just, right, or reasonable.

Lets put it in other terms. Forget speculators for a minute, government places a 100% tax on each barrel of oil and thereby doubles the cost for the consumer. Would you consider that artificial increase in price to be justified so long as people still purchased barrels of oil?

 

[BigRob]

I think you meant to say consumption in the second sentence.

Justify: To prove or show to be just, right, or reasonable.​

I do not consider an artificial increase in price to be just, right, or reasonable.

Lets put it in other terms. Forget speculators for a minute, government places a 100% tax on each barrel of oil and thereby doubles the cost for the consumer. Would you consider that artificial increase in price to be justified so long as people still purchased barrels of oil?

It is not up to me to determine whether the price is justified, it is up the market to show us what it will bear.

If government doubled the price, and people continue to buy oil at the same levels, then demand justifies the price....but the odds are demand would plummet if such action occurred, and therefore the price is not justified.

 

[GenSeneca]

It is not up to me to determine whether the price is justified, it is up the market to show us what it will bear.

The 100% tax represents an artificial price increase - True or False

but the odds are demand would plummet if such action occurred, and therefore the price is not justified.

In such an event, the level of actual demand would remain the same but fewer people could afford to purchase the product, allowing some to claim that "demand" had fallen. So are you equating demand for a product with an ability/willingness to pay for that product? Are they the same thing?

Even if "demand" plummets and the actual cost is cut in half, the 100% tax is still there on the new price. So, is the tax justified?

If you're saying such a tax is justified, so long as people are willing/able to pay it, then I'd like to ask if you think that's a Conservative position.

 

[BigRob]

The 100% tax represents an artificial price increase - True or False

True...but artificial or not, that is now the price.

In such an event, the level of actual demand would remain the same but fewer people could afford to purchase the product, allowing some to claim that "demand" had fallen. So are you equating demand for a product with an ability/willingness to pay for that product? Are they the same thing?

At its core, demand in economics is simply the consumer's ability and willingness to pay for a product....so yes, demand is heavily influenced by a consumer's ability and willingness to pay.

How would you define demand?

Even if "demand" plummets and the actual cost is cut in half, the 100% tax is still there on the new price. So, is the tax justified?

If the market shows me that demand is meeting supply at X price, then the price is justified in my opinion.

If you're saying such a tax is justified, so long as people are willing/able to pay it, then I'd like to ask if you think that's a Conservative position.

I am not saying that at all...I would view the tax as absurd, and unjustified...but we are not discussing whether a tax is justifiable, we are discussing whether demand is present for oil at X price. If people pay for the product at that price, then demand seems to be present....does it not?

 

[Dr.Who]

If you're saying such a tax is justified, so long as people are willing/able to pay it, then I'd like to ask if you think that's a Conservative position.

Now that you mention it...

A tax is only justified if the need for the tax justifies it being imposed on the population. How large it is or how fair it is are separate issues. For example, if the New Red Menace (a fictional enemy) were planning to attack and annihilate us tomorrow any amount of money collected would be justified if it saved us from annihilation. As a corollary any amount collected, no mater how small, for no particular reason, would be unjustified. Sadly our tax system is more like the latter than like the former.

 

[GenSeneca]

Now that you mention it...

A tax is only justified if the need for the tax justifies it being imposed on the population.

I disagree. Two things here... First, I consider a tax justified only when it can be considered payment for a service; Police, fire, Military, Courts, etc. You pay the government, it protects your rights. That's the only legitimate reason for government to exist.

Second, a tax that is not born by all members of the population, rich and poor alike, is not justifiable. Every single American citizen should have to pay taxes, no exceptions, and in return get the exact same level of protection from the government.

 

[PLC1]

I disagree. Two things here... First, I consider a tax justified only when it can be considered payment for a service; Police, fire, Military, Courts, etc. You pay the government, it protects your rights. That's the only legitimate reason for government to exist.

Second, a tax that is not born by all members of the population, rich and poor alike, is not justifiable. Every single American citizen should have to pay taxes, no exceptions, and in return get the exact same level of protection from the government.

So, would a higher gas tax be justified if the revenue were used to upgrade our roads and replace the bridges that need replacing?

 

[GenSeneca]

At its core, demand in economics is simply the consumer's ability and willingness to pay for a product....so yes, demand is heavily influenced by a consumer's ability and willingness to pay.

How would you define demand?

You are confusing movement on a demand curve for a change in demand.

Demand does not change as a result of price fluctuations.

Movements versus shifts

Movement along a demand curve due to a change in the good's price results in a change in the quantity demanded, not a change in demand. A change in demand refers to a shift in the position of the demand curve in two-dimensional space resulting from a change in one of the other arguments of the demand function.​

Shift of a demand curve

The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve. Non-price determinants of demand are those things that will cause demand to change even if prices remain the same—in other words, the things whose changes might cause a consumer to buy more or less of a good even if the good's own price remained unchanged.​

As you can see, demand only shifts as a result of non-price determinants and price fluctuations only cause movement along the demand curve.

In a free market, consumption and supply meet on the supply and demand curve to determine price. Introduce anything that causes artificial movements along either the supply or demand curve, such as speculation and taxation, and you no longer have a free market but one that is being artificially manipulated.

I would view the tax as absurd, and unjustified...

Whether it's through a tax or speculation, the price has still doubled despite there being no changes in supply or consumption.

It seems you only find this 'absurd and unjustified' in the case of taxation but not in the case of speculation...

Why is it acceptable to have speculation cause artificial movement along the demand curve but not taxation?

 

[GenSeneca]

So, would a higher gas tax be justified if the revenue were used to upgrade our roads and replace the bridges that need replacing?

No.

You pay the government, it protects your rights. That's the only legitimate reason for government to exist.

Roads and bridges do not protect my rights. Let them be owned and built privately rather than publicly.

A tax that is not born by all members of the population is not justifiable.

Not everyone buys gas. Institute a flat tax on income so everyone pays the exact same percentage of their earnings with no exceptions. Or... abolish income taxes and institute a Fair Tax without prebates. One or the other, not both. Since abolishing income taxes would require a constitutional amendment, and I would never trust politicians with that kind of power, the flat tax is more appealing.

 

[BigRob]

You are confusing movement on a demand curve for a change in demand.

Demand does not change as a result of price fluctuations.

Movements versus shifts

Movement along a demand curve due to a change in the good's price results in a change in the quantity demanded, not a change in demand. A change in demand refers to a shift in the position of the demand curve in two-dimensional space resulting from a change in one of the other arguments of the demand function.​

Shift of a demand curve

The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve. Non-price determinants of demand are those things that will cause demand to change even if prices remain the same—in other words, the things whose changes might cause a consumer to buy more or less of a good even if the good's own price remained unchanged.​

As you can see, demand only shifts as a result of non-price determinants and price fluctuations only cause movement along the demand curve.

In a free market, consumption and supply meet on the supply and demand curve to determine price. Introduce anything that causes artificial movements along either the supply or demand curve, such as speculation and taxation, and you no longer have a free market but one that is being artificially manipulated.

I have tried to argue this based on an earlier agreement that I would assume supply remains constant...but it has to be brought up, supply is not remaining constant. Oil is a finite resource. Even if production remains the same, that doesn't mean supply remains the same.

Go back to the run up in 2008, everyone wanted to blame speculators, but ignored a weakening dollar, ignored declining Russian production, and ignored the issue surrounding the legitimacy of Saudi oil reserves....all of which would play a major role in the price of oil.

Now even today, we are facing similar issues...declining dollar, questions about proven reserves, and static inventories..all of which play a role in the price of oil...but we all want to blame the speculators..

If these things are occurring, why should the price not go up?

I don't want get bogged down with a debate of shifts vs. movements in the supply/demand curve...in my opinion they are always shifting and moving..but not because of some unjustified speculation.

Whether it's through a tax or speculation, the price has still doubled despite there being no changes in supply or consumption.

It seems you only find this 'absurd and unjustified' in the case of taxation but not in the case of speculation...

Because future supply and demand has changed.

Speculation is based on future supply/demand, and as we discussed in another thread, in terms of the onion market, the elimination of speculation was the blame for wild changes in price...in direct contrast to the oil market.

Why is it acceptable to have speculation cause artificial movement along the demand curve but not taxation?

I think you are making a lot of assumptions that supply/consumption remain unchanged, and therefore price changes are artificial, and caused by speculation. The simple fact is that supply/consumption never remain unchanged.

You seem to advocate that the consumer should simply pay spot prices at all times...but this would mean you are paying X amount one day, and then based on reasons I outlined earlier (supply constrictions, reserve issues etc) your spot price could double overnight. I don't see why that is preferable to a gradual increase/decrease, which speculators provide.

That aside, speculation is simply private contracts between individuals...something taxation is not...

 

[GenSeneca]

I think you are making a lot of assumptions that supply/consumption remain unchanged, and therefore price changes are artificial, and caused by speculation.

Careful, I have never claimed that all fluctuations in price are the result of speculation. What I have said is that speculation (and taxation) artificially cause fluctuations in price.

You see specualtion as a benign practice, nothing more than private contracts between individuals with the side benefit of smoothing out market volatility.

I see specualtion as artificial market manipulation which assists in the creation of market bubbles, thus adding to market volatility, and, by way of speculators inserting themselves as middle men between suppliers and consumers, speculation diverts consumer capital to non-productive expenses creating a drag on the economy.

We have both made our case and there's no reason to continue if we're just going to start again from the beginning. I doubt either of us believed the other would change his mind as a result of this exchange but there is a chance that our discussion has made an impact on others.