Friday, July 11, 2008

It too hot, lets ban thermometers

The title of this post paraphrases Russ Roberts. His post is about how Airlines are mailing their customers complaining about speculative activity in the oil market. The airlines seem to be arguing that the high cost of fuel today is due to speculation.

Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab.Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs

Exactly why speculators play this game of buying from one another, and why prices go up with each transaction is unclear. Why would speculator 1 sell to speculator 2 when he knows that speculator 2 can sell it on in a few days at a higher price? Why not hold on for a few days and pocket that profit himself?

The piece reminded me of this other article, also about how the Airlines industry seems to want the government to step in and regulate them. They are honest in some places

For passengers, Crandall's plan means fewer flights and higher fares. And for employees, it means less flexibility to fight for fair wages and benefits

and you can always read between lines such as these

Fares would undoubtedly go up, but they'd be more consistent. And regulation would provide the industry with some much-needed financial stability....Collectively, airlines have lost over $13 billion since deregulation, and that's even after you throw all the profitable years into the mix.

And this post by the Undercover Economist is about the impact of banning futures trading on the volatility of commodity prices.They quote a recent paper

The fundamental result of this paper is that futures markets are systematically associated with lower levels of commodity price volatility. The means for arriving at this result is a series of quasi-experiments with futures markets provided by history, namely their establishment as well as prohibition through time.

Alex Tabarrok at Marginal Revolution has a post on the same topic

Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings.