The Rage Against Derivatives Speculators Is Unfounded
Speculation, Congress & The Price Of Oil
Lately, the equity marketís daily fixation on the price of oil and corn has created a lot of consternation in Washington. As a result, there has been a lot of finger pointing by Congress as to just who is the culprit in all of this.
Just last week, simultaneous proposals were floated in the Senate with the goal of eliminating certain types of investors from the commodity markets. Citing ìspeculatorsî in the market as the cause of high energy prices, Senator Joseph Lieberman of Connecticut disclosed he was considering a proposal that would bar large institutions from investing and trading certain commodities.
Recently, on both conservative and liberal talk shows alike, there seems to be a newfound rancor towards ìspeculationî in the marketplace. This appears to be another case of misguided perception. By confusing ìspeculationî with ìmanipulationî, the public is being led in the wrong direction. Those of us who earn our living in the markets know that speculators play a vital role in their proper function.
Speculators Are Vital
This role has never been more apparent than in this new era of electronic trading. That is because the markets are now open to anyone who can afford the risk. Without speculators, there would be no penny-wide markets in equities.
In fact, speculators may be the key component that now prevents most kinds of market manipulation. By stepping in and taking either a long or short position for their own account, speculators provide much needed market liquidity. I shudder to think how wide the markets in oil would be without them.
Speculation in the markets is as old as the markets themselves and those in Washington, who believe that they are the cause of the problem, show a root ignorance of how the markets actually work. Pandering to the voters is as old as the markets themselves. If Congress really wants to point a finger at someone, they should look in the mirror. For it is there that they may find the villain in all of this.
There is no one single reason responsible for the explosion in the price of a barrel of oil. The Malthusians believe it is a supply demand issue, whereas the politicians have blamed everyone from Big Oil, to China and India and now speculators.
Letís look at some history. Back in 2003 when the Iraq War started, the price of a barrel of oil was $25.00. This week, oil was trading at around $132.00. In five years, the price of oil has gone up five-fold. Between 1972 and 1974 we saw the price of oil quadruple from $3.00 a barrel to $12.00 after the Yom Kippur War.
During the Iran-Iraq conflict in 1979 and 1980 the price more than doubled from $14 to $34 dollars. Apparently after 1980, we didnít have a clue that a Middle East conflict might negatively impact price of oil. How dumb are we?
We could have had an alternative energy plan in the works for the last 29 years. Unfortunately, our politicians canít ever see past the lobbyist in front of them. A comprehensive energy policy in this country is non existent. As John McCain so candidly admitted in May, our energy policy basically consists of ìfighting for oilî.
It would be easy to beat up on our President for this and believe me, Iím not big a fan.
However he has had the complicit support of the two bodies of Congress for the last seven and a half years. Those elected officials, who have allowed our country to get into this predicament, should be embarrassed and ashamed.
Under their watch they didnít have the foresight to recognize a disaster that has been 30 years in the making. Their lack of vision and complacency is a national travesty, and it has come from both sides of the aisle.
The light at the end of this tunnel will only be illuminated when we have a sound energy policy in place. We have to change our national mind-set regarding our consumption patterns. The good news in all of this is that I truly believe for the first time, there is widespread recognition of the issues and challenges before us.
The Tipping Point
There is a tipping point here and we may be close to reaching it. A point of no return, where technology and economic efficiencies combine to wean the world off of this dependency. This is a destiny that the world has been moving towards since the early days of the industrial revolution.
Earth can sustain life forever, but at some point man must push his selfish interests aside and insure this fact for every generation that follows. With vision, foresight and hope we can look past our instant gratification mentality and create a prosperous world.
We CAN make money making the world a better place instead of tearing it apart as a byproduct of our greed and ignorance. Detroit can boom again. Africa can become a blooming land of agriculture. We can create new industries, new jobs, and new wealth with renewable energy and advancements in technology.
We need to show the world that we are not going to go the way of the Romans, Greeks and other great civilizations whose life span was little more than a mere 200 years. We must rise above the selfishness and complacency that marked those doomed civilizations of the past, and take control of our own destiny.
I truly believe the world wants to embrace democracy and capitalism. But if we are going to be the beacon of light that Lady Liberty so stoically represents, we will have to start leading again.
To Congress I say, it is time to get off of your yachts and roll up your sleeves.
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