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California State University, Dominguez Hills
University of Wisconsin, Parkside
Created: June 28, 2008
Latest Update: June 28, 2008

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The Speculators Did It!

  • Introduction

    May need to switch this to another file. Want to have three levels of depth. jeanne

    Using dichotomies is inaccurate, a mere schema of how reality is actually experienced by us. So left/right becomes kind of like a straw man to distract us from the real issue that needs to be acted on and ameliorated. When is this most likely to happen? When we are providing feedback to an authority, be it government or merely power, to tell it that something in the system isn't working. By deflecting the argument to a one-sided approach with dichotomistic thinking, we can short circuit accountability. I think that's a lot of what we see in political staging. jeanne

  • Source backup with original URL

    Article backup with commentary and highlights by jeanne, for reference when studying this issue.

    Backup of Easy Target, but Not the Right One
    By Joe Nocera
    SOURCE: New York Times Business Section
    Copyright: Source Copyright.
    Included here under Fair Use Doctrine for teaching purposes only and for archival preservation when old papers are dropped from existing websites or when websites and/or their archives cease to exist. This happens more often than you may realize. jeanne

    This backup copy is to be used only if the original site on the Web is not accessible. It is meant to preserve the document for teaching purposes, when sometimes the URLS are changed when sites are updated, or sites are eliminated. Please be certain to give credit if you refer to this material to the original URL: Original URL, consulted: June 28, 2008.

    June 28, 2008
    Talking Business
    Easy Target, but Not the Right One

    Highlights and commentary by jeanne.

    So now we know: it’s all the fault of those damnable speculators. They’re the ones to blame as the price of oil tops $140 a barrel.

    Someone to blame. A scapegoat in the family. A group that shares some value, skin color, ethnic pattern, whatever that we don't share, that's "not like us." Someone to blame to divert our anger at the more complex factors that underlie whatever's wrong. For further discussion of the one-sided argument, understanding it, and getting beyond it: Speculators in Oil. jeanne

    It’s not our government’s fault for failing to come up with a credible energy policy — that can’t be it. Nor is the problem the weak dollar, or the voracious energy appetite of the Chinese, or those pesky rebels in Nigeria who are trying to blow up their country’s oil pipelines. And it’s certainly not the fault of you and me for driving gas-guzzling S.U.V.’s. It has to be those speculators. They are the only villains in sight.

    Here Nocera offers some of the more complex factors leading to the oil crisis. These represent the more complex two-sided arguments in which we would need to think carefully about how this crisis came about and about what we could do about it. None of these more complex factors offer a convenient "group" DIFFERENT FROM US on whom we can turn our anger and frustration.

    Nocera emphasizes the "groupness" of the speculators as different from us in calling them "villains:" they're "making money" off our misery. We're all in this together, except THEM. This is a wonderful illustration of how one-sided and two-sided arguments confound communication. jeanne

    This was “first let’s kill all the speculators” week on Capitol Hill, and it was not a pretty sight. On Monday, the House Oversight and Investigations Subcommittee held an eight-hour hearing (!), the sole purpose of which was to decry “excessive speculation.” “Have speculators hijacked trading on the futures exchange?” asked the Michigan Democrat Bart Stupak. His answer throughout the day — as he “grilled” an array of sympathetic academics and futures market critics — was a resounding yes.

    "first let's kill all the speculators" - from Shakespeare's "first let's kill all the lawyers": deflecting anger and frustration to a hated, different, group has been with us as a persuasion technique for a very long time.

    And "grill[ing] sympathetic academics and . . . critics" is a favorite pastime with all policy makers. Notice how the insertion of the adjective "sympathetic" subtly suggests that they must be somewhat biased in favor of whatever it is they're sympathetic to, a terrible insult to the integrity of any academically trained expert.

    Ad hominem arguments, arguments that are likely to appeal to emotions rather than logical argument, and that fall into the one-sided argument category. jeanne

    On Tuesday, the action moved to the Senate, where the Homeland Security and Governmental Affairs Committee held its hearing. “Speculation in the food and fuel markets is not illegal,” Senator Joe Lieberman of Connecticut conceded, “but that does not mean it is not very hurtful.” He continued: “They are artificially inflating the price of food and oil and causing real suffering for millions and millions of people and businesses.”

    Yes, the high prices on food and gas are hurtful, but the speculators are a small part of the cause of those high prices. OPEC and our government's failure to seek alternative energy and means of preserving energy dwarf the speculator's activities by comparison. By leaving out the primary villains, and focussing on the speculators, Lieberman is deflecting anger from his own group, the legislators who permitted this to hapen. By telling a part-truth, and leaving out the bigger part of the whole-truth, Lieberman is resorting to manipulative language play to deflect the public's anger and frustration. - a one-sided argument. jeanne

    There were yet more hearings on Wednesday, and by Thursday evening, the House had passed, by a wide margin, a bill calling on the Commodity Futures Trading Commission to curtail “excessive speculation.” Indeed, the C.F.T.C spent the week being raked over the coals for allowing all this rampant speculation to take place. On Monday afternoon, for instance, Representative John Dingell of Michigan took unseemly glee in going after Walter L. Lukken, the agency’s chairman.

    The use of "unseemly glee" in this paragraph, and "to prevent farmers and consumers from being “screwed” by “those folks in the futures markets.” in the next paragraph, an image is being painted that evokes a one-sided argument. Subtler than the drama played out by Rep. Dingell, but very much the same technique. This is the point at which I would recommend Albert O. Hirschman's The Rhetoric of Reaction. See the References following this backup copy. jeanne

    Jabbing his pencil at Mr. Lukken, Mr. Dingell described the founding of the agency as an effort to prevent farmers and consumers from being “screwed” by “those folks in the futures markets.”

    “Now,” he said, “we find that those good-hearted folks in the futures market have figured out how not just to screw the farmers and the consumers in the city, but they figured out how to screw the farmers and the consumers in the city on a whole new product — oil.” As Mr. Dingell sneered triumphantly, Mr. Lukken seemed to shrivel in his seat.

    Pay attention whenever you come across emotion laden words in what should be governance discourse. Such word pictures add a little excitement and fun to what otherwise may be fairly dull proceedings, but they do not exist comfortably or well in a reasoned discussion of vital issues. Sometimes the "political" needs to be taken out of "policy" to focus on the complexity of the issues and the diversity of the populace. jeanne

    Yes, it was wonderful theater, and great blood sport. And it had absolutely nothing to do with the price of oil.

    YES! jeanne

    It’s not just congressmen who are railing about speculators, of course. As oil prices have doubled in the last year, I’ve gotten e-mail messages from readers decrying speculators, who, many believe, are manipulating the futures market. More than once this week, legislators used that same word their constituents were using: “manipulation.”

    So let’s take a closer look at what the speculators’ critics are saying. First, despite the loose use of the word “manipulation,” that is really not what is being alleged here, at least not in the classic sense. Remember how the Hunts tried to corner the silver market? They bought up silver and took it off the market, thereby creating an artificial shortage. I suppose OPEC could do something like that — one could even argue that OPEC does that already — but no mere speculator could.

    I can already hear your rejoinder: what about Enron and its famous manipulation of energy prices in California? But remember, Enron was manipulating electricity prices, not oil, which was possible mainly because electricity can’t be stored. By getting power plants to shut down for hours at a time, Enron was able to create artificial shortages and jack up the price.

    Instead, the critics’ thesis is that speculators are creating an energy bubble the same way investors created the Internet bubble. As speculative bets on energy have grown drastically in recent years, the sheer amount of money being thrown at energy futures is making those bets a self-fulfilling prophecy. All that money, in other words, pushes prices higher than they would go if the market simply consisted of the actual buyers and sellers of oil.

    In addition, because of something called the “London loophole” and the “Enron loophole,” which allow speculators to use unregulated exchanges, they can evade the limits of the New York Mercantile Exchange, as well as C.F.T.C. scrutiny.

    The leading proponent of this theory is a portfolio manager based in the Virgin Islands named Michael W. Masters. When I caught up with him on Thursday afternoon, after his week of testimony, he said that the problem was that institutional investors had stopped seeing energy as a commodity the world relies on and instead saw it as an “asset class” for their portfolios. “I am opposed to thinking about commodities as an asset class,” he said.

    Several years ago, he continued, he began to notice that increasing cash flows were moving into commodities index funds. This was, he said, “long-only money” — meaning that it was a pure bet that prices would go up. By now, he told me, there is $240 billion in commodity index funds, up from $13 billon five years ago. As he also noted in his testimony before Congress, “the prices of the 25 commodities that compose these indices have risen by an average of 183 percent in those five years!” He claims that energy prices will fall by 50 percent if the speculators can only be driven out of the futures market.

    There are so many holes in this argument I scarcely know where to start. The C.F.T.C. says that some $5 trillion worth of futures and options transaction trades take place every day; can an influx of $240 billion, spread over five years, really propel prices upward to the extent that he and others claim? Then there’s the fact that the commodities markets don’t work like equity markets, where a small amount of trading can lift every share of a company’s stock. In commodities trading, every contract has a buyer and a seller, meaning that for every bet that prices are going up, somebody else is betting they are going down. Why doesn’t that short interest depress prices?

    And what about all those commodities, like coal or barley or sulfur, that don’t trade on any futures market but have risen as fast as or faster than oil? Or how about the recent decline in cash flows into many commodity funds — why have prices kept going up if the money has stopped pouring into those funds? My speculator friends tell me that in the last two weeks, trading volumes have been cut in half. Indeed, what I hear is that much of the speculative money that remains in the market is betting against higher oil prices.

    As for the London and Enron loopholes, I can pretty much guarantee they will be closed soon. There are some eight bills aimed at curbing speculation, and virtually every one of them calls for an end to the loopholes. That is probably a good thing — but I’d lay odds the price will not drop as a result. The loopholes are not the reason prices are going up.

    In fact, I’d be willing to go a step further. Even if you eliminated speculation entirely, the price of oil wouldn’t fall. Thankfully, no one is proposing to go that far (though Senator Lieberman was toying with the idea), because even members of Congress understand that futures markets serve a crucial purpose. They help companies hedge their oil prices, and they help energy companies manage their risk, for starters.

    The energy speculators I spoke to say that Congress has it exactly backward: the futures market is actually taking its cues from the physical market, where the buyers and sellers of oil do their business. Last week, the Saudis promised to produce an extra 200,000 barrels a day. But it is pricing that oil so high that oil companies are balking at paying for it. The Saudis didn’t arrive at their price by looking to the futures market — but if they get that price, it will certainly affect the futures market.

    Both speculators and oilmen say that supply and demand is the real culprit. “Our supply is pathetic,” said Gary Ross, the chief executive of the PIRA Energy Group, and a well-known energy consultant. “Look at the data,” he continued. “The world economy is growing by 3.9 percent a year. World oil demand should grow by 2.3 percent just to keep pace. That’s an extra two million barrels a day. We don’t have it! It’s obvious.”

    I also think there is something else at play. After years of ignoring the rather obvious fact that oil is a finite resource, the world has suddenly become acutely aware of that reality. Everyone in the oil markets is attuned to every little twitch that has the potential to damp supply or increase demand. That’s why, for instance, when Libya announced on Thursday that it might cut oil production, oil jumped more than $5. Meanwhile, when Brazil discovers a huge new oil field, the market shrugs. That is not speculation at work — it’s market psychology. There’s a big difference. If there is indeed a bubble, that’s what is causing it.

    “Speculators have always been an easy target,” said Leo Melamed, the man who founded the futures markets. As Ron Chernow, the great business historian put it, “At times in history when you have vast and impersonal forces wreaking havoc in markets, there is always a temptation to villainize someone.” Centuries ago, it was Shylock; now it’s the speculator and the short-seller.

    In his book “The House of Morgan,” Mr. Chernow has a description of Herbert Hoover, “moody and isolated,” convinced that short-sellers were behind the market’s horrendous downturn in 1929. “He came to believe in a Democratic conspiracy to drive down stocks by selling them short,” Mr. Chernow writes, adding that Hoover “began to compile lists of people in the bear cabal and even claimed to know they met every Sunday afternoon to plot the week’s destruction!”

    I wonder whether Mr. Dingell has heard about them.


    Copyright 2008 The New York Times CompanyTEXT


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