Time To Close the Enron Loop Hole

Derivatives have nothing to do with what is happening to gas prices. I challenge anyone to explain how derivatives trading has ANY impact on a commodity that is simply being influenced by supply (not enough being pumped) and demand (a great deal of it and increasing by the day). Lay it out, please. You can't.

This is so stupid. Even the fact that it has been labeled a "loophole" is proof that this is politically-motivated bullshit and nothing more. I always pay attention to the language people use when they call for any type of regulation.

Since when is people trading freely in a PERFECTLY LEGAL commodity a "loophole"? If I log onto Ameritrade and buy a stock am I taking advantage of a "loophole"? When you go to the supermarket and buy a bottle of spaghetti sauce are you taking advantage of a "loophole"?

Let's start by calling this what it is. It is an attempt by people who favor regulation of things to protect people from themselves (without actually knowing how to do it, though, so their solution has "mess" written all over it). There are people who want to regulate the derivatives and swaps markets. Derivatives are complicated investments. They have the potential -- when you create a commodities market around something like energy, which is vital to our economy -- for people to make bad investments, which in turn can have wider-ranging impact on the economy.

But the "speculators are jobbing you and driving up the price of oil" stuff is pure populist bullshit. Enron wasn't a speculation problem. It was a FRAUD problem. They did something illegal and criminal -- lied, didn't report correctly to the SEC, made up financials, cooked the books. Derivatives weren't to blame. People acting illegally were.

If you want to police the markets better, it is one thing. But this level of government interference (read up please about what they want to do) is not a simple matter of policing. It is outright regulation -- making up rules that inhibit people's abilities to trade freely and invest.

The arguments for this--since the word "Enron" pushes so many buttons, to me, are akin to saying, "There are people who rob convenience stores. Therefore we should strip search everyone who walks into a convenience store before allowing them to buy a pack of cigarettes."

It is really that simple. Do you agree with that kind of logic?

 

That is SOOOO untrue. It flies in the face of every fact. The Saudis have been cutting production and they are the largest supplier in the world. Our biggest problem right now is that the Arab countries aren't pumping enough oil to meet demand. What you said is just patently untrue. The world supply of oil is NOT MEETING DEMAND. If you insist, I can PROVE it, but I will then get accused of overposting. Then look at worldwide demand. It has been increasing steadily the last few years with Asia being the main cause. Again, I can PROVE this.

And that Congressional report is pure unadulterated bullshit. They cite a LAW SCHOOL professor from the University of Maryland, who without anything backing it up with anything HE has done, testified that $25 of the then $90 a barrel price of oil was the result of speculation. It's like they found a warm body to say what they wanted to hear (it suited their political goals) and then they wrote a report actually giving it credence to the exclusion of reality. They could have put Pee Wee Herman before the committee saying that and it isn't any more true. Meanwhile, they glossed over the people who could empirically demonstrate that speculation CAN'T have that much of an effect on a market. Speculation requires buyers and sellers. No one is going to buy a commodity at a price that they believe is going to lose them money in the future. And no one is going to sell at a price they think is too low. Think about how ANY market works. The only way you can throw a market out of whack and manipulate prices to that degree is by doing something illegal. And that is NOT what that report is alleging (or is there any proof there is anything illegal going on -- in fact, a lot of proof to the contrary).

This is little more than bullshit conspiracy theory. What is so sad about it is that these elected officials know it is, but they also know populist rhetoric that resonates with their constituents, so they will feed bullshit on a dumb public and intentionally advocate falsehoods and horrible policy based on those falsehoods.

 

Don't just provide the link, please. EXPLAIN what is in the link... You cited a 2006 government report saying that $25 of the price of a then $90 barrel of oil was the result of speculation. Now you link to an article that says what has happened to oil RECENTLY is the result of a bubble.

So what is it? You link to something from 2006 saying "It's the speculators!" Mind you, that report is more than two years old. And you link to an article now saying that the RECENT rise in oil COULD BE (it doesn't actually draw a conclusion, just quotes different people) the result of the, um, "speculators," and quotes someone saying it could be a bubble. The two things you just linked to are inconsistent. Unless we are in the midst of a never-ending bubble.

Pay attention to the quotes in that story like this: "It would be silly if we waited until things were not available," said a veteran energy trader at a U.S. hedge fund, who spoke on the condition of anonymity to protect his business relationships. He said traders have become convinced that military conflict between the United States and Iran is inevitable. He added, "People react to perceptions of what will happen. That's not idle speculation."

The reason I say that has nothing to do with Iran and how much that is influencing the futures market. It's to point out that the commodities market isn't the result of people somehow manipulalting prices. The market makes a reasonable guess about where the price of oil is headed based on what is going on the world. To the extent that there is speculation in the market (because most of the trading is by people who are involved in the business, who want to hedge their exposure), no one is betting on a price of oil that is higher than where they really believe it is headed. No one wants to lose money!

This is such a ridiculous line of thinking. The price of oil could be moving toward $200 a barrel. I can cite a zillion factors that make that a bet with better than 50/50 odds, including statements from the OPEC chief recently, the prospect of a fight with Iran, the weak U.S. economy, the weak U.S. dollar, etc.

So the commodities market is running up right now -- futures prices on oil are rising, BECAUSE people trading in those instruments see where things are headed.

But now people turn around say, "It's all because of the speculators!"

It's confusing cause with effect.

Speculators don't cause the market to behave the way it does. They are just placing future orders based on where they can reasonably see the price of oil headed. They aren't creating those world factors. They are just investing BASED on what they see.

If you take away the futures market, you are still going to get that rise in the price of oil we are looking at--and it is a pretty safe bet it is going to get much more expensive. The only thing you will do is make it impossible for people who are in that business to hedge their exposure.

In any case, explain how your 2006 report jibes with that newspaper article which makes the case that this is a RECENT bubble.

It's the same populist bullshit. The 2006 report is political. The newspaper article is typical journalism. Find people to give quotes giving credence to two things and you are being "objective." And voila, instant newspaper filler.

 

Where do I begin? The price of oil IS based on the futures market, as you said. Why is that bad or shocking? It ALWAYS has been based on where the futures market thinks the price is headed... Just as the price of orange juice is based on the futures market. And so is the price of pork bellies. And the price of gold... This is not a BAD thing. It protects people who make their living in those markets against unforseen things that can financially devastate them. That has NOTHING to do with 2000 act that created a new kind of derivative.

I'm either not understanding you or you don't understand what the "Enron Loophole" is and how futures markets work. There has ALWAYS been a futures market for oil. This has nothing to do wit the 2000 act. People traded in oil futures prior to 2000, and either way, 2000 as your starting point (or 2002 when the single-stock derivative was first traded) doesn't explain anything we have seen in the oil markets.

First of all, all the act in 2000 did was create a derivative in single-stock futures. It is just a trading instrument. THAT shouldn't be a threat to anyone. And they are very narrow securities. The act actually has very little bearing on the world oil market, because oil is a commodity that has ALWAYS traded on commodities markets. It was relevant to Enron, because it created a futures market for small energy markets that didn't exist before. They are apples and oranges.

Secondly, if the price of a barrel of oil is overpriced, the market will correct itself. Bubbles always pop (that article you linked to quoted people saying there was a bubble) -- UNLESS you are alleging some sort of manipulation, which is the unspoken bullshit feeding the "Enron loophole" crap. They invoke the name of Enron, which isn't remotely related to this, but pushes buttons, and they characterize perfectly legal trades as "loopholes." All you are doing is limiting a free market and a type of instrument, if you pass this type of regulation and it will have NO effect on the price of oil.

Thirdly, if you think there is manipulation (because you haven't explained how the derivatives or futures markets actually inflate the price of oil; please tell me HOW that is happening, and I will listen), you need to understand that people can BRIEFLY dominate slices of a financial market and manipulate prices. But any notion of prolonged manipulation is ridiculous. You can pump and dump a stock, for example, by hyping a small, obscure stock and then just making a handful of trades to make the price go up. But you can't manipulate the entire stock market. It's impossible.

What you need to do is explain how there is any manipulation going on in that market--if that is what you somehow believe.

What Enron did--which once again was fraud--was to exploit a single state's rules to sell electricity at inflated prices. It was a pretty short-term scheme focused on just one market (the California electricity market). And it was fraudulent! The ONLY way you can compare the world oil market to Enron is to show me how there is some force out there manipulating something much bigger, involving WAY MORE people, and that it hasn't just been a short-term fraud, it has been an ongoing thing -- which is what you are alleging if you think things have been somehow artificially inflated since your arbitrary 2000 starting point. You have to show me how speculators (a bunch of hedge funds) are getting together and saying, "Hey, let's drive the price up!" And then you have to explain how they are doing it and doing it for such a prolonged period.

Also, it flies in the face of how most hedge funds trade. If you run a hedge fund, there is MUCH greater potential to make money on falling prices than by driving prices of a commodity up. Hedge funds can make way more money short selling short, because the profits are unlimited. What some have done is borrow ridiculous amounts of stock, for example, and sell them at current prices to create excess supply that drives down the price. They then buy the shares at the lower price and repay their obligations and collect the profit on the difference. You can do that to any financial instrument -- stock options and other stock and fixed-income derivatives. But it is absolutely illegal to "bear raid" an instrument, where you purposely manipulate the price (for example, by spreading false rumors).

That doesn't apply, though, because you seem to be alleging that oil futures are being manipulated to trade too high, not too low. Either way, though, there is a huge difference between market manipulation and speculation. What is happening in the oil market is that speculators all see the price of oil headed up (And it's a "well, duh" kind of observation) and since anyone with a brain shares the same view they are driving the price--possibly to extremes.

You can't regulate that, though. It will correct itself if that is the case. And once again, if you blame "the speculators" you are confusing cause and effect. You take away the futures market and the price of oil is STILL headed up.