These days there seems to be a lot of argument about whether or not speculators are a major factor in the rising price of oil. Speculators basically invest their money on the basis of what they think the value of something — in this case — oil, will be in the future.
I traded stock index futures for a while myself and eventually stopped because it was just too stressful. Trading futures seems complicated at first, but it’s really pretty simple when it is explained in simple terms.
For example, if I believed that the NASDAQ index was going to go up, I would go “long” and buy a contract that would pay off for me if the NASSAQ did indeed go up and I sold my contract. I would then make a profit and pocket the difference between what I paid and what I sold it for.
If I believed the NASDAQ was going to go down, I would go “short” and sell a contract that would pay off for me if the NASDAQ went down and I was able to buy my contract back for a lower price. I would then pocket the difference between the price I sold the contract for and what I paid to buy it back.
Going “short” always seems to be the hardest concept to understand and I once heard of it explained in a way that made it quite easy to grasp.
Suppose a friend if yours moves overseas for a while and he decides to let you borrow his car while he is away. You get a very credible tip that the value of this particular type of car is going to drop dramatically in the near future. Maybe it is because it is a gas-guzzling SUV and people want to get rid of them due to the high price of gas. The market will soon be flooded with cheap SUV’s because the supply is so great and demand is so low.
So you sell your friend’s SUV for $15,000 and a few weeks later you buy the exact same model of SUV for $10,000 to replace your friend’s. Since you sold your friend’s SUV for $5,000 more than you paid for the one you bought to replace it, you pocket the nice $5,000 profit!
Naturally, it is probably not a great idea to sell your friends SUV without his permission, but this is essentially how going “short” works. You are borrowing futures contracts from a broker with the hope that they will drop in value and then you can buy back the contracts you need to pay back what you borrowed at a lower price and keep the difference.
Personally, I don’t think there’s any problem with the existence of a futures market for stock market indexes or pork bellies or a bunch if other things, but I do have a problem with a futures market for oil, since it is such a vital resource that pretty much powers the planet.
Today a bunch if airline companies sent a letter to Congress asking them to look into speculation in the oil market because the high cost of fuel is threatening to put them out of business. I happen to agree with them and believe that millions of people should not have to suffer because speculators want to line their pockets. There are plenty of futures markets to trade and I don’t think oil should be one of them.
There’s much disagreement among the experts about whether or not the speculators are having a significant effect on oil prices. I’m certainly no expert, but my belief is that the speculators surely aren’t doing anything for the price of oil except helping to drive it higher.
When you start talking about $100 to fill up your SUV or $1600 for me to fill my propane tank to heat my house, I’d say things are starting to get out of control and consumers the world over are getting quite fed up with it.
I sincerely hope Congress steps in and at least takes a good hard look at how these speculators may be driving the price of oil to these unprecedented high prices we are seeing these days.
Here’s a site that may be worth a look: Stop Oil Speculation Now
Leave a Reply