« Kaminsky on Sirota | Main | Ideas Matter» Don Boudreaux
June 20, 2008
Thoughts on Oil
Don Boudreaux
Yesterday's Diane Rehm Show -- it was on oil prices and drilling prohibitions -- prompts two thoughts.
First, one of the guests, Athan Manuel of the Sierra Club, asserts (somewhere around the 47th minute of the program) that "more drilling will only benefit the oil companies." Such a statement is the economic equivalent of proclaiming the earth to be flat: it appears to some people to be flat, but a bit of knowledge about the reality beyond one's immediate senses reveals this appearance to be wholly misleading. As my friend George Leef, of the Pope Center, asked when he heard Mr. Manuel's assertion: "And would increased production of violins benefit only the violin makers?" 'Nuf said.
Second, Ms. Rehm and most of her guests (like many pundits elsewhere) seem to think that the fact that any oil to be had from permitting drilling in ANWR and on the outer continental shelf will not hit the market for several years is sufficient reason to discount the seriousness of calls to open these areas to oil exploration and drilling. What I find sadly ironic about such complaints is that those who issue them are often the same people who lament the market's alleged inability to plan for the long-run. In this instance the pundits correctly recognize that opening up new areas today to drilling would require huge amounts of investments -- investments of lots of money and time -- and that oil companies that undertake such investments won't begin to earn a return on these investment for years, perhaps as much as a full decade.
But because of the large stretch of time required to actually bring forth oil from the ground in these areas, these pundits conclude that allowing such drilling is inappropriate. In other words, while the market has the patience to wait years before starting to earn a return on invested resources, pundits urge government to ignore the prospect of more oil from the likes of ANWR and the OCS because that oil won't arrive for many years.
Posted by Don Boudreaux in Energy, Myths and Fallacies, Politics, Regulation | Permalink
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d834518ccc69e200e5537e81768834
Listed below are links to weblogs that reference Thoughts on Oil:
Comments
For all those out there that want to stick-it to the “evil oil companies” by not allowing them to drill, maybe you should force them to drill. This will drive the price down and they will not have all those “evil windfall profits”.
This will of course take “10 years” and is not a long term plan, but the current plan is not working so this is just a suggestion.
Posted by: Ted | Jun 20, 2008 1:15:43 PM
If we shouldn't drill because it will take "ten years" to get any of the oil to market, then we shouldn't research alterative fuels either. After all, the payoff from that research may be even further in the future than the oil the environmentalist don't want to drill for. I guess expecting logical consistency from environmentalists is too much to ask.
Posted by: Joe Calhoun | Jun 20, 2008 2:03:49 PM
Ted, you don't understand. Either way, the oil companies profit. That' just not right. They're greedy, those oil-jerks! They don't deserve any profit. If I were president, I'd declare a law that the oil companies have to make zero profits!!! It's only fair.
Posted by: markwriter | Jun 20, 2008 2:04:56 PM
I wonder if these same people would agree that we should stop all research efforts aimed at finding a cure for HIV/AIDS because, given the current state of science, we are many years from a cure.
Posted by: Don | Jun 20, 2008 2:25:19 PM
I don't understand how they can say that this drilling won't have an effect on current oil prices because there won't be any production for a decade. If I have an oil field and think that there will be a shortage of oil (and higher prices) in the future, I have an incentive to keep some oil in the ground. But if I find out that there are going to be new supplies coming onto the market in the future and that oil will not be as scarce as I thought, then my incentive to keep that oil in the ground has gone down. So, is it not possible that opening up ANWR and offshore fields could reduce current prices or am I missing something?
Posted by: Rolo Tomasi | Jun 20, 2008 2:35:58 PM
The one issue about ANWR that I have yet to hear addressed is how the rights to drill would be attained. I assume this would be done by some sort of government auction or sealed bid process, right?
If so, how would the bidders value the oil in the ground? Wouldn't they bid on the tracts assuming the price of oil were something close to the current price (or in some sort of wide range)? And if that's the case, then wouldn't this process fail to substantially lower the price of oil?
Posted by: tw | Jun 20, 2008 2:42:09 PM
So is anyone actually wanting to drill? I mean, if the government wants to remove the restrictions that would be fine, but if the price of oil actually drops because of it, would it still be worth the effort to drill on the outer continental shelf?
Also thinking that if the government wants to really take some effective immediate action to lower the cost of oil it should cut government spending - immediately and dramatically. That is, stop just talking about a strong dollar and actually do something that would strengthen the dollar.
Posted by: Randy | Jun 20, 2008 2:53:56 PM
The liberals appeal to all the meatballs from the public school education monopoly.
Posted by: jorod | Jun 20, 2008 3:12:54 PM
The Diane Rehm show has always been pretty economically bone-headed. After all, she did devote an entire segment to Byron Dorgan (alone) and his protectionist nonsense.
Posted by: Urstoff | Jun 20, 2008 3:50:32 PM
http://www.econbrowser.com/archives/2008/06/drilling_our_wa.html
Now let me ask you this, is best-case $1.44 off the expected price of a barrel of oil in 20 years worth even the possibility of destroying the porcupine herd?
And if so how would the Gwich'in and other Alaska Natives be compensated. Their culture depends on that caribou and right now they have a right to graze their caribou on that land (if we assign a form of property rights to the citizens of Alaska to the wildlife living there, giving preference to rural Alaskans just like the AK constitution and various treaties do). So if we take away that grazing lands Coase would say they deserve compensation, and since they currently hold the right Coase Theorem would say they get to set the price for that compensation. This is Libertarian 101, isn't it?
Posted by: Mike Russell | Jun 20, 2008 4:09:35 PM
Had to google "porcupine herd". The first image I got when reading the above was just too funny :)
Posted by: Randy | Jun 20, 2008 4:27:46 PM
Would the liberals tell a hungry man not to plant a crop because it would take 6 months to grow?
Posted by: Doug | Jun 20, 2008 5:35:27 PM
http://globalresearch.ca/index.php?context=va&aid=8878
‘Perhaps 60% of today’s oil price is pure speculation’
by F. William Engdahl
Global Research, May 2, 2008
The price of crude oil today is not made according to any traditional
relation of supply to
demand. It’s controlled by an elaborate financial market system as well
as by the four major
Anglo-American oil companies. As much as 60% of today’s crude oil price
is pure speculation driven
by large trader banks and hedge funds. It has nothing to do with the
convenient myths of Peak Oil.
It has to do with control of oil and its price. How?
First, the crucial role of the international oil exchanges in London
and New York is crucial to
the game. Nymex in New York and the ICE Futures in London today control
global benchmark oil
prices which in turn set most of the freely traded oil cargo. They do
so via oil futures contracts
on two grades of crude oil—West Texas Intermediate and North Sea Brent.
A third rather new oil exchange, the Dubai Mercantile Exchange (DME),
trading Dubai crude, is more
or less a daughter of Nymex, with Nymex President, James Newsome,
sitting on the board of DME and
most key personnel British or American citizens.
Brent is used in spot and long-term contracts to value as much of crude
oil produced in global oil
markets each day. The Brent price is published by a private oil
industry publication, Platt’s.
Major oil producers including Russia and Nigeria use Brent as a
benchmark for pricing the crude
they produce. Brent is a key crude blend for the European market and,
to some extent, for Asia.
WTI has historically been more of a US crude oil basket. Not only is it
used as the basis for
US-traded oil futures, but it's also a key benchmark for US production.
‘The tail that wags the dog’
All this is well and official. But how today’s oil prices are really
determined is done by a
process so opaque only a handful of major oil trading banks such as
Goldman Sachs or Morgan
Stanley have any idea who is buying and who selling oil futures or
derivative contracts that set
physical oil prices in this strange new world of “paper oil.”
With the development of unregulated international derivatives trading
in oil futures over the past
decade or more, the way has opened for the present speculative bubble
in oil prices.
Since the advent of oil futures trading and the two major London and
New York oil futures
contracts, control of oil prices has left OPEC and gone to Wall Street.
It is a classic case of
the “tail that wags the dog.”
A June 2006 US Senate Permanent Subcommittee on Investigations report
on “The Role of Market
Speculation in rising oil and gas prices,” noted, “…there is
substantial evidence supporting the
conclusion that the large amount of speculation in the current market
has significantly increased
prices.”
What the Senate committee staff documented in the report was a gaping
loophole in US Government
regulation of oil derivatives trading so huge a herd of elephants could
walk through it. That
seems precisely what they have been doing in ramping oil prices through
the roof in recent months.
The Senate report was ignored in the media and in the Congress.
The report pointed out that the Commodity Futures Trading Trading
Commission, a financial futures
regulator, had been mandated by Congress to ensure that prices on the
futures market reflect the
laws of supply and demand rather than manipulative practices or
excessive speculation. The US
Commodity Exchange Act (CEA) states, “Excessive speculation in any
commodity under contracts of
sale of such commodity for future delivery . . . causing sudden or
unreasonable fluctuations or
unwarranted changes in the price of such commodity, is an undue and
unnecessary burden on
interstate commerce in such commodity.”
Further, the CEA directs the CFTC to establish such trading limits “as
the Commission finds are
necessary to diminish, eliminate, or prevent such burden.” Where is the
CFTC now that we need such
limits?
They seem to have deliberately walked away from their mandated
oversight responsibilities in the
world’s most important traded commodity, oil.
Posted by: Reed Randall | Jun 20, 2008 6:04:34 PM
These people are idiots and need to be treated as such:
"…more drilling will only benefit the oil companies."
Uh, wrong, idiot. Let’s see, investors and shareholders benefit (I’m a shareholder, so I benefit), consumers benefit (they receive oil, albeit at a higher cost), state, local, and sometimes national governments benefit (Canada charges foreign tax on oil/nat gas pass-thru trusts), so indirectly everyone (in that country) “benefits”.
“…any oil to be had from permitting drilling in ANWR and on the outer continental shelf will not hit the market for several years is sufficient reason to discount the seriousness of calls to open these areas to oil exploration and drilling. “
So the hell what? We probably shouldn’t be looking fore a cure for cancer, or even alternative sources of energy for that matter. Thos are still a ways off. So we’re just screwed.
And aren’t you, Athan Manuel and your moronic Sierra Club lobbyists, directly responsible for blocking drilling for 30+ years?
Athan Manuel, you are an idiot and a moron. Screw you, shut up, and stop talking about things you don’t understand. You should be ashamed to spout this crap in public.
Posted by: Mesa Econoguy | Jun 20, 2008 6:22:05 PM
I gonna tell my kids to quit school- after all, the return on the investment of their time in class won't begin to show for more than 10 yrs. Might as well start having fun now.
Posted by: David | Jun 20, 2008 6:52:21 PM
Athan Manuel's assertion that "more drilling will only benefit the oil companies"--sounds like the same kind of thinking that assumes below market fuel prices in China actually benefit the Chinese consumers...Not...interesting jump in oil prices today.
Posted by: Cora | Jun 20, 2008 6:52:30 PM
It's very simple. Oil = evil, bad energy. Solar/wind/geo-thermal/hydro = good energy.
4 legs good.
2 legs bad.
Bah bah bah baahhhhhhhhhhhhhh.
THat's pretty much the American political discourse in 2008. Enjoy!
Posted by: FreedomLover | Jun 20, 2008 6:53:52 PM
Re: Reed's post, ‘Perhaps 60% of today’s oil price is pure speculation’
[apologies in advance for length here]
Okay, prove it. This is dangerous financial "journalism." Clearly, whoever wrote this (F. William Engdahl, never trust a guy with a first initial in his name) has no clue about trading, or writing.
Here's what his editor should have said:
"With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices."
Okay, so why didn’t this happen earlier, like, say, around a decade ago? Why now? Which rule suddenly changed to cause this spike in oil futures?
This is largely market paranoia and misreading of market forces, especially misunderstanding of demand (in)elasticity.
"The report pointed out that the Commodity Futures Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand"
Quantify these, please.
"...rather than manipulative practices or excessive speculation."
Define "manipulative practices," and then define speculation. I'm looking for abnormal swings in average daily trading volume, large percentage price moves, etc. Give me specifics. And by "speculation," do you mean excessive liquidity changes,
The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity
Again, define speculation please.
"...under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations..."
Define "sudden" and "unreasonable" please.
"...or unwarranted changes in the price of such commodity,"
Please.
"...is an undue and unnecessary burden on interstate commerce in such commodity.”
Dude.
As you can see from this article, and the legislation cited, most of this is subjective interpretation and reliance on imprecise, undefined and largely arbitrary descriptions of market movements.
There are definitions attached to many of these terms, only this "journalist" didn't see fit to put them out there so the public would have a better idea that (many of) these things are already policed.
But F. William is a journalist - what do you expect? Information? Surely, you jest...
Posted by: Mesa Econoguy | Jun 20, 2008 7:53:22 PM
And apologies for not closing italics tag.
Related to XP SP3 (final) release? Whole buncha stuff screwed up this week…
Thanks, Bill Gates!
Posted by: Mesa Econoguy | Jun 20, 2008 7:55:31 PM
Sorry, this should have read:
And by "speculation," do you mean excessive liquidity changes, large single-sided positions, open orders, or otherwise concentrated actions?
Posted by: Mesa Econoguy | Jun 20, 2008 9:37:11 PM
As much as 60% of today’s crude oil price
is pure speculation driven
by large trader banks and hedge funds.
Pure genius. The author must have graduated at the top of his remedial class in junior high.
Well done, Mesa. Here's another little pedestrian concern of mine as a trader (not an oil trader): If I don't think there's enough real demand for oil to drive up the price, why would I risk my money buying it? If I think demand is going down or supply is going up (i.e. oil is overvalued), I would short oil. I would sell it. And that would drive oil prices down. I don't want to risk my dough in a long oil position when I know that oil is overvalued.
So, if I'm risking my own money (usually highly levered) to buy oil, it means that I think oil is going up because demand is strong and supply is constrained. I'll do the opposite if new information tells me I'm wrong. Am I speculating? Certainly. I'm speculating that I'm correct about the the future supply and demand in the oil market. Since when is that illegal? Maybe we should stop people from buying stocks they expect to increase in value. Or houses.
The Senate report was ignored in the media and in the Congress.
Because, not unlike the senators themselves, the report was idiotic, self-serving and utterly useless.
The US
Commodity Exchange Act (CEA) states, “Excessive speculation in any
commodity under contracts of
sale of such commodity for future delivery . . . causing sudden or
unreasonable fluctuations or
unwarranted changes in the price of such commodity, is an undue and
unnecessary burden on
interstate commerce in such commodity.”
Please allow me to translate this: "Bla bla bla...must justify our existence...bla bla...to protect our government pensions...bla bla...and useless jobs...blah". Utter BS. The aroma of this is much like the putrid stench of "price gouging" claims. "Excessive speculation" is the "price gouging" accusation levied against financial markets when goods people feel they are entitled to become too expensive for them to afford easily. People hate scarcity. For the things they think are happening to actually happen, we must live in a parallel fantasy universe.
Here's the bottom line: The Friends of Angelo Mozilo are once again trying to appease the unwashed masses by feeding into their fears and ignorance. I can't wait for them to go after the speculators by restricting trading in oil (which is the only way to go after them). That will serve only to reduce liquidity in the oil market. And what do we know about illiquid markets? They are characterized by larger and more erratic price swings (the very thing blamed on "speculators" who add liquidity to the market by using their own capital to provide bids and offers). So, the volatility in oil prices will skyrocket and the spread will widen. Wider spreads mean that buying and selling oil will be more expensive, the cost will be passed along to the consumer and feed inflation. The Friends of Angelo Mozilo will then find another scapegoat and the unwashed masses yearning to drive Escalades cheaply will demand that the new scapegoat is sacrificed to appease their ignorance.
I can't wait for the circus to start. Know who else can't wait? The oil traders (i.e. "speculators") at the NYMEX because they stand to make a lot more money with widening spreads and a reduction in the number of competitors. At least the Friends of Angelo can always be relied upon to create a world class sh*t show.
Posted by: Methinks | Jun 20, 2008 11:37:47 PM
With regards to Reed Randall's ineptly pasted article regarding how speculators are responsible for high oil prices, one must keep in mind that 75% of the world's oil supply is controlled by governments, not speculators nor oil companies. Who's gouging who here?
I suggest that people should also peruse the other articles on the referenced website in order to verify that this is where some of the worst of the lunatic fringe resides.
Posted by: Mace | Jun 20, 2008 11:48:00 PM
Guess who else can’t wait, Methinks? The guy who just testified to (Democratically controlled) Congress about how to manipulate markets.
George goddamn Soros.
Get your oil shorts on (again), kids!
Posted by: Mesa Econoguy | Jun 20, 2008 11:48:26 PM
Just wondering - does everyone agree that we're eventually going to have to move away from our dependence upon fossil fuels for energy?
Posted by: David P. Graf | Jun 21, 2008 12:09:39 AM
Here’s a thought: maybe oil futures are predicting another Jimmy Carter (Barack Obama)?
Posted by: Mesa Econoguy | Jun 21, 2008 2:26:17 AM
Mesa Econoguy, to answer the question, "Does everyone agree that we're eventually going to have to move away from our dependence upon fossil fuels for energy?"
Every one doesn't have to agree. Market forces will steer us whether we agree or not. It seems $4.00 gas is accomplishing what CAFE standards and greenies have been unable to do.
Posted by: macquechoux | Jun 21, 2008 5:42:39 AM
First a little reminder to all of you about that if oil companies are bad they are not the only ones bad. Currently Venezuela receives net from oil about 350 dollars monthly per each of its 26 million citizens but all these resources are captured by a presumptuous socialist turned into a full bloom oil-state capitalist.
Second, of course drilling for oil in some places could result in more environmental dangers that drilling for oil in other places or using more nuclear power. What I miss is a reasonable analysis of alternatives… but perhaps I should presuppose that such analysis has already been exhaustively completed before making these announcements.
Third, you talk about long term exploration commitments, but where is the long term purchasing commitment? If an Arnold Schwarzenegger would go to Venezuela and offer to buy up oil for his Californian constituency, on a revolving 20 years basis, at prices that would be seen as reasonable for both the producer and the consumer, and thereby taking away much of the very expensive price volatility; and offer to pay the Venezuelan citizens directly, then he might very well be able to satisfy his needs with much less dangerous environmental consequences… while simultaneously, as an important side benefit, helping democracy.
Posted by: Per Kurowski | Jun 21, 2008 9:38:05 AM
Thanks, mac, but that was David Graf’s question.
I completely agree with your answer, though.
Posted by: Mesa Econoguy | Jun 21, 2008 2:29:58 PM
Just wondering - does everyone agree that we're eventually going to have to move away from our dependence upon fossil fuels for energy?
What does 'eventually' mean?
We'll move away from fossil fuels for energy when the price/cost of other sources moves below the price/cost of fossil fuels.
It seem quite possible that technological development will effect such a scenario.
Posted by: Sam Grove | Jun 21, 2008 2:39:27 PM
Carbon nano tube ultra capacitors.
Posted by: Sam Grove | Jun 21, 2008 2:47:37 PM
So, if I'm risking my own money (usually highly levered) to buy oil, it means that I think oil is going up because demand is strong and supply is constrained.
"My own, highly leveraged money" is a bit of an oxymoron.
An Israeli official calls the bombing of Iran's nuclear enrichment facilities inevitable, and the price of oil rises ten dollars a barrel in a day. Is that speculation? Of course, it is. I don't necessarily blame speculators, but if the speculation is highly leveraged, but I certainly blame the statesmen fueling the speculation with their endless war making in the oil rich regions, and I might blame monetary authorities with little personally to lose by extending credit to fuel the speculation. If the leveraged speculators themselves have much less to lose than they have to gain, their speculation is more likely irrational.
Posted by: Martin Brock | Jun 21, 2008 4:33:02 PM
Once we start listening to the Sierra Club for economic advice, we might as well just kiss our economy goodbye.
I don't suppose Mr. Manuel owns any stock, has a 401(k) or even a savings account.
Posted by: AST | Jun 21, 2008 7:48:06 PM
Martin Brock: "If the leveraged speculators themselves have much less to lose than they have to gain"
I don't understand this. Why would anyone ever speculate if the reward was not significantly greater than the amount at risk?
Martin Brock: "'My own, highly leveraged money' is a bit of an oxymoron."
Highly leveraged investors are definitely risking more than their own cash. Regardless of the how their futures contract turns out, they still owe the amount they borrowed. So it is their own money at risk. Am I misunderstanding your meaning, Martin?
Posted by: John Dewey | Jun 23, 2008 9:22:54 AM
No, David Graf, I don't agree that we're going to have to move away from using fossil fuels. The problem with fossil fuels is that they are so damned efficient and that's why we haven't been able to replace them.
We're just going to be paying more for them in the future unless 1.) there's a drop in demand due to a decline in economic activity (not good), 2.) we develop technology which allows us to drill in places currently off limits, 3.) we develop better secondary and tertiary recovery techniques.
But I'm sure that lots of fern-fondling, tree-hugging, bleeding hearts are willing to starve the third world in their self-indulgent pursuit of "breaking" themselves from their "addiction" to fossil fuels by turning food into fuel. I'm absolutely sure of that.
Posted by: Methinks | Jun 23, 2008 11:28:13 AM
David Graf: "does everyone agree that we're eventually going to have to move away from our dependence upon fossil fuels for energy?"
Well, David, I don't know what you mean by "move away from our dependence".
If you mean that we will stop using fossil fuels as our primary energy source within the next 50 years, then I definitely do not agree.
If you mean that fossil fuels will become a second tier energy source a century or two from now - because their equilibrium prices will rise above that of solar, wind, and nuclear energy - then I agree.
But what is your purpose in asking this question, David?
Posted by: John Dewey | Jun 23, 2008 1:01:22 PM
The nice thing about fossil fuels is you can put a gallon of gasoline in an automobile and drive as much as 40 miles or more.
To do that with batteries requires that you carry several hundred pounds of batteries...expensive batteries. And it takes a fairly good while to charge up those batteries, the chemical conversion generates heat.
If carbon nanotube capacitors realize their theoretical potential, then plugging in your car for a few minutes to charge up may make gasoline and diesel engines obsolete.
Posted by: Sam Grove | Jun 23, 2008 3:04:53 PM
Diane Rehm is a very mediocre moderator and interviewer. This episode consisted of choosing a handful of obviously biased advocates, and giving them free rein, without any question. A lot of the economic reasoning was inaccurate. Some observations were not picked up. For example, how come $50B were spent in R&D without any result? Has anyone done an accurate cost-benefit analysis of the available policies? Are the oil companies or the speculator to blame for high prices? Why?
Posted by: gappy | Jun 23, 2008 5:04:23 PM
Look I have no problem with drilling but let's be honest about one thing. Most of the time we have plenty of warning of what is coming down the road. For 15 years now we knew China and other countries were developing and in need of Oil. During that time how much progress have we made in alternative fuels. If you want to drill fine but that is not a long ternm solution to a problem that is not going away. We must put our energy and money towards energy alternatives that will work for the next 100 years. Drilling more Oil is like putting a band-aid on a guy whose leg has been shot off---its going to help with some of the bleeding but not help the guy in the long run. We put a man on the moon, a shuttle on Mars are you telling me Oil is the only answer. This is Freaking America man---We built an Atom Bomb out of thin air!
I think we can create A new Energy source.
Posted by: matthew | Jun 23, 2008 7:39:37 PM
If you want to drill fine but that is not a long ternm solution to a problem that is not going away.
oh? Why not? Simply assertively stating something doesn't make it so. In fact, "Most of the time we have plenty of warning of what is coming down the road. For 15 years now we knew China and other countries were developing and in need of Oil." is just plain wrong.
We must put our energy and money towards energy alternatives that will work for the next 100 years.
Who is this "we"? If you think it's such a profitable pursuit, you invest in it and reap the reward. Don't reach into my wallet .
Drilling more Oil is like putting a band-aid on a guy whose leg has been shot off---its going to help with some of the bleeding but not help the guy in the long run.
How so? This isn't a rally for Barack Obama, where a posse of sycophants melts as he gets to the substantive portion of his speech: "Hope and Change and Change and Hope and Change, Hope, Change, Hope..." We actually expect you to back up wild assertions with arguments.
This is Freaking America man---We built an Atom Bomb out of thin air!
You're kidding, right? This is a joke. Tell me it's a joke.
I think we can create A new Energy source.
Sure we can. Just not one that is as efficient as fossil fuels. But, this is a free country and you are free to try - with your own money.
Posted by: Methinks | Jun 23, 2008 8:30:38 PM
We must put our energy and money towards energy alternatives that will work for the next 100 years.
"We...our..."?
Please, learn something about economics.
Increasing scarcity of any good tends to drive up its price until substitutions are made by consumers.
It's a simple statement, but the implications are enormous.
Don't need that 'we' 'our' stuff. That road leads to boondoggles and corruption.
Posted by: Sam Grove | Jun 23, 2008 11:02:49 PM
Martin Brock: "If the leveraged speculators themselves have much less to lose than they have to gain"I don't understand this. Why would anyone ever speculate if the reward was not significantly greater than the amount at risk?
Amount of reward is not comparable to amount of risk.
Martin Brock: "'My own, highly leveraged money is a bit of an oxymoron."Highly leveraged investors are definitely risking more than their own cash.
They place their cash more at risk, but they place a lot more of other people's cash at risk.
Suppose you'll lend me a thousand dollars to buy a thousand lottery tickets if I'll buy ten lottery tickets with my last ten bucks. If I don't win the lottery, I owe you a thousand dollars, but you'll readily forgive the debt, and even if you won't, I can't repay you anyway, and no one will jail me for indebtedness. If I do win the lottery, I get a million dollars and pay you a thousand. Why wouldn't I take this "risk"?
Regardless of the how their futures contract turns out, they still owe the amount they borrowed. So it is their own money at risk. Am I misunderstanding your meaning, Martin?
What I owe is irrelevant if I don't ultimately repay it. The Fed owns all of those mortgage backed securities now. Right?
Posted by: Martin Brock | Jun 24, 2008 12:13:33 PM
Amount of reward is not comparable to amount of risk. - Martin
As usual, not knowing what the hell you're talking about doesn't stop you. Does it Martin? How exactly do you know this? Same way that you know other people's motivations, no doubt.
They place their cash more at risk, but they place a lot more of other people's cash at risk.
The "other people" are lenders who have decided they are being adequately compensated for their risk by lending to the trader (in this case). Who are you to decide for them that they're not?
The rest of your post, including your example, is just a more detailed illustration of your total ignorance of how financial markets (credit market in particular but all markets in general) work. As usual, this does not stop you from rooting your strong opinions in your colossal ignorance.
Posted by: Methinks | Jun 24, 2008 1:27:04 PM
Sam,
Thanks for the link to the info about the carbon nonotube capaciter article.
"If carbon nanotube capacitors realize their theoretical potential, then plugging in your car for a few minutes to charge up may make gasoline and diesel engines obsolete.
Posted by: Sam Grove | Jun 23, 2008 3:04:53 PM"
There is another area of technology that this improved electrical storage capability may advance dramatically.
Laser weaponry.
Laser weapons are a developed technology, the problem has been in gaining a storage capability to make laser weapons mobile and therefore avoid retalitory stikes on a fixed position.
Interesting stuff.
Beam me up, Scotty.
Posted by: vidyohs | Jun 24, 2008 6:28:42 PM
Where do guys like this come from?
"Look I have no problem with drilling but let's be honest about one thing. Most of the time we have plenty of warning of what is coming down the road. For 15 years now we knew China and other countries were developing and in need of Oil. During that time how much progress have we made in alternative fuels. If you want to drill fine but that is not a long ternm solution to a problem that is not going away. We must put our energy and money towards energy alternatives that will work for the next 100 years. Drilling more Oil is like putting a band-aid on a guy whose leg has been shot off---its going to help with some of the bleeding but not help the guy in the long run. We put a man on the moon, a shuttle on Mars are you telling me Oil is the only answer. This is Freaking America man---We built an Atom Bomb out of thin air!
I think we can create A new Energy source.
Posted by: matthew | Jun 23, 2008 7:39:37 PM"
Oh yeah, the Socialist Church, where idiots are created as well as birthed.
Hey, matthewduck, not a long term solution? Don't do it, it ain't worth it?
How about a interim solution to bridge the shortages of now and the near future to that glorious future where we wave our magic socialist wands and get free energy from the air. Think drilling might be a decent interim solution to ease the pain that will surely be suffered hardest by those poor suffering slobs in the ghetto that you socialists love to get emotional over? Naw, thinking isn't your forte as is aptly demonstrated by your post.
Posted by: vidyohs | Jun 24, 2008 6:33:04 PM
Amount of reward is not comparable to amount of risk. - MartinAs usual, not knowing what the hell you're talking about doesn't stop you.
The two have different units. An expectation of reward is not a risk or probability. It's a product of risk and reward. You migh as well compare a distance to a speed.
The "other people" are lenders who have decided they are being adequately compensated for their risk by lending to the trader (in this case). Who are you to decide for them that they're not?
I haven't decided anything. I state as a matter of fact that other people's money is at risk.
The rest of your post, including your example, is just a more detailed illustration of your total ignorance of how financial markets ...
You write these words without specifying a single error in the post.
Posted by: Martin Brock | Jun 24, 2008 8:13:36 PM
[risk & reward} The two have different units.
The two are inexorably linked. Basic finance. The expected return is a function of payoffs and the probabilities of those payoffs. The reason you think they are different is because you don't know how expected return is calculated. Don't you have an applied math degree? This should be child's play for you. Grab a finance book and have a read before you embarrass yourself, Martin.
I haven't decided anything. I state as a matter of fact that other people's money is at risk.
No, you don't state it as a matter of fact. The clear implication of everything you say is that there is no cost of borrowing or that cost is lower than it should be. If you don't understand that this is your implication, it's only because you don't understand what you're really writing. In fact, credit is not extended in the willy-nilly way you think it is and the consequences are not as small as you imply. Although, to be fair to you, I'm not that surprised you think that since the only criteria to obtain a mortgage a couple of years ago was a pulse and there was a loosening (although not that much) of credit standards even with professional traders. Margin requirements have been tightened for institutional accounts across the board - but they were never as loose as you imply in your example.
You write these words without specifying a single error in the post.
The sole reason is that adequately correcting your errors is far more involved than I have time for right now. I'll give you a start, though.
"Suppose you'll lend me a thousand dollars to buy a thousand lottery tickets if I'll buy ten lottery tickets with my last ten bucks."
That would never happen (although, if you find a willing idiot, please take advantage). The implied payout of the lottery in this example is far higher than it actually is. The only way you're going to get the $1k loan from Methinks Brokerage is at a prohibitive interest rate and guaranteed by your personal property because I've already calculated that the probability of getting my money back is uber slim. But more likely, I won't even give you a loan, but you'll give me a laugh by asking for it.
but you'll readily forgive the debt,
not any brokerage house I've ever met.
I can't repay you anyway, and no one will jail me for indebtedness.
If that happens, I'll put a lien against your personal property and against any future earnings you have. You'll never get another loan until you pay off those liens and your wages are subject to garnishment. No other brokerage will extend you credit. It won't be fun. There are endless scenarios - legal and practical - that can happen here but I don't have time to get into them. Suffice to say, you'll pay a heavy price - keeping in mind that our original example is not an idiot with a lottery scheme but a professional trader (read: a professional idiot with an oil scheme :) whose career is now over.
If I do win the lottery, I get a million dollars and pay you a thousand. Why wouldn't I take this "risk"?
There's no reason you wouldn't take that risk! Except that nobody will lend you the money to take it - with the possible exception of your cousin Lenny whose IQ doesn't quite reach into the high double digits.
In other words, all of your assumptions are based on complete ignorance of how to calculate expected returns and how credit is extended. Thus, none of your objections or conclusions make any sense. You should refrain from being so sure of yourself until you have reason to be. Hope that you found that more helpful.
Posted by: Methinks | Jun 24, 2008 10:54:35 PM
The two are inexorably linked. Basic finance.
Speed and distance are also linked. So what? What I said is that they aren't comparable. One compares a distance to a product of speed and time. One compares expectations of reward, which are products of risk and reward, not risks and rewards.
No, you don't state it as a matter of fact.
As a matter of fact, I do.
The clear implication of everything you say is that there is no cost of borrowing or that cost is lower than it should be.
No. I never say or imply such a thing. You somehow confuse your own words with mine here, presumably because you want to dispute some words and can't find enough of mine to dispute.
"Suppose you'll lend me a thousand dollars to buy a thousand lottery tickets if I'll buy ten lottery tickets with my last ten bucks."That would never happen
You obviously don't appreciate the hypothetical.
"I can't repay you anyway, and no one will jail me for indebtedness."If that happens, I'll put a lien against your personal property and against any future earnings you have.
You apparently missed the part about the ten dollars being my "last". Good luck getting my next before I buy food with it.
You'll never get another loan until you pay off those liens and your wages are subject to garnishment.
You've apparently never declared bankruptcy. In fact, people get loans the next day. Don't you listen to car salesmen on the radio? "Bankruptcy? Noooo problem!"
There's no reason you wouldn't take that risk! Except that nobody will lend you the money to take it ...
But the Fed did accept all of those mortgage backed securities, that private investors are so reluctant to buy, as collateral when financing the purchase of Bear Stearns. I'm not making that up. It's not a hypothesis. It's a fact. These things you say never happen do happen.
Posted by: Martin Brock | Jun 25, 2008 12:12:38 AM
Martin, you seem to enjoy rolling around in your ignorance and then defending it in public places. Why do you embarrass yourself so?
No broker will extend margin to someone until it finishes an exhaustive process of due diligence. I don't appreciate your hypothetical because it is utterly pointless in every way except as a clear illustration of your intense ignorance. No broker is going to extend credit to a moron with only ten bucks and a negative expectancy strategy. Even after months of due dili, the broker monitors your daily volatility and if it gets uncomfortable with the volatility, it will call all or a portion of its loan to you and you will spend all of the cash in your account paying back your broker because the broker will simply take it out of your account. You're confusing private loans with brokerage arrangements. We're not talking about the loan your grandma got for home improvements or the Fed and the banking system. We're talking about traders and margin accounts. Do yourself a favour and stop twisting yourself into a pretzel in a fruitless attempt to win an argument you don't even understand.
Now, stop bothering the grown-ups and go look up "expectancy" and learn how to calculate it. I don't have time to disabuse you of your BS this morning.
Posted by: Methinks | Jun 25, 2008 8:38:18 AM
Martin, you seem to enjoy rolling around in your ignorance and then defending it in public places. Why do you embarrass yourself so?
You enjoy writing these vague, unsubstantiated, personal assertions.
No broker will extend margin to someone until it finishes an exhaustive process of due diligence.
Your brokers are so exhaustive. They should be our central planners.
No broker is going to extend credit to a moron with only ten bucks and a negative expectancy strategy.
Gee. I wonder why investors are so reluctant to buy these mortgage backed securities now. We all know that the mortgage brokers do their due diligence. Maybe too little diligence is due ... or maybe risk is poorly understood by people presuming to judge others understanding of it.
Now, stop bothering the grown-ups and go look up "expectancy" and learn how to calculate it.
Hmmm. I have a master's degree in applied mathematics with a 4.0 GPA from the University of Alabama in Huntsville, so I have all of these university professors testifying to my understanding of "expectancy", and I have you here disputing it. Maybe I should sue the university for fraud.
Posted by: Martin Brock | Jun 25, 2008 11:36:42 AM
Maybe I should sue the university for fraud.
Based on the only example I have of their graduates, I recommend that course of action.
Posted by: Methinks | Jun 25, 2008 12:30:06 PM
The comments to this entry are closed.
