How is it allowed? Well it is a free country and you are allowed to do anything that isn't specifically prohibited under the law. Since futures contracts are voluntary contracts between two individuals with no unlawful purpose, it is highly unlikely they will be disallowed. Even if they are, it is a world wide market and they will just be traded offshore in places like the Cayman Islands instead.

I already told you, that the futures contract can be sold over and over again, as long as there is a willing buyer and a willing seller. So looks like each futures contract gets traded on average 27 times. But the profits and losses come from the people trading in the futures contracts, not the guy who makes delivery. The futures contract does not set the spot price. Any increase in price on the future market comes out of a loss from either the person who made the contract or a subsequent buyer of the future contract--it does not come from a delivered barrel of oil.

Your attempt at an explanation does not explain how a futures contract can change the spot price on a delivered barrel of oil. The delivered barrel of oil is all that matters because you don't fill up your car with futures contracts. That some people make money and some people lose money on these contracts is of no concern to me, or any sane person who does not trade in them.

A good analogy is sports betting. The wins and losses in sports betting are paid by the gamblers by the bookie adjusting the spread but do not have a causal factor on who actually wins the match. That the number of betters betting on one team has a predictive value on who usually wins, it has no actual affect on the game. Saying that futures contracts raise the price of oil is just like saying sports betters change the outcome of the game.

So please answer the question, explain the mechanism which futures contracts cause the price of oil to rise. The number of times the contract gets traded is irrelevant.

BTW your statement to KK

"It's nice how you are manipulating statistics by setting an arbitrary starting date."

Wouldn't a graph that only dates back to 2008 be "setting an arbitrary starting date"? Hypocrite.

My argument is more than a single graph or chart, his wasn't. Now quit derailing and explain that mechanism whereby futures contracts change the price of a delivered barrel of oil.

Hopefully it will also explain how sports betters change the outcome of the game by betting on it.

Here's another pretty good write up which you can debunk in your free time. Either read it or just shut up.

http://jrvarma.wordpress.com/2008/07/04/crude-oil-spot-and-futures-markets/

Some blog? What a lame source, well Krugman has it right and that article does not debunk him as is claims. In fact if you read the article, his whole explanation is centered around the Brent crude market, which by his own admission "is a market for physical crude, it is a forward rather than a true spot market." So that futures play a role in a forward market that isn't a spot market is unsurprising and in fact couldn't be any other way but this doesn't have anything to do with the spot market we are discussing or the prices we pay at the pump.

The price of oil is what the producers are willing to sell it for and what the buyers are willing to pay. That some producers point to a futures market as a justification to raise the price and the buyer willingly pays for it doesn't mean the futures market caused the price increase. The producer is claiming there is a increase in the value of oil, and the futures market is a refection of this, not a cause. Oil producers are not compelled to use futures pricing, they set whatever price they want. Oil producers love to blame speculators. But if speculators were causing the price to get out of the supply and demand equilibrium, then the producers wouldn't be able to sell oil as the price would be too high for the buyers to pay. Since they are able to keep shipping us oil, the supply and demand equilibrium must be in place.

How about some studies by actual economists, both of which indicate that speculation in the futures market has no effect on prices of actual assets.

http://www.jstor.org/pss/2353144
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0106.2006.00308.x/abstract

Debunk these for me, you know, from actual economists in peer reviewed journals, not some d-bag with a blog about peak oil conspiracies.

"That some producers point to a futures market as a justification to raise the price and the buyer willingly pays for it doesn't mean the futures market caused the price increase."

WHAT? HUH? ARE YOU KIDDING ME? Are you off your Ritalin?
"some producers point to a futures market as a justification to raise the price" there ya go. Enough said. No more conversations with you you moron.
You know what? GFY...it's the only person that will have you. And have someone switch you back from kid mode if that's possible.

May I help?



Fish on...

Todd

The amount people squawk about the increasing cost of a product is inversely proportional to the elasticity of that product's demand curve.

Oil has an inelastic demand curve. When the price goes up, everybody squawks because they know they can't live without it. That's why the demand curve is steep

If my economics classes were this lively, I wouldn't have been copping z's in the back of the lecture hall.

You expect the Saudis to insult us by saying to our faces, your dollar is worth less? If their price was too high, we would go buy elsewhere where it is cheaper. But guess what it isn't cheaper anywhere else, so we still buy it. The Saudis could have said, "you know why the price is up, because I shagged your mom last night, that's why" and we would have still bought it. It's simply salesman's puffery and you bought it like a sucker. Of course the Saudis would rather have you blame some businessman rather than our government. Maybe we can have our president go over there and bow down to the Saudi king again, and it will be those evil businessmen's fault.

I've been saying the whole time that the rise in the price of oil and the rise in the futures contracts of oil are both caused the same factor, inflation. You are saying it is caused by speculators, but other than the Saudis and some conspirator blog, nobody else is saying this. If you read those articles I posted, economists did experiments and proved the opposite of what you claimed under controlled conditions.

Speculators are not taking oil out of the market, so they don't reduce the supply. Speculators are not increasing the demand for oil by speculating on the future price. Therefore they are not causing the price increase.

This is difficult for you to understand because the measurement you are using to measure value, the dollar, is constantly changing, it is being worth less and less. The dollar is a measurement of value. If we double the number of dollars in circulation tomorrow, we didn't just double the wealth in the country, we just cut the measurement in half. If the government was continually making the gallon a smaller and smaller measurement to keep the price of gas the same, it would be more obvious but the same result--you would be paying more for what you are getting. Get outside of your dollar-centric valuation and you will see that the problem isn't oil, futures contracts or speculators--it is the dollar.



I know that's not true because I banged your mom last night... and your father too, I never did a brother and sister at the same time before.

Todd's post is the best on this thread . . . by a mile.

Seems someone also doesn't know we get most of our oil from Canada. Strike one.
I've also pointed out that the price of oil DOES NOT rise with the same percentage as inflation nor percentage fall with the dollar index. If it did you could compare it to the price of a loaf of bread and oil would be much cheaper than it is.
Strike two.
"I know that's not true because I banged your mom last night... and your father too, I never did a brother and sister at the same time before."
Well they didn't mention it so they didn't feel a thing which is proof that you are indeed a little prick.
Strike three.

Read post #742935 in this very thread. Not only do I know that, I said that in this thread. I was talking about Saudi Arabia because YOUR article was talking about Saudi Arabia. Are you stupid or can you just not read?



Again this is a long term trend issue, I am not distracted by short term fluctuations. Look at the long term trend. Long term trend. But I could make the argument to you as to why the futures contracts don't directly mirror the spot price, but I'm not a fool who looks at small statistical deviations and ignores the long term trends.



So you don't deny that your mother and father are in fact brother and sister. No wonder you are so stupid.

uhhhh stlhead, if you did FPs dad too, that makes you a FAG... nice try, but you just pop flyed out to center with that one...

We could go on about who is a raging homosexual and who banged whose father all night but It doesn't matter who or who isn't a raging homosexual.

What matters is how wrong stlhead is.

I'm still waiting for an explanation why all these futures contracts are raising the price. What is causing people to buy futures contracts? Why are the futures contracts predicting higher prices? What makes people think the price of oil is going to go up?

The fact that the futures market exists and that the futures are traded multiple times does not explain this, despite what stlhead believes.

My explanation is inflation. I'm waiting for stlheaders explanation. He has some serious gaps in his logic.

My argument:

1. There is inflation, which makes dollars worth less.
2. If dollars are worth less, then it takes more dollars to buy oil.
3. Oil goes up in price as measured in dollars.

His argument:

1. There is a futures market, where futures get traded on average 27 times each.
2. ???
3. Oil goes up in price as measured in dollars.

Also, keep in mind that the price of oil in gold or swiss francs hasn't risen. My argument explains this, yet stlhead's doesn't. Why are the futures contracts only effecting Euro and Dollar prices but not Swiss Francs and Gold?

I was supposed to say I [Bleeeeep!] his dad too, I'm sorry I screwed it up. So what's the problem? Who's dad did I get nasty with? Was it a bearded dude? I don't like beards, they remind me too much of chuck norris

Go back to your glory hole. At least you can't screw that up.

I was the one who said I banged stlhead's father, jebus it's like www.moron.com around here.

after re reading that, i saw that, but didnt want to seem like an over zealous douchebag and change it to something else, so i just left it there... quoting isnt so hard to do actually... so i got a pop fly out on myself... BOOOOOO

It's not your fault that sthlhead is such a moron he can't work the quote function in the forum and it confuses others. What an idiot!

I'm surprised that he hasn't brought out his gimmick account to jump on me in this thread too. Ah well, he probably will soon once he gets home from work.

Does this make any sense? Seems fairly reasonable to me but I'm defiantly no expert on this subject, Complex issues like this can be argued into eternity.

http://malcolm-logan.suite101.com/how-does-speculation-affect-oil-prices-a367688

Every economic experiment that has been conducted has concluded that futures markets prevent asset bubbles and markets without futures are prone to them. There were no rampant futures trading in the real estate bubble. There was trading in Real Estate that caused the bubble, why was there dysfunctional trading in the Real Estate market? It wasn't futures, it was government extending too much credit. What caused the dot-com bubble, it wasn't futures market, it was the government extending too much credit. Futures markets actually contain asset bubbles and resolve them without causing a bubble in the underlying asset. Every time the government over-extends credit or currency, the money has to go somewhere and it gets mal-invested because when overextended the financial system has too much money or credit to rationally invest but it has to invest anyway so it invests irrationally and causes a bubble.

If you think the price of oil is going to rise, then you have 2 options:

1. Buy a futures contract
2. Buy and hoard oil

Since the first, does not take any oil out of the system, it doesn't effect supply and demand and thus the price of oil. The second however, does remove oil from the market and the hoarder does increase the price of oil. But speculation in a futures market does not effect the market like hoarding does.

The article, refers to futures markets as a false demand, it is not a false demand, it is a representation of FUTURE demand. This travel blogger, who isn't an economist, doesn't understand that futures do not increase or create demand. Most futures contracts are not consummated with the delivery of a barrel of oil but rather by selling the future contract to someone else. In this way, they can be sold again and again without effecting the price of oil. The profits and losses come from other participants in the oil futures market, not from traders who solely operate in the spot market. The supply of oil is finite, but the demand is increasing not because of futures markets. More and more countries are consuming more and more oil, and we compete against them by bidding for them in the marketplace.

The fact that there is speculation in a future market does not address the underlying question. WHY do people think the price is going to go up? It's like saying the price is going up because people are betting it will go up. But this doesn't answer the question of why prices are rising or why the betters are winning these bets, it just moves the question. Why are these people so sure that the price will rise to the point where they will risk real dollars to bet on it? There are actual real world reasons that the price of oil will go up, they are the government, their inflation policy for one, their saber rattling in the middle east for a second.

What do you think would happen to oil prices if the government quit inflating the currency and quit going to war in the middle east? It would go down or at least level off and the futures market would crash.

The futures market is a boogyman that the scumbag politicians and their bootlickers use to scare people from looking at the actual problem: the government.

The people trading oil futures are a symptom of a problem, not the cause. We need to strike the root. We need to treat the underlying disease, not the symptom.

If oil prices are rising on the anticipation that prices will rise in the future, the oil future price is a reflection of this anticipation, not the cause. Something is causing this anticipation. Just brushing off the reasons and blaming the futures market doesn't answer where this anticipation is coming from, it just moves the question.