Of course it is impossible for him to judge. If it were true, and possible to judge, someone would be gaming the system and making a lot of money.

Is that why nobody in the energy industry is making lots of money or...?

I got more styles than prison got bricks- ain't that some shit?

Yeah, it's only filthy rich that are allowed to own stock in publicly traded companies.

So it's not just the big players who aren't making any money, but the little guys as well?  The market must be freer than I thought!

I got more styles than prison got bricks- ain't that some shit?

It's speculation: some folks make money, some folks lose money.

Did you read the comments at all? And I'm pretty sure you're a random internet commentator too. lol

The consensus is more nefarious than that (and not implausible). There are saying that producers can be speculators (and are) and they could intentionally manipulate the market by halting/limiting production (actually didn't OPEC do exactly that?) by leaving oil in the ground. Also, there are other comments about countries that hoard oil, which the US certainly does (and not all of it is on paper obviously). Krugman's analysis relies heavily on OECD inventory estimates.

There are saying that producers can be speculators (and are) and they could intentionally manipulate the market by halting/limiting production (actually didn't OPEC do exactly that?) by leaving oil in the ground.

That very well could be, but it is entirely irrelevant to the type of speculation that people get their panties in wad about.  Good luck forcing companies in other countries to drill baby drill via legislation.

Also, there are other comments about countries that hoard oil, which the US certainly does (and not all of it is on paper obviously).

Certainly if there is hoarding by the middlemen the price could go up, but there is simply no evidence that this is actually happening at the moment.

Ok, let's simplify - you explain the mechanism by which you believe that financial speculators are raising the price oil and enriching themselves at the same time without actually taking delivery of the oil and storing it.  Not just Speculation! Bad!, but the actual mechanism and how it could be eliminated legislatively and maybe I'll listen.

Well the hands of other countries can be twisted via other methods. They hold oil we hold aid or other things (as what has happened in the past anyway).

What would be a type of evidence of hoarding by middlemen if the whole point is to avoid showing evidence of it?

What would be a type of evidence of hoarding by middlemen if the whole point is to avoid showing evidence of it?

They would have to be storing it somewhere.  Where are they putting it?

"explain the mechanism by which you believe that financial speculators are raising the price oil and enriching themselves at the same time without actually taking delivery of the oil and storing it"

I think this is how the futures markets work.  Real or not real?

Oh, and prices go up and down on the futures market.  Ultimately these contracts do get delivered, and what happens to prices as that delivery date gets closer is interesting, so, from what I understand from a few heating oil dealers I did work for is:

• In April (or soooner)they would go on the market and, based on contract committments from their customers for so many gallons at a certain price over a period of time, they would buy futures contracts for #2 oil at fixed prices.

• Their customers knew in advance the price and amount, choosing an amount based on their past usage and a wild guess as to weather in the coming season.  The dealer shared with them records of their usage inm the past.

• An advance deposit sometimes was required.

• When the heating season drew closer, the dealer started taking delivery of the oil.  As the weather turned cold, they woudl receive more oil on schedule to satisfy demand.

• If the weather caused increased demand, customers would indeed be exposed to higher prices at the end of the season, as contracted oil ran out, but they had locked in their prices and, presumably, did not have to suffer the price increases throughout the season that others did.  

• If the weather was milder, they would find themselves paying for oil they could not use, but had the benefit of not paying more due to weather and supply/demand pricing.

• The dealer had the advantage of selling all of the fuel he had contracted for.  And happier customers that had predictable pricing for at lest the majority of their heating oil.

• And in this scenario, the speculators would hope that the weather turned bad.  If so, their later contracts would be sold for more money. Profit!

• If the speculators had the bad fortune to gamble on bad weather and it was mild, they would sell their contracts before delivery, and potentially at a loss, since they couldn't have that oil dumped on their palatial grounds very well, could they? Much less pay to have it trucked in.  So they have to sell, or default and maybe never be trusted again - not good.  

Futures.  For the wise, good things.  For the speculators, a tool.  Sometimes win, sometimes lose.

Exactly: those who believe that speculators have caused an increase in gasoline prices are victims of their own muddled thinking.

In our businesses we get cold calls and guys that show up from companies like "Energy Plus", who are basically (as I understand it) guys that buy electricity in bulk from Electricity companies and sell it back to us at a lower rate than the energy company. So is this legitimate? Because you're saying it's stupid of the electricity companies to do that, since they could directly sell it to us without the necessity of a middleman (Energy Plus). I agree with that, but why does it happen anyway?

And as I further understand it, you have to sign an agreement with fixed rates with Energy Plus, while you are in the hands of the market if you go directly with the electricity company.

I have heard stories in the past where people expected lower rates but were hit with higher rates because then they increase the delivery charge or the market rate went down (or people were issued refunds) and they didn't see any of the lower rate. In this scenario, Energy Plus seems to be a speculator that adds little or no value and instead causes prices to increase.

In our businesses we get cold calls and guys that show up from companies like "Energy Plus", who are basically (as I understand it) guys that buy electricity in bulk from Electricity companies and sell it back to us at a lower rate than the energy company. So is this legitimate? Because you're saying it's stupid of the electricity companies to do that, since they could directly sell it to us without the necessity of a middleman (Energy Plus). I agree with that, but why does it happen anyway?

That happens because the electricity producer is effectively selling risk to Energy Plus.  They sell electricity to the distributor at a lower rate because they have a guaranteed buyer and if Energy Plus cannot find an end buyer, they are the ones who eat the cost.  This is how almost every producer-to-wholesale-to-retailer-to-consumer logistic train on the planet works, it just strikes you as odd here because you don't generally think of electricity as something that can be traded as such.  If you really want to go with that logic, though, then your local supermarket is also a speculator and must be stopped at all costs from raising the prices of apples.

I never bought a contract for apples (as a consumer) so I don't see the analogy. But, there was no market like this before, so how all of a sudden? Deregulation, eh. I just don't think electricity (any energy) should be traded as such because then people can amass vast amounts of it and ripoff people at high rates. I mean there's sort what happened with Enron and California right?

No, what happened with Enron and California was caused by price controls.

I never bought a contract for apples (as a consumer) so I don't see the analogy.

Sure, but your supermarket probably is.  The producer gets a stable contract, and the supermarket then parts them out at a higher price to consumers, but if they can't sell them all, they have to eat the cost.  Stop the speculation!  We need to regulate this market!

I just don't think electricity (any energy) should be traded as such because then people can amass vast amounts of it and ripoff people at high rates. I mean there's sort what happened with Enron and California right?

The Enron thing in California had to do with utterly retarded regulation that forced(!) everyone(!!) to buy at the highest bid(!!!) on the spot market.  The fact that this was called "deregulation" doesn't mean it had anything to do with actually deregulating the energy market, it just regulated the market differently in an easily exploitable way.

Also, please explain how you can (cost-effectively) hoard vast amounts of instantaneous load power?  If you got that figured out, there may be a Nobel prize in it for you.

I'm not sure then how you can say they eat the cost, is there energy just unused and sitting around?

I'd like to see more about the Enron thing, do you have links?

And the hoarding of load power is my point, how are they taking a risk if that power is "on-demand"? It seems to me that someone somewhere will be using that power so why do you need to pre-package it wholesale anyway? I don't buy the risk argument, though it's seem very convenient for any type of hoarding to throw it in, even in cases where the product functions as "Just-in-time" inventory.

I'm not sure then how you can say they eat the cost, is there energy just unused and sitting around?

No, they have to sink it to ground or generate less than peak.

Energy Plus and their ilk will make a deal to purchase, say, 10MW of electricity for a certain amount of time at price x.  They then sign up customers to purchase electricity from them at, say, a 10% markup.  For every hour that their customers are using an aggregate of at least 9MW-Hr, they are making money.  For every hour that their customers are using less than 9MW-Hr, they are losing money.  The electricity producer is guaranteed their sale of 10MW-Hr every single Hr (even if they don't need to produce that much) and they don't have to worry about the vagaries of customer demand.

(obviously, actual contracts are more complicated and are adjusted for time of day and the like)

You can read more about the retarded California energy "deregulation" here:

http://en.wikipedia.org/wiki/California_electricity_crisis

Yeah, the physical generation actually has to match demand quite closely - so if 9MWhs are being consumed, 9MWhs are being generated - it's just that Energy Plus has to pay for 10 (or whatever their agreed upon amount).  

I am not sure how such contracts work, but Energy Plus might also have to take on the risk of excessive demand driving up real time pricess.  For example if the weather forecast is bad, and a day is much hotter than expected, electricity usage will be much higher than the utilities were prepared for.  In these cases electricity needs to be imported from other locations over the grid (at a higher price), or the difference needs to be met with higher cost "peaking" facilities that use gas turbine generators and can respond to changes in load much more quickly than a coal or nuclear plant (though as gas prices have fallen, peak generation costs are getting close to base load costs).

As I understand it, they're acting as a broker between specific natural gas generating plants and consumers.  They have long-term contracts with the generating plants, who have either long-term natural gas contracts or long-term hedges on natural gas costs.  Except under unusual circumstances, they aren't exposed to the spot electricity or natural gas markets at all. Certainly there is some exposure to average demand, but this rarely changes much.

The basic idea is that lower natural gas costs have resulted in long-term electricity market prices well below the regulated utility rates.  Under current regulations in many states, these companies are able to capture this windfall which would otherwise go to the regulated utility.  When market conditions change, these companies can temporarily go out of business, and their customers can go back to the regulated utility, which will have to bear the loss resulting from buying power at higher rates than it can sell it for.

Who does Goldman Sachs buy their futures from?

I take your point that all trades have two sides, and if you define speculation to be the total volume or total net position of trades then yeah, the net speculation of industry and non-industry players must by definition be equal, but I don't find this to be particularly informative.  I mean, if one side has a set price/position volume curve, and the other side suddenly comes in and buys and buys and buys, then, yeah, net open interest is the same, but it's pretty clear that it's the side buying as the price rises that's doing the speculation as people understand the word.

It's only when it causes changes in physical holdings that speculation will move the spot price.  There are some physical holdings by traders, usually heavily concentrated at Cushing or held offshore in oil tankers contracted to sit around full.  They're fairly small, but have large fractional changes.  

When I was talking about speculation by industry being small, I was mostly thinking of speculation in the physical market, relative to the side of the market.  Except for the products with high seasonality, for the most part the oil industry just doesn't think about speculation as being the industry it's in.

Total profits from holding a volume V at a price P will be the integral of V dP  = PV - integral P dV.  Over any closed path any constant PV (or PVnormal) has no effect on profits, so the instantaneous profit can be thought of equivalently as V dP or -P dV or (V-Vormal) dP.  So long as you keep changes in the volume you hold small, you aren't exposed to losses due to volatility, even if you must hold large volumes, and much of the oil industry runs on this basis.

Where there are large oil industry stock changes, they're mostly either imposed by factors outside of their control, or are hedged against futures markets so that they can view departure from their normal amount of stocks as something which gives a virtually guaranteed profit.   This is where futures prices (including industry hedging activity) change the spot price.  Of course the oil companies are still exposed to changes in the price basis of what they actually pay or receive relative to reference oil basket, but these are usually comparatively small.

This is a very different price setting mechanism from how I imagine people think oil prices are set.  I think people imagine some guy in XOM looking at the markets and saying, "OK, what price can we get away with?  Let's set it to that."  That's pretty much how prices for cars and many other items are set, but they can only do that for cars because cars are not exactly the same, and because they're willing to shut in car production or increase their car stocks for their particular model until they get the price they asked for.

There's very little shutting in of wells, except for OPEC, and even they're down to UAE, Kuwait and Saudi Arabia being the only ones that ever shut in wells, and in not terribly large volumes any more either.

Mainly, though the price volatility results from the fact that there's so little storage variation that if we produce 1.3% more oil than we consume as we did in the 1Q 2012, that's a huge imbalance.  If there were people with a large volume of physical storage who could actually predict the price accurately, we wouldn't have the price volatility we do.

It's only when it causes changes in physical holdings that speculation will move the spot price

What is the mechanism for that effect?

Mainly, though the price volatility results from the fact that there's so little storage variation that if we produce 1.3% more oil than we consume as we did in the 1Q 2012, that's a huge imbalance

Exactly. Demagogues, however, would have us believe that speculation overwhelms normal supply and demand forces. (And monetary policy, too.)