The wrong kind of speculation is the housing speculation, in form of 0% down loan. You can’t speculate as easily that housing price would go down. The speculators can walk away from losing bets by defaulting on the loan, thus have asymmetrical risk of winning and losing. And loser DOES require taxpayer bailout.

I think the role of speculators with respect to oil prices has been played up to mute the panic of peak oil. I think world oil production peaked in July, 2008. (Obviously, time will tell on this point. That's the test I mentioned earlier.) Now, the world economy has cooled so demand for oil is lower. The dawning reality of peak oil is thus being spread out over 3-5 years, instead of being a point event. As a result, we (the world) can react to it in a less panicked manner. So blaming the speculators, if erroneous, may have been a good thing to do.

There is untapped oil in the Bakken oil fields of North Dakota in the Northern USA and Saskatechewan, Canada. Additional oil resources may become available in the Arctic as well as at numerous offshore locations around the USA.

Bottom line is, speculators take a specific percentage of every $ spent on petroleum products, sometimes higher, sometimes lower. Fred believes that percentage is worth the price, I remain unconvinced.

I think recent and not so recent history has shown that speculators can exhibit highly volatile behavior. This could be limited by increasing margin requirements. Nothing that Friedman said indicates speculators have a right to 90-95% leverage. Let the dumb speculators fail. Just don't let them crater the rest of the financial system as well.

I guess I don't understand. When oil falls from > $ 140 to < $ 40 what do you call the people who take a bath (beside losers)?

Furthermore, the oil speculators in the big financial institutes know more about this subject than anybody else, ON THE AVERAGE. That's why they take home a couple of hundred thousand every year - plus bonuses. They have the highest IQs, they work harder, they love money more, they have been to the right schools which gives them certain social and other advantages, etc.

Now lets see what I said in this note. I mentioned two spikes when the oil price jumpted up, but these were spikes and not sustained escalations. Why? Because the speculators, on the average, were smart enough to know that there was plenty of oil, and OPEC did NOT have its act together. Those speculator/traders who stayed in took a bath, but so what. .

This time it was different. OPEC HAS ITS ACT TOGETHER, and moreover, what they SAY they are going to do where things like investment and production are concerned, and what they ACTUALLY DO are two different things. When the oil price started up in 2008 and people like Matthew Simmons and T. Boone Picens started talking about it going to $200/b, and demand from China and India were high, and there was no reserve capacity anywhere in the world except Saudi Arabia - and regardless of what they said they did not have much - then it was time to start buying and to keep buying even when the oil price hit the magic number $100/b.

And when the price reached 100, OPEC simply asked: WHAT'S WRONG WITH MORE? We like money too.

Then who is selling if these Wall Street people are doing a lot of buying? Answer:. Other traders/speculators who think differently, and later - in that highly liquid market - some of those sellers closed their positions and became buyers, and some of the buyers changed their minds and etc, etc. There were also plenty of chumps in this market are there are in all markets: they are called noise traders, and some of the older ones remember Milton Friedman saying that the oil price was going to fall to 5 dollars. BUT THE KEY THINGS WERE THAT PHYSICAL DEMAND WAS OUTRUNNING PHYSICAL SUPPLY, AND THE OPEC PEOPLE HAD READ A FEW PARAGRAPHS IN A GAME THEORY BOOK, AND KNEW HOW TO PLAY THIS THING.

Say that you are going to invest and produce, but don't!

And by the way, without the macro melt down the oil price would be much higher today, although it was the steady rise in the oil price that undoubtedly contributed to a lot of the macro and financial market trouble. And ladies and gentlemen, I' afraid that there might be some bad news ahead, because today's oil price is too high.

From EnergyBizInsider 8/31/09 I believe that the size of the markets and the effects that they have on the day-to-day lives of the American public make it that much more important that we aggressively fulfill our mandate," says Gary Gensler, head of the commission, at a Congressional hearing. "Position limits should enhance liquidity by promoting more market participants rather than having one party that has so much concentration so as to decrease liquidity." Created in 2000, the Enron loophole had exempted from government regulations most over-the-counter energy trades and trading on electronic commodity indices. The thinking was that all commodities could be packaged and sold over online trading forums. Unfettered markets would then bring down prices for everyone. But such free market finesse has been blamed for not just excessive price volatility but also fraud and manipulation. In the intervening years, Congress introduced legislation that went nowhere. However, last year one such bill passed both chambers and was sent to President Bush for his signature. And while he vetoed it, Congress was able to override that rejection in June 2008. One of those accused of price manipulation was hedge fund Amaranth that managed $9 billion in assets. On a practical matter, the feds are still dealing with the fallout resulting from its failure in 2006. The Federal Energy Regulatory Commission recently approved an agreement that settles the case against the fund -- one that concluded its large natural positions created unstable markets and forced average people to pay much higher prices. The settlement requires the Amaranth parties to pay $7.5 million to the U.S. Treasury. Task Ahead Amaranth had dominated trading in U.S. natural gas markets just before its collapse, holding about 40 percent of all outstanding natural gas contracts on the New York Mercantile Exchange. At times, it held 100,000 natural gas contracts in a month. Critics maintain that such large positions have been the driving force behind higher natural gas prices. They add that speculators generally have become the dominant force in the futures markets, distorting the basic economic laws of supply and demand. In testimony before Congress this month, the Industrial Energy Consumers of America said that from January 2008 to August 2008, the price of natural gas more than doubled because of too much speculation. During the same time period, U.S. production of natural gas actually rose about 8 percent while national inventories were well within the five-year average and demand was essentially unchanged from the same period of the previous year. As a result of that excessive risk taking, consumers paid more than $40 billion in higher natural gas costs, it concludes. A report by the Government Accountability Office in 2007 tends to agree with that overall assertion. It said that speculation among futures traders could cause prices to escalate.

Functioning market doesn’t yield rational price all the times. $147/b oil doesn’t necessarily mean dysfunctional market.

But you see, what OPEC started doing after that was trying to figure out what the oil demand curve looked like. I mean, they jumped for joy when the price of oil went above 28 dollars a barrel - which was the top of their desired range - and now suddenly it was above 100, and the international economy was cruising along without a (visible) bump. That's when the lies and dreams started about raising production and investing in new deposits, and when George W. flew to Saudi Arabia to request some assistance, he was politely told to get lost.

Think about it. According to the USEIA, Opec raked in more than 900 billion in 2008. You don't get that kind of money by making plenty of oil available. Now they know that, it's part of the latrine gossip in that building in Vienna, and because they know it the price of oil is around 70 dollars a barrel instead of.....

As for the natural gas, I'll have to read your comment again later in the day

According to the EIA, the OPEC countries raken in more than 900 billion dollars in 2008. They could never have gotten that much money without restraining their production of oil.