Monday, June 23, 2008

Obama + Energy

As the political race in the States has now winnowed, the candidates are starting to spout off their ideas to energize (pun, ha!) the public behind their campaign.

One such recent tack is that taken by Obama under the CNN headline of "Obama Wants Energy Speculator Crackdown."

Reading the piece, it sounds like he wants more governmental intervention and oversight into energy commodities futures trading (but not other types of futures, let alone commodities futures, trading).  Hmm.. while regulation per se may be not all that bad, knee-jerk regulations surely are ripe for mistaken results (death of habeas, anyone?).

The Dems are smart to throw around the term 'closing the Enron loophole' in their petitioning.  I had no idea what this is, so I read up on it a bit.

First up was - hmm, wonder where they stand:

Additionally, through the so-called "swaps loophole," financial investors can "game the markets" for pure profit by buying up positions in the energy markets,without any limitation on the size of the positions they can take.  One recent estimate suggested that they now control one third of the commodities markets, or $150 billion - a 1,000% increase in less than five years!

What exactly is wrong with taking large positions on bets that you think will go your way?  That's like saying you, as an individual investor, can buy as much Google stock as your wealth allows!  Oh, no!

Look at this May 2008 Baltimore Chron commentary, talking about the Enron Loophole:

In 2006, the "Enron loophole" allowed Amaranth Advisers hedge fund to shift its trades from the regulated New York Mercantile Exchange (NYMEX) to the unregulated Intercontinental Exchange (ICE) in Atlanta. 
That let Amaranth corner the natural gas market, betting that futures prices would rise. The hedge fund lost about $6 billion and imploded as natural gas prices fell to a two-year low in September 2006. 

Haha - that second 'graph is where all these Enron Loophole types are missing in their comprehension.  The spot price for oil is what people pay for it today - so higher prices hurt the buyers and help the sellers of oil.  Spot prices, for the most part, depend on demand characteristics.  

Futures trading is about bets on future price movements - you can use it to bet future prices will be up or down from today, and trade in and out of those positions before the maturity date to make money based on intra-contract price movements of the underlying asset (here, oil).  A futures trade is a contract - there are two sides of the transaction, and neither side is an actual consumer (nor producer) of oil.  It's just a bet between two people, and if you're on the wrong side of the bet, you have to pay up.  

Is this speculation?  Yes, but so is making any investment.  As from the example, just because you "corner" the futures market doesn't mean you'll make money.  It could mean you blow up spectacularly and be used as a whipping boy in hedge fund conferences.  

Complaining about things like 'energy speculation' makes Obama sound more and more like every other poltico and less about the "change" that we need.  After all, when I go out and buy a Prius, I'm an "energy speculator" too!    

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