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Does oil speculation increase gas prices? · Stuff You Should Know

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Speaker 1: Brought to you by the reinvented two thousand twelve Camray.
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Speaker 1: It's ready. Are you welcome to Stuff you Should Know?
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Speaker 1: From House Stuff Works dot Com. Hey, and welcome to
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Speaker 1: the podcast. I'm Josh Clark. Across from me is one
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Speaker 1: Charles W. Chuck Bryant. And since there's a couple of
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Speaker 1: the microphones in front of us that would make this
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Speaker 1: stuff you should know, the all audio podcast, All Goodness,
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Speaker 1: all the time. And in the other room, as guest producer,
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Speaker 1: Elizabeth Lizzie. Yeah, her old buddy is back here working,
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Speaker 1: which is nice, giving us um pieces of dry mango.
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Speaker 1: And in between she worked for Emily and so I
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Speaker 1: just haven't been able to lose Lizzie. That's good, but
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Speaker 1: she's not when you want to lose Lizzie's awesome. Stop
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Speaker 1: picking on Lizzie, Chuck. I'm a big fan. I started
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Speaker 1: the Lizzie Fan Club here. Oh yeah, and then I
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Speaker 1: dissolved it. I was gonna say, I have not been
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Speaker 1: invited to that. That's just me, Chuck. Remember when we
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Speaker 1: were on the call all with a senior White House
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Speaker 1: official yesterday, Yeah, that was kind of cool. Huh yeah
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Speaker 1: White House. Yeah, Obama Administration that's who's in there. Basically
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Speaker 1: we were talking about the UM. Well, we're basically going
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Speaker 1: over the talking points for the energy security policy that
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Speaker 1: he unveiled today as of this recording March thirty one, right,
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Speaker 1: I was tomorrow the thirty one. So he goes over
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Speaker 1: this or or she's going over this with us and UM.
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Speaker 1: Basically Obama has said that over the next decade he
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Speaker 1: wants to reduce American oil imports by a third, right,
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Speaker 1: And it's something that every president going back to I
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Speaker 1: think Nixon has said that. All right, So it's an
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Speaker 1: ambitious goal, is what you're saying. Well, not sorary third,
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Speaker 1: but yeah, they all There's a video that John Stewart
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Speaker 1: ran on The Daily Show where it literally showed the
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Speaker 1: same clip from like our last five presidents saying reduced
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Speaker 1: foreign dependency on they have the best researchers on that show. UM.
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Speaker 1: So okay, Well, Obama took his rightful place, following in
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Speaker 1: the footsteps of Richard Nixon, and UM has has said
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Speaker 1: that he wants to reduce our imports by a third
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Speaker 1: in about ten years. UM. And one way to do
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Speaker 1: that is to UM figure out how to conserve oil,
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Speaker 1: how to reduce use e g. A smarter grid, more windpower,
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Speaker 1: more nuclear um more um clean coal, clean coal was
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Speaker 1: another one. Natural gas, no clean coal, and to basically
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Speaker 1: get online are reserves that we have now. So the
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Speaker 1: big talking point around Washington with the Democrats right now
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Speaker 1: is that oil is um. That the oil companies have
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Speaker 1: leases on something like seventy nine million acres of UM
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Speaker 1: of oil land, suspected oil land that we were not tapping, right,
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Speaker 1: that's not being used. It just own these leases, right,
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Speaker 1: And then I think like nineteen million acres are actually
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Speaker 1: being mined for their oil or natural gas. And Obama's
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Speaker 1: position is, hey, you fat cats, um, you need to
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Speaker 1: go ahead and start producing or else we're going to
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Speaker 1: penalize you, like invest in the United States, come off
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Speaker 1: some of these profits and start spending on exploration and
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Speaker 1: production and get American oil out of the ground, which
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Speaker 1: is hugely different than what he was saying he should
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Speaker 1: do before, which is like no ausch or really nothing
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Speaker 1: like that. Um. So it's it's kind of a big
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Speaker 1: deal that he's really putting oil at the center of
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Speaker 1: his energy security policy. UM. But one thing we asked
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Speaker 1: that they didn't really answer very well is what role
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Speaker 1: does preventing speculation in the commodities market play in energy security?
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Speaker 1: That's my question. I get the sense, and this is
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Speaker 1: one of those topics again that you know, Chuck's little
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Speaker 1: guitar playing English major brain has a hard time wrapping
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Speaker 1: around this. But I get the feeling that there's not
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Speaker 1: a lot of people in the government they want to
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Speaker 1: talk a lot about oil speculation. It's like, don't bring
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Speaker 1: that up, no, um, which is strange because its whole
4:20
Speaker 1: you know, there's that whole kicking around Wall Street, um
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Speaker 1: during the recession thing that was going on, and that
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Speaker 1: seems to have been largely abandoned. Um. But the question
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Speaker 1: of whether or not oil speculation is affecting oil prices today,
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Speaker 1: it still remains oils up to UH. I think triple
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Speaker 1: A saying a national average of three sixty right now
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Speaker 1: for unlighted for regular that's a national average. Yea, yeah,
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Speaker 1: that's crippling. And and well, I know the recession ended.
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Speaker 1: I just made air quotes, um, but people are hurting. Uh.
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Speaker 1: Food prices are increasing, oil prices are increasing, Gas prices
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Speaker 1: are increasing, and UM, a three dollar and sixty cent
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Speaker 1: gallon of gas is crippling to the average American. Yeah,
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Speaker 1: and that's average. I mean you've got to some places
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Speaker 1: like California and there in the summertime they may be
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Speaker 1: creeping up over five bucks a gallon. Yeah, so the
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Speaker 1: money for a gallon of gases, it is a barrel
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Speaker 1: of oil today is trading for opeque. By the way,
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Speaker 1: it stands to make one trillion in revenues in two
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Speaker 1: thousand eleven. That's the course it's on right now. Yeah,
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Speaker 1: it's a lot of UM. So so uh the there
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Speaker 1: there's this idea out there that oil trading at one
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Speaker 1: fifteen and barrel should actually be trading at something like
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Speaker 1: UM ninety a barrel, and that oil speculation is accounting
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Speaker 1: for UM twenty to twenty five dollars on top of
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Speaker 1: the barrel price, and it counts for a lot of
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Speaker 1: this increase in in UM the price of oil. So
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Speaker 1: this is nothing new. This is going on right now
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Speaker 1: in two thousand and eleven. But it just happened in
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Speaker 1: two thousand and eight. Do you remember when oil hit
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Speaker 1: four dollars a gallon? It hit four eleven as a
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Speaker 1: national average. This is the highest ever remember two seven,
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Speaker 1: So two thousand seven, two eight, Yeah, I remember when
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Speaker 1: it took the first big jump, um, whenever that was.
6:17
Speaker 1: I was living in l a And I remember it
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Speaker 1: got over two dollars a gallon, and it was a
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Speaker 1: big jump. It was like one weekend it was you know,
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Speaker 1: a dollar or eighty five, and the next weekend it
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Speaker 1: was like to thirty five. Then we would have probably
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Speaker 1: been like two three or two thousand four. It was
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Speaker 1: a big It was like a fifty cent jump or
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Speaker 1: something like that. Um, don't quote me, I'm going on
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Speaker 1: my feeble memory, but I remember saying at the time,
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Speaker 1: you know what, I just had a feeling, said, this
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Speaker 1: is something different. Gas is never gonna be this cheap again,
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Speaker 1: never gonna go back down. You know, in nine, the
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Speaker 1: average was ninety cents a gallon. Nine it was it
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Speaker 1: was so twelve years ago a gallon. Now we're all
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Speaker 1: we're at three sixty, we've already hit four and change
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Speaker 1: for an average. I remember feeling a little hondap for like,
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Speaker 1: you know, fourteen dollars. Yes, that was just so beautiful now,
7:05
Speaker 1: so um chuck. From two thousand four to two thousand
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Speaker 1: and eight, the price of a barrel of crude oil
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Speaker 1: increased from thirty one dollars and sixty one cents in
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Speaker 1: two tho four, two hundred and thirty seven dollars and
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Speaker 1: eleven cents in July two thousand eight. Right, so guess
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Speaker 1: prices grew from one to four oh nine over that
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Speaker 1: same period. There's a lot of things. There's so much
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Speaker 1: that goes into oil production that could affect the markets.
7:35
Speaker 1: Instability right right now, people are taking to the streets
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Speaker 1: of Yemen, in Syria and once in a while in Iran,
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Speaker 1: Um they are um, they are overthrowing the government in Egypt.
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Speaker 1: There's a civil war going on in Libya. Libya's oil
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Speaker 1: production is virtually offline right now. So so well, it
7:56
Speaker 1: depends on who you're asking. It's actually pretty stable. It's
8:00
Speaker 1: just socialists, which is why everybody's like, oh, that's a
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Speaker 1: dangerous country. If you're America, it is, right, but that's
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Speaker 1: one of the reasons that people said, you know, geopolitics
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Speaker 1: in these instability unstable regions that produce oil has a
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Speaker 1: lot to do with it. But Michigan Senator Carl Levin
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Speaker 1: during a hearing said, you know what, yeah, it's unstable,
8:19
Speaker 1: but it's been unstable for decades and we've been buying
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Speaker 1: oil from them. No problem. But that's how he claimed
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Speaker 1: at least right, and Hugo Chavez, remember for through SITCO,
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Speaker 1: that's the Venezuelan oil company that's here in the US.
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Speaker 1: Through SITCO. Remember, he used to donate like a million
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Speaker 1: gallons of heating oil to people in the Northeast to
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Speaker 1: keep them alive. And that was like basically him saying
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Speaker 1: like this is what socialism gets you, people of Boston
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Speaker 1: with UM. Yeah, so it's unstable in that he's not
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Speaker 1: a friend of America. We were not capable of pushing
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Speaker 1: him around, and we need their oil, right, but we
8:56
Speaker 1: have a dayton because people like money, economies like money,
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Speaker 1: and we want to their oil. So everybody's chill out.
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Speaker 1: What's more with this um recent drop in production that
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Speaker 1: that's represented by Libya going in the civil war, Saudi
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Speaker 1: Arabia stepped up and said, you know what, that's three
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Speaker 1: percent of the oil that's produced every day, and we're
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Speaker 1: gonna add an extra three percent to make up for
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Speaker 1: this temporary shortfall. So there actually isn't any kind of
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Speaker 1: thing in the production or supply side. Well, no, because
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Speaker 1: you mentioned in the article like could it be peak oil,
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Speaker 1: but now it's not peak oil. Well, peak oil, do
9:29
Speaker 1: we not podcast on the end? No, we know we
9:31
Speaker 1: have we need to do that. That's the point where
9:34
Speaker 1: you know there's only a fine it amount of oil.
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Speaker 1: So once we cross that little threshold, it's like all
9:38
Speaker 1: of a sudden, there's getting less and less oil. Yeah,
9:41
Speaker 1: and there's there's a whole um group of people out there,
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Speaker 1: very educated, smart people. They're not crack pots olas. Sometimes
9:47
Speaker 1: people look at them like that, who believe we have
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Speaker 1: past peak oil and it's gonna take us five years
9:52
Speaker 1: or ten years to figure it out. But by that
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Speaker 1: time it'll be way too late, and the the world's
9:57
Speaker 1: gonna come to a grinding halt for a while until
9:59
Speaker 1: we can figure out what to do. UM. A lot
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Speaker 1: of people think that we haven't hit peak oil. And
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Speaker 1: if you look at UM the at least the published figures,
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Speaker 1: Saudi Arabia is often accused of fudging on their numbers,
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Speaker 1: and I think they were found to UM a while back.
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Speaker 1: But most people say, no, supply still exceeds demand, which
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Speaker 1: if you look at Mr Adam Smith's The Wealth of Nations,
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Speaker 1: the the basis of the capitalist economy. If supply exceeds demand,
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Speaker 1: prices should remain low. And oil, Isn't that the kind
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Speaker 1: of thing you want rewriting the rules of base economics. No,
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Speaker 1: because ultimately it's a commodity, and a commodity is something
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Speaker 1: that we can make things out of, or something we need.
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Speaker 1: Wheat is a commodity, we need that. Pork bellies a commodity.
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Speaker 1: That's the most delicious commodities. Um, and oil is a
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Speaker 1: very very vital commodity. So if Carl Levins saying, yeah,
10:54
Speaker 1: that's unstable, but were we we can deal with them.
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Speaker 1: If Saudi Arabia is saying, yes, Olivia's off line right now, um,
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Speaker 1: but we're gonna make up the shortfall. If if we
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Speaker 1: haven't actually passed peak oil and the supply still exceeds
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Speaker 1: the demand. A lot of people are saying, why is
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Speaker 1: oil so high? Why is it increasing and increasing? And
11:14
Speaker 1: there's a correlation that's going on right now. The the
11:19
Speaker 1: answer to that, obviously for a lot of people's minds,
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Speaker 1: And I'm not taking a position on this because it
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Speaker 1: is a very controversial thing to say that is oil speculation. Yeah,
11:29
Speaker 1: there's speculation that the speculation is what's driving up the price, right,
11:33
Speaker 1: that's perfect chuck uh. And one of the ways that
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Speaker 1: it's being. UM, I guess suggested is that from I
11:41
Speaker 1: think July of two thousand, eight h there were six
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Speaker 1: D seventeen thousand oil futures contracts on the market, on
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Speaker 1: the oil commodities market. Can we explain what the future is? Well,
11:52
Speaker 1: we'll go back. I just wanted to get this one
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Speaker 1: last stat out, and we'll go back to the beginning, UM,
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Speaker 1: and then July or January two thousand eleven. So July
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Speaker 1: two seventeen thousand, January two eleven, one million UH futures
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Speaker 1: contracts on the oil market, it's right. And between those
12:10
Speaker 1: two times, after the last bubble burst, it's been creeping
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Speaker 1: up and up and up. Prices have basically commensurate with
12:18
Speaker 1: oil futures contracts. So it really looks a lot like
12:22
Speaker 1: it could be oil speculations driving up the prices. So
12:25
Speaker 1: let's talk about oil speculations. Yes, and my mind starts
12:28
Speaker 1: to melt starting now, all right, Josh, the future and
12:32
Speaker 1: you're gonna tell me with this, But UM, any kind
12:34
Speaker 1: of future is a contract between a buyer and as seller.
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Speaker 1: Buyer agrees to purchase a fixed amount of a commodity
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Speaker 1: that it fixed price, and oil future we're talking about
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Speaker 1: oil obviously, So it's different than actually buying into a
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Speaker 1: commodity because you're just betting on whether or not it
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Speaker 1: will be higher or lower at the end of your contract.
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Speaker 1: That correct, A future is a derivative and a derivative
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Speaker 1: of as any kind of financial contract or instrument that's
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Speaker 1: the value of which is based on the value of
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Speaker 1: something else. It's you know what it is to me,
13:09
Speaker 1: to my little brain that doesn't think about the stuff, Well,
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Speaker 1: is it's a made up way to make money almost,
13:14
Speaker 1: That's exactly right. It's like someone created this and said, hey,
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Speaker 1: this doesn't even exist, but as long as there's someone
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Speaker 1: buying and selling it, it does exist. Because so a
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Speaker 1: futures contract is very standard. It's not an exotic financial instrument,
13:29
Speaker 1: but the way that it's being used in the derivatives
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Speaker 1: market is um extremely exotic and volatile. So, Chuck, you
13:38
Speaker 1: have a bunch of oil, and I I have a
13:43
Speaker 1: refinery over here in my backyard, and uh, well, I'm
13:48
Speaker 1: I'm saving up it for a better life for it. Um,
13:51
Speaker 1: So I want to buy some oil from you, all right,
13:55
Speaker 1: But I think that oil, the price of crude is
13:59
Speaker 1: going to go up. You know, A year from now
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Speaker 1: per barrel, right, and I'm going to so I'm gonna
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Speaker 1: go ahead and buy it for the market price now right,
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Speaker 1: and um, you're going to sell me a futures contract.
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Speaker 1: So we have an agreement that a year from now
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Speaker 1: in um, at the end of March two thousand twelve,
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Speaker 1: the that contract expires because you have to I have
14:20
Speaker 1: to buy that oil from you, okay, but not now
14:23
Speaker 1: a year from now. Right now, if I'm right and
14:27
Speaker 1: oil goes up, say I, I'm buying a hundred barrels
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Speaker 1: at fifty bucks of barrel. That's our future contracts, our
14:33
Speaker 1: contracts for five grands um. If it goes up. If
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Speaker 1: the price of oil goes up to fifty two dollars
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Speaker 1: of barrel a year from now, I just got fifty
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Speaker 1: barrels of oil for two hundred bucks less than I
14:44
Speaker 1: should have paid. It's a good deal for you, it is.
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Speaker 1: But the future's um contract is also. Um. Well, it's
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Speaker 1: a bet, right because the price of oil could go down.
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Speaker 1: I said in two thousand twelve, and the MARCHI done.
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Speaker 1: Twe I'll buy those fifty barrels of oil from you
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Speaker 1: for fifty bucks. But if the value of oil in March,
15:05
Speaker 1: she does twelve forty eight bucks of barrel. Then I'm
15:08
Speaker 1: paying two more than I could have if I just
15:10
Speaker 1: bought on what's called the spot market, which is I
15:12
Speaker 1: go to you, I want your oil right now, and
15:14
Speaker 1: you sell it to me for whatever the market prices. Right.
15:16
Speaker 1: And if this sounds weird, it's not so different than
15:20
Speaker 1: betting on whether or not a stock will go up
15:21
Speaker 1: or down. It's the same thing. It is, but in
15:24
Speaker 1: a lot of ways, it's just kind of it's it's
15:27
Speaker 1: saying it can Also it also comes into play if
15:31
Speaker 1: if I don't need oil right now, but I'm gonna
15:33
Speaker 1: need it in the future, and I think it's gonna
15:35
Speaker 1: go up right now. When the real bet comes in,
15:39
Speaker 1: that's when when I'm when I'm saying that I think
15:41
Speaker 1: it's gonna go up, I'm gonna go long. It's called
15:44
Speaker 1: going long. Yeah. And at the end of this contract,
15:46
Speaker 1: you're actually gonna get oil. Correct, if you're holding the
15:51
Speaker 1: contract and that I have with you, um, then yes,
15:54
Speaker 1: So that has to buy oil from you that is
15:56
Speaker 1: a country and be like give me my money, I'll
15:58
Speaker 1: give you your oil. Right. But that's an important thing
16:00
Speaker 1: to distinguish because that is a future and that means
16:03
Speaker 1: actually oil is being traded at some point, right, And
16:06
Speaker 1: that's a normal thing. Right. Okay, Now that's going long.
16:09
Speaker 1: If I'm betting that oil prices are going to go up.
16:11
Speaker 1: If I think oil prices are gonna fall, I'll go short. Right.
16:15
Speaker 1: So it's virtually the same thing. We go into a contract, right,
16:19
Speaker 1: So Chuck, let's say conversely, Um, you you think that
16:23
Speaker 1: oil is gonna go down, so you're happy to sell
16:25
Speaker 1: me a future's contract, right, Um, the price of oil
16:31
Speaker 1: goes down, right, we we say, we say, for you know,
16:34
Speaker 1: five grand, Um, the price of oil goes down to
16:37
Speaker 1: forty eight bucks of barrel, and you buy that contract
16:40
Speaker 1: back from me at the market price you just made
16:43
Speaker 1: two bucks. Okay, Okay, So there's going short and there's
16:48
Speaker 1: going long. But as you said, in a standard commodities
16:51
Speaker 1: market that there's not a secondary derivative derivatives market going on,
16:56
Speaker 1: then ultimately there's going to be an exchange of oil
17:00
Speaker 1: the secondary derivatives market. You never get caught with the
17:04
Speaker 1: contract when it expires. Your trading contracts day by day,
17:08
Speaker 1: moment by moment, as the price of oil changes up
17:10
Speaker 1: and down throughout the day. You're making money off of
17:13
Speaker 1: those fluctuations by buying and selling, by shorting and longing um,
17:19
Speaker 1: the the price of oil on these contracts, and that
17:23
Speaker 1: is speculation that, okay, leads to what's called an artificial market.
17:29
Speaker 1: Supply and demand no longer applies to the commodity itself.
17:34
Speaker 1: Supply and demand is also subject to the two the
17:41
Speaker 1: the financial instruments as well. Yeah, the whims of who
17:43
Speaker 1: has a lot of money and can affect a market
17:45
Speaker 1: with a big purchase. So that's called an unstable market
17:50
Speaker 1: because it's you don't it's very violable. It's not it's
17:53
Speaker 1: not nearly as steady as a real tangible market. No.
17:56
Speaker 1: I mean, if you look at if you look at uh,
17:58
Speaker 1: you know, um, it's just a regular commodities market where
18:01
Speaker 1: there aren't any futures or derivatives um trading by anybody
18:05
Speaker 1: besides the people who actually will end up with this stuff.
18:10
Speaker 1: There's the changes, the fluctuations over you know, a month
18:13
Speaker 1: or a year or a quarter are you know, pennies
18:16
Speaker 1: or a buck or two. Here it's when investment banks
18:21
Speaker 1: and hedge funds, who, by the way, when interest rates
18:25
Speaker 1: are very very low, tend to turn to the commodities
18:28
Speaker 1: market for to safely park their money. Right, because they're
18:32
Speaker 1: not gonna make much much money when interest rates are low. Um,
18:36
Speaker 1: they turn to the commodities market when they get involved.
18:38
Speaker 1: That's when things start going from thirty bucks of barrel
18:42
Speaker 1: in two thousand and four two hundred and forty dollars
18:44
Speaker 1: a barrel in two thousand and eight. Right, And that's
18:46
Speaker 1: what happened with the housing uh bust, all of a sudden,
18:50
Speaker 1: Wall Street Housing wasn't a good place to put any money,
18:53
Speaker 1: So Wall Street flocked over to speculation futures, oil futures, right,
18:58
Speaker 1: and and um, we should say in that this is
19:00
Speaker 1: this is all very much debatable. This is if you
19:03
Speaker 1: believe that oil speculations affecting oil, this is how it happens. Right.
19:08
Speaker 1: They were just explaining that that's what we do. Well,
19:10
Speaker 1: what we just explained was how derivatives trading works. This
19:13
Speaker 1: is no secret. It's the effect that it has, that's
19:16
Speaker 1: what's that's what's debatable. So the people who believe that
19:20
Speaker 1: there is consequences for oil for derivatives trading to say
19:25
Speaker 1: that here's what happens. Right, if you want, if you
19:29
Speaker 1: want to get your hands on actual oil, right you
19:33
Speaker 1: aren't going to be able to keep up with an
19:35
Speaker 1: investment bank or a hedgephone manager who is buying up futures.
19:39
Speaker 1: So you're gonna need oil now, and you're gonna have
19:41
Speaker 1: to stockpile. It's one good thing about oil is you
19:43
Speaker 1: can stockpile it for a while, right well, and oil
19:46
Speaker 1: producers can hoard it. That that's exactly right as well,
19:49
Speaker 1: But there's you could also the derivatives market in futures
19:54
Speaker 1: can also inadvertently force a horde among people who actually
19:59
Speaker 1: use the oil, who are buying oil for use, not
20:02
Speaker 1: just trading in the derivatives market by saying, Okay, I
20:05
Speaker 1: can't buy futures because they're just too expensive right now,
20:09
Speaker 1: so I'm gonna buy whatever I can get my hands on.
20:11
Speaker 1: So the spot market that deals in actual oil right
20:15
Speaker 1: that moment has a higher demand, which means the actual
20:20
Speaker 1: price of oil goes up, which means those oil futures
20:22
Speaker 1: go up even further, which means prices across the board rise,
20:27
Speaker 1: especially for gasoline. That's right, and when big companies like
20:31
Speaker 1: Goldman Sackson City Group are these huge financial institutions are
20:35
Speaker 1: buying up tons and tons of uh are speculating. Then
20:41
Speaker 1: that's going to have a really big sway on the
20:43
Speaker 1: market that alone will right, they stand and gain tons
20:48
Speaker 1: of cash, tons of cash. But imagine if you not
20:52
Speaker 1: only stood to getting tons of cash from the secondary market,
20:55
Speaker 1: but you're an oil producer as well. Yeah, and all
20:58
Speaker 1: of a sudden you're aculating on your own production or
21:02
Speaker 1: buying oil features. If you buy a bunch of oil
21:04
Speaker 1: features from higher price, you can actually the market um
21:09
Speaker 1: trades on rumor, right, So people are like, well, somebody's
21:12
Speaker 1: buying up a bunch of this stuff, and the prices
21:15
Speaker 1: actually rising, right, so that a lot of people are
21:17
Speaker 1: gonna be willing to pay more and more and more.
21:19
Speaker 1: If you're an oil producer doing that, then you're going
21:22
Speaker 1: to stand again through the financial instruments and through the
21:25
Speaker 1: actual sale of your oil. And there was an investigation
21:28
Speaker 1: into this um the the secondary oil markets that found
21:32
Speaker 1: that in the New York Mercantile Exchange alone, which is
21:35
Speaker 1: the commodities market, or one of them for the us UM,
21:39
Speaker 1: eleven percent of the oil futures contracts were owned by
21:43
Speaker 1: vital which is a Swiss oil producer. So how, Chuck,
21:47
Speaker 1: how can an oil company be allowed to artificially inflate
21:54
Speaker 1: the price of oil for its own gains, And how
21:57
Speaker 1: can investment banks be allowed to drive up the price?
22:00
Speaker 1: That is, in fact, what's going on. How can they
22:02
Speaker 1: be allowed to drive up the price of a commodity
22:05
Speaker 1: as valuable as oil If normally it should be something
22:08
Speaker 1: like thirty or forty or fifty dollars a barrel, and
22:10
Speaker 1: it's double or triple or quadruple, what what experts believe
22:14
Speaker 1: it's actual value should be. Well, it shouldn't be able
22:17
Speaker 1: to happen, because they're starting in with our congress. There
22:21
Speaker 1: was something put in place called the Commodity Futures Trading Commission,
22:24
Speaker 1: the CFTC, and they were put in place specifically to
22:28
Speaker 1: prevent this kind of thing from speculation artificially inflating prices
22:32
Speaker 1: of commodity. So they were like, they've realized a long
22:35
Speaker 1: time ago this could be a real problem. Let's put
22:36
Speaker 1: this thing in place and let's make them keep it
22:39
Speaker 1: in check. So if you were trading on that exchange,
22:43
Speaker 1: you gotta file reports every day. The Commission looks them over,
22:46
Speaker 1: keeps an eye out for speculation. They know if somebody
22:49
Speaker 1: is trying to corner the market. There who and they
22:51
Speaker 1: try to stop it. But quite a few things have
22:54
Speaker 1: happened to nooter for the most part. The CFTC. Yeah,
22:59
Speaker 1: because you can create a federal agency and empowered all
23:02
Speaker 1: you want, but if successive presidents disagree with you about
23:05
Speaker 1: the value of that that agency, they can neglect it,
23:08
Speaker 1: they can strip it of its powers. They can as
23:10
Speaker 1: you say, new to it and not even have the
23:12
Speaker 1: courtesy to put noodle noodicles on it afterward, just leave
23:17
Speaker 1: it laying there, you know. So in two thousand, the
23:20
Speaker 1: very big thing happened. Prices were still pretty low for oil,
23:23
Speaker 1: less than thirty bucks of barrel, but a little company
23:26
Speaker 1: called en Ron started lobbying Congress to remove regulatory powers
23:31
Speaker 1: of the CFTC. And basically what the deal was. The
23:35
Speaker 1: CFTC um had regulatory powers over the official exchange. So
23:40
Speaker 1: Enron says, hey, New York Mercantile Exchange and uh, CFTC,
23:45
Speaker 1: I'm sorry. And Ron said, hey, you know, we've got
23:47
Speaker 1: the software that allows futures to be traded over the counter,
23:50
Speaker 1: which is something outside of the formal exchange market. Right.
23:54
Speaker 1: It's basically like I can say, hey, Chuck um, you've
23:57
Speaker 1: got a bunch of futures like in your pocket, can
24:00
Speaker 1: come to your house and buy it and it will
24:02
Speaker 1: be a legitimate exchange. But it's over the counter. It
24:04
Speaker 1: exists outside of the market, that's right. And that became
24:06
Speaker 1: known as the Enron loophole because all of a sudden,
24:08
Speaker 1: O t C trading was allowed for futures exchanges with
24:11
Speaker 1: no government oversight because it was out of the jurisdiction
24:13
Speaker 1: of the CFTC. So, josh, that was one thing happened
24:17
Speaker 1: in two thousand. Then another little thing came along, uh
24:20
Speaker 1: called the Intercontinental Exchange. The IC was set up in London,
24:24
Speaker 1: and that was to trade European oil futures. And the
24:28
Speaker 1: funny thing about that is it was headquartered here in Atlanta,
24:31
Speaker 1: so it's headquartered in Atlanta, but it's European oil futures,
24:34
Speaker 1: so the CFTC didn't have any oversight over them because
24:39
Speaker 1: it was European, right, So, um, you could trade American
24:43
Speaker 1: oil futures on this exchange. Well six years later, that's
24:47
Speaker 1: when they set up the American terminals. Think about it, like,
24:51
Speaker 1: the time in London and the time in New York
24:53
Speaker 1: are totally different, and that's kind of a problem. So really,
24:56
Speaker 1: if you can get these commodities, the same commodities trading
25:00
Speaker 1: on the same time zone. You can really create you
25:05
Speaker 1: you have a more robust market, that's right. And now
25:08
Speaker 1: all of a sudden, the CFTC couldn't even regulate these
25:11
Speaker 1: formal exchanges on the formal formal formal market, even though
25:16
Speaker 1: it was based in Atlanta. They set up trading post
25:20
Speaker 1: trading post terminals inside the United States in New York.
25:23
Speaker 1: But it's almost like the O t B. Like horse
25:27
Speaker 1: racing is illegal, but you can this race is in Cuba, right,
25:30
Speaker 1: and but you can bet on it in you know,
25:32
Speaker 1: on the Lower East Side. And so as these things
25:36
Speaker 1: just kept going and going, um, the the CFTC just
25:42
Speaker 1: lost any jurisdiction whatsoever. And rafty people that are coming
25:47
Speaker 1: up with these things, they basically saying like, let's set
25:50
Speaker 1: up away where we can make gobs of money outside
25:52
Speaker 1: of regulation, and I mean outside of regulation. People have
25:58
Speaker 1: no ideas. I was reading some blog post and it
26:01
Speaker 1: was about how the aluminum market was being cornered by somebody,
26:05
Speaker 1: and they thought it was some hedge fund manager and
26:07
Speaker 1: they had an idea who but not enough to publish.
26:10
Speaker 1: But they have no idea who's buying what there's it's all.
26:13
Speaker 1: It all exists in the shadows the derivatives market too,
26:16
Speaker 1: because it's outside of the jurisdiction of this federal agency
26:19
Speaker 1: that was created specifically to police these things. You know,
26:23
Speaker 1: I'm never gonna be wealthy because I'm one of those
26:25
Speaker 1: dumb schlubs who it's just like, let me go out
26:27
Speaker 1: and near my paycheck. And I'm not like against the
26:29
Speaker 1: stock market, like I'll invest in the stock market and
26:31
Speaker 1: set up my foreone can on that. But I'm not.
26:34
Speaker 1: I can't even fathom the kind of what causes someone
26:38
Speaker 1: to think of like, hey, how can I really make
26:41
Speaker 1: tons of money with no oversight? And I'll invent this
26:43
Speaker 1: way to trade ether and not really the people would
26:48
Speaker 1: buy ether of them. They probably, especially drug dealers. Patrick
26:51
Speaker 1: Bateman would have eaten you alive. Oh man, I'd be
26:55
Speaker 1: so dead. So um. There was a July two thousand
26:59
Speaker 1: eight or by the International Energy Agency that concluded that
27:03
Speaker 1: speculation didn't really have anything to do with it. They're like, no, no, no,
27:06
Speaker 1: that's not what's driving oil prices up. There's another report
27:09
Speaker 1: the next September contradicted the i e. A report said,
27:13
Speaker 1: now there's actually a lot of correlations between this big
27:16
Speaker 1: influx of money and oil futures and the rising cost
27:18
Speaker 1: of oil. I mean, I'm a dummy. To me, it
27:21
Speaker 1: kind of looks plain that that's probably what's been happening.
27:24
Speaker 1: But there's probably a lot of people are going to
27:25
Speaker 1: right and say, oh, what you guys didn't consider was
27:28
Speaker 1: X y Z. No. There's there's a lot of factors
27:30
Speaker 1: that that um that go into producing and buying and
27:34
Speaker 1: selling oil, and there's no way you can cover all
27:37
Speaker 1: of them. And that's not the point. And I don't
27:39
Speaker 1: think that's anybody who's accusing the speculation of influencing the price.
27:43
Speaker 1: That's not the point of anybody, because it's not there's
27:46
Speaker 1: nobody who's going to say this is a of the problem.
27:49
Speaker 1: There's other stuff that does have this effect. I think
27:52
Speaker 1: what gets people to say speculation is hav an effect
27:56
Speaker 1: is because there's people out there who's like, it has
27:58
Speaker 1: no effect, and it's just not possible that a million
28:03
Speaker 1: futures contracts can't have some effect on the end price.
28:08
Speaker 1: And it is just correlated, it's not causal. So quickly
28:14
Speaker 1: right along with it it was I don't know, and
28:16
Speaker 1: I mean, ultimately what it comes down to, is uh,
28:20
Speaker 1: the average American who's still you know, maybe unemployed, paying
28:24
Speaker 1: tons of money for food, is getting you know, reamed
28:28
Speaker 1: at the pump still and if there's anything that could
28:30
Speaker 1: be done to reduce that without causing harm to the
28:36
Speaker 1: to the markets, why not. But hey, good news, Josh.
28:39
Speaker 1: In two thousand eight, Congress introduced the Consumer First, Hey
28:44
Speaker 1: how about that Consumers First the Energy Act in May
28:48
Speaker 1: two thou and that would have extended oversight for the
28:51
Speaker 1: CFTC to foreign lands, probably would have helped a lot,
28:54
Speaker 1: and it died on the Senate floor a month later.
28:57
Speaker 1: A month later. Yeah, they said consumer First, let's kill it.
29:00
Speaker 1: They're talking about it now, like, um, this whole Obama
29:03
Speaker 1: pushes basically making the oil companies out to be bad guys.
29:07
Speaker 1: So the Democrats are really taking their they're banging the
29:09
Speaker 1: war drumb against oil companies right now. And then investment
29:13
Speaker 1: bankers are a fun target too. So this is this
29:16
Speaker 1: is coming up again, but it's coming up like it
29:19
Speaker 1: did in two thousand and eight because oil speculation is rampant.
29:23
Speaker 1: And I know everyone thinks we're we're anti capitalism, but
29:26
Speaker 1: that's not true at all. It was just just play fairly.
29:28
Speaker 1: Just play fair at the very least, admit that you're
29:31
Speaker 1: having the effect that you're having. That's that's what I
29:35
Speaker 1: think would gal anybody who who is like, yes, oil
29:38
Speaker 1: speculation as an effect. UM. And it's not just oil.
29:41
Speaker 1: By the way, If you want to read a really
29:42
Speaker 1: cool article UM on speculation commodity speculation, UM, read Frederick
29:48
Speaker 1: Kaufman's The Food Bubble. It's he tries very hard but
29:52
Speaker 1: fails ultimately in the end to connect Goldman Sacks trading
29:57
Speaker 1: wheat and creating a wheat bubble that created the food
30:01
Speaker 1: crisis in the riots in Haiti and Egypt in two
30:03
Speaker 1: thousand and eight. UM and it's he came so close,
30:07
Speaker 1: but he wasn't able to UM. But it's worth a
30:10
Speaker 1: read anyway. It was in Harper's like last year. Interesting. Yeah,
30:13
Speaker 1: so that is oil speculation. UM. It's us speculating on
30:17
Speaker 1: oil speculation, or speculating as little as we as we
30:20
Speaker 1: can write. UM. If you want to learn more about
30:23
Speaker 1: that type in oil in the handy search bar how
30:26
Speaker 1: stuff works dot com. We have a bunch of cool
30:28
Speaker 1: stuff on the side about that. UM and I said oil,
30:32
Speaker 1: followed by handy search bar, which means listener mail Josh,
30:37
Speaker 1: I'm gonna call this uh sperm donation. Uh. Dear Josh,
30:43
Speaker 1: Chuck and Jerry. What I'm gonna say Lizzie today? Because
30:46
Speaker 1: Jerry has left us tell you it again? Dear Josh,
30:49
Speaker 1: Chuck and Lizzie. My name is Melanie'm a college student
30:51
Speaker 1: from Seattle attending full time school in South Korea. I
30:55
Speaker 1: was listening to how twins work and it made me
30:57
Speaker 1: think of my own unique family situation. My mom and
31:00
Speaker 1: legal father, her husband could not have a child together,
31:02
Speaker 1: so they decided to get a sperm donor. The laws
31:05
Speaker 1: are looser now, but twenty years ago information was more
31:08
Speaker 1: closed off in secretive. I grew up not knowing really
31:11
Speaker 1: anything about my real dad until just about a month ago.
31:14
Speaker 1: In late February, the day before I was to depart
31:16
Speaker 1: back to South Korea, I got a letter in the
31:18
Speaker 1: mail from my real father. He lives in Athens, Georgia.
31:21
Speaker 1: Pretty cool. We have been communicating through Facebook and email,
31:25
Speaker 1: and I've discovered that we have quite a bit in
31:27
Speaker 1: common despite never knowing each other. Of course, you do
31:31
Speaker 1: Jean's baby, it's all the Jenes. I wonder if it
31:34
Speaker 1: turned out to be biker Lee. We have very similar handwriting, religious,
31:40
Speaker 1: spiritual beliefs, paranormal, paranormal experiences, TVs TV show taste. He
31:47
Speaker 1: is a nurse and that was the first job I
31:49
Speaker 1: ever wanted, so it's not really And he was a
31:52
Speaker 1: journalist in my main talent in a large interest of
31:54
Speaker 1: mine's writing. On top of all this, five years ago
31:56
Speaker 1: or so, my mom received a letter from a lady
31:59
Speaker 1: who had registered the same donor number. So, in short,
32:02
Speaker 1: I also have a half brothers. That's very cool. Um.
32:05
Speaker 1: We were able to meet once actually my senior year,
32:08
Speaker 1: and also discovered we had several things in common. My
32:10
Speaker 1: boyfriend was a part Japanese guy named Max, and as
32:17
Speaker 1: was his best friend, a part Japanese guy named Max Wow,
32:21
Speaker 1: same political views, both played guitar, same favorite band, half brother,
32:25
Speaker 1: half sister reunited. Does she say the same favorite band?
32:28
Speaker 1: She doesn't mention what the band is, but she said,
32:31
Speaker 1: this leads me to my request that we do an
32:33
Speaker 1: episode on sperm and egg donation and how relationships can develop.
32:38
Speaker 1: So let's add that to the kittie to the queue. Yeah,
32:42
Speaker 1: let's do that, Melanie A thanks a lot, Melanie, And
32:45
Speaker 1: we got to come down to Athens for a little while. Right, No,
32:49
Speaker 1: she did not come down, she just was in contact.
32:51
Speaker 1: You definitely have to go to Athens, and while you're
32:54
Speaker 1: there to make sure you eat at Harry Bassett's. I
32:56
Speaker 1: strongly recommend the chicken Rochambo and they do not kick
33:00
Speaker 1: you in the crotch when you ordered. I promise this
33:02
Speaker 1: isn't like of a prank. No no, um. If you
33:08
Speaker 1: were produced outside of the traditional means of reproduction, we
33:12
Speaker 1: want to hear about it. Yeah, good one, Um, wrap
33:15
Speaker 1: it up. Sending in an email to stuff podcast at
33:19
Speaker 1: how stuff works dot com for more on this and
33:25
Speaker 1: thousands of other topics. Is it how stuff works dot com.
33:28
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33:31
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Speaker 1: how Stuff Works iPhone app has a ride. Download it
33:36
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