Monday, June 2, 2008

A Response to an Email

I sent out an email to a listserve with the link which is an effort by gasoline retailers to shift the blame for gas prices to the derivative markets. To which I got a response which I answer below. I figured this was worth sharing.



I did not invent financial derivatives or complex financial markets. Neither did the US. In fact I believe it was European traders starting with the exiled Scottsman John Law in France that first created financial markets.

High prices hurt. But they are good for progress. It is crushing many in the gasoline station business. Local companies that own one or two gas stations can't afford to own the gasoline in the ground (they can't afford to fill their tanks anymore than the suburbanites driving SUVs).

The fact that petroleum companies are pitting themselves against Wall-Street and big oil says alot about how this debate is going. Old time friends are throwing others under the bus. The debate is about to change in a big way and this is the first significant sign that the policy debate is now changed for good.

It looks like $130 a barrel oil and $4 gasoline was the magic number everyone speculated about. The world is changing.

I have a bachelors in petroleum economics, know alot about the subject. I understand enough to know that I don't understand how these systems work and personally believe anyone else associated with these large markets does either. Anymore than a poker player knows how to beat any other poker player

They are a living complex system similar to an ecosystem. They existed at the dawn of time and as humanity has scaled up so have these markets. They exist at all levels of society but only recently (last thirty years) have developed into the hypothetical exchanges that they really are at the commodity level.

Also - France, England, Japan, and many other nations have systems exactly the same as the US. Just smaller in scale with the size of the markets doing business in those economies. The existance of commodity exchanges is not the fault of the US, George W. Bush, petroleum hedgers, cattle drivers, or any other phenomenon. The fault of petroleum costs is the fault of everyone who buys it, trades it, or relies on it.

The fault of rising commodity prices is instablity in the US money markets due to mortgage backed securities having issues right now. Institutional investors (not speculators) moved to commodities which are easily convertable into dollars. The markets for agricultural goods (though large) are small in comparison to money markets and that is why many economists blame non-recieving buyers of commodities for the spike in commodities across the world.

The petroleum jobbers and retail gasoline retailers are spinning this to avoid blame for the high pump price.

Mark Fitz

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