Tan Kin Lian's Blog: Oil speculation and cost of living

Friday, October 14, 2011

Oil speculation and cost of living

The financial industry claim that they help to make the market more efficient by getting the right price for each product - using the efficient market theory. This is theory. In reality, the speculation in the market gives the chance for the professionals to make large profits at the expense of the consumers. This article explains what happens and the effect on households. This is why I support the effort of the US regulators to place controls on financial speculation by large banks and hedge funds. Our leaders in Singapore need to realize what is really happening, when they promote Singapore as a financial hub. http://money.cnn.com/2011/10/13/news/economy/gasoline_cost_speculation/index.htm?section=money_topstories&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_topstories+%28Top+Stories%29

4 comments:

Anonymous said...: Jokes - Changing Singapore (light bulbs)

How many regulators does it take to change a light bulb.

Answer:
None. The light bulb will change itself because there is an Association of Light Bulbs that guides member light bulbs on matters of professional conduct.; October 14, 2011 11:04 AM
Anonymous said...: Make our problem (investment fraud) the government's problem, by voting wisely.

Then the government will start to listen.; October 14, 2011 1:35 PM
Anonymous said...: The only way to control the masses is to impoverish them. There will never be equality and the rich and elites will rule the poor. No two ways about it.; October 14, 2011 6:53 PM
SimplyTerror said...: Another note of dissent from me again :) Mr Tan, I hope you do not mind.
I recently wrote a thesis on asset market bubbles, and one difficulty which recurs in the literature I've read is this - how do you know when speculation has occured?
The word "speculation" is tossed around like a swear word, but what does it actually mean?
Suppose I define speculation to mean buying something to hold, so as to be able to resell it for a higher price sometime down the road for capital gains. WAIT! Isn't that investing?
Ok, what about buying something now in massive quantities, hoarding it, driving up prices so I'll be able to sell at a profit later on. But wait, if I'm the one driving demand and hence prices, wouldn't demand collapse once I stop buying and start selling? No profit there.
Fine, perhaps I'll just say I buy something at more than what I think its worth, so I can resell again later for a capital gain is a reasonable definition for speculation.

(Key here is that I buy for more than what I think the fair market value is, driving prices further away from fair market prices, and hence distorting the economy.)

The problem here is this, how do you know, (without reading someone's mind... or incriminating private emails :) that someone is buying the asset/commodity for a price more than what that person think its really worth?

A related problem is, what is the fair market price? Without defining a fair market price or the fundamental value of a commodity, the term speculation is meaningless. And it seems to me that it is very difficult to say that the spot price at which some commodity is trading at, isn't the fair market price.

High prices could just be due to the fact that significant demand is still driving the market, and that supply isn't catching up as oil production infrastructure takes time to construct. (Disruptions due to events in the Arab world could be to blame. Or that OPEC is up to its old tricks again... but that is not speculation, that's oligopolic power...)

To claim that speculators in oil trading markets are driving up prices, therefore in my opinion, requires significant proof from the person claiming it. I found no evidence substantiating that claim in the linked article, besides 2 guys claiming that it has occured. Well, I claim that there is no speculation. Will someone believe me please? :)

p.s. Mr Tan, if you are uncomfortable with my comments, please let me know at terence.yeo.ct@hotmail.com :); October 21, 2011 7:01 PM