WEBVTT - Does oil speculation increase gas prices? 0:00:00.280 --> 0:00:02.920 Brought to you by the reinvented two thousand twelve Camray. 0:00:03.160 --> 0:00:07.560 It's ready. Are you welcome to Stuff you Should Know? 0:00:08.160 --> 0:00:16.400 From House Stuff Works dot Com. Hey, and welcome to 0:00:16.440 --> 0:00:19.720 the podcast. I'm Josh Clark. Across from me is one 0:00:19.840 --> 0:00:23.640 Charles W. Chuck Bryant. And since there's a couple of 0:00:23.680 --> 0:00:25.400 the microphones in front of us that would make this 0:00:25.440 --> 0:00:28.960 stuff you should know, the all audio podcast, All Goodness, 0:00:29.040 --> 0:00:31.600 all the time. And in the other room, as guest producer, 0:00:32.000 --> 0:00:35.760 Elizabeth Lizzie. Yeah, her old buddy is back here working, 0:00:36.320 --> 0:00:39.320 which is nice, giving us um pieces of dry mango. 0:00:40.000 --> 0:00:42.040 And in between she worked for Emily and so I 0:00:42.120 --> 0:00:44.400 just haven't been able to lose Lizzie. That's good, but 0:00:44.520 --> 0:00:47.720 she's not when you want to lose Lizzie's awesome. Stop 0:00:47.720 --> 0:00:50.320 picking on Lizzie, Chuck. I'm a big fan. I started 0:00:50.320 --> 0:00:53.080 the Lizzie Fan Club here. Oh yeah, and then I 0:00:53.120 --> 0:00:55.160 dissolved it. I was gonna say, I have not been 0:00:55.200 --> 0:00:59.360 invited to that. That's just me, Chuck. Remember when we 0:00:59.360 --> 0:01:01.560 were on the call all with a senior White House 0:01:01.600 --> 0:01:06.760 official yesterday, Yeah, that was kind of cool. Huh yeah 0:01:06.920 --> 0:01:11.440 White House. Yeah, Obama Administration that's who's in there. Basically 0:01:11.480 --> 0:01:15.080 we were talking about the UM. Well, we're basically going 0:01:15.080 --> 0:01:19.120 over the talking points for the energy security policy that 0:01:19.160 --> 0:01:23.040 he unveiled today as of this recording March thirty one, right, 0:01:25.680 --> 0:01:29.520 I was tomorrow the thirty one. So he goes over 0:01:29.560 --> 0:01:34.039 this or or she's going over this with us and UM. 0:01:34.080 --> 0:01:37.679 Basically Obama has said that over the next decade he 0:01:37.720 --> 0:01:42.600 wants to reduce American oil imports by a third, right, 0:01:43.160 --> 0:01:45.959 And it's something that every president going back to I 0:01:45.959 --> 0:01:49.000 think Nixon has said that. All right, So it's an 0:01:49.040 --> 0:01:51.320 ambitious goal, is what you're saying. Well, not sorary third, 0:01:51.320 --> 0:01:53.320 but yeah, they all There's a video that John Stewart 0:01:53.360 --> 0:01:55.480 ran on The Daily Show where it literally showed the 0:01:55.520 --> 0:01:59.080 same clip from like our last five presidents saying reduced 0:01:59.080 --> 0:02:03.200 foreign dependency on they have the best researchers on that show. UM. 0:02:03.280 --> 0:02:06.600 So okay, Well, Obama took his rightful place, following in 0:02:06.640 --> 0:02:10.519 the footsteps of Richard Nixon, and UM has has said 0:02:10.560 --> 0:02:13.200 that he wants to reduce our imports by a third 0:02:13.360 --> 0:02:16.440 in about ten years. UM. And one way to do 0:02:16.480 --> 0:02:20.080 that is to UM figure out how to conserve oil, 0:02:20.480 --> 0:02:24.840 how to reduce use e g. A smarter grid, more windpower, 0:02:24.960 --> 0:02:30.720 more nuclear um more um clean coal, clean coal was 0:02:30.760 --> 0:02:36.040 another one. Natural gas, no clean coal, and to basically 0:02:36.480 --> 0:02:40.760 get online are reserves that we have now. So the 0:02:40.800 --> 0:02:43.720 big talking point around Washington with the Democrats right now 0:02:43.960 --> 0:02:49.440 is that oil is um. That the oil companies have 0:02:50.480 --> 0:02:55.359 leases on something like seventy nine million acres of UM 0:02:55.400 --> 0:02:59.919 of oil land, suspected oil land that we were not tapping, right, 0:03:00.080 --> 0:03:03.280 that's not being used. It just own these leases, right, 0:03:03.919 --> 0:03:08.480 And then I think like nineteen million acres are actually 0:03:08.560 --> 0:03:13.600 being mined for their oil or natural gas. And Obama's 0:03:13.600 --> 0:03:17.360 position is, hey, you fat cats, um, you need to 0:03:17.360 --> 0:03:20.160 go ahead and start producing or else we're going to 0:03:20.240 --> 0:03:24.280 penalize you, like invest in the United States, come off 0:03:24.320 --> 0:03:27.240 some of these profits and start spending on exploration and 0:03:27.320 --> 0:03:30.639 production and get American oil out of the ground, which 0:03:30.680 --> 0:03:34.120 is hugely different than what he was saying he should 0:03:34.120 --> 0:03:37.200 do before, which is like no ausch or really nothing 0:03:37.240 --> 0:03:39.800 like that. Um. So it's it's kind of a big 0:03:39.840 --> 0:03:42.480 deal that he's really putting oil at the center of 0:03:42.560 --> 0:03:46.800 his energy security policy. UM. But one thing we asked 0:03:46.840 --> 0:03:51.560 that they didn't really answer very well is what role 0:03:51.920 --> 0:03:57.760 does preventing speculation in the commodities market play in energy security? 0:03:58.120 --> 0:04:00.920 That's my question. I get the sense, and this is 0:04:00.960 --> 0:04:03.800 one of those topics again that you know, Chuck's little 0:04:04.040 --> 0:04:06.720 guitar playing English major brain has a hard time wrapping 0:04:06.720 --> 0:04:09.640 around this. But I get the feeling that there's not 0:04:09.720 --> 0:04:12.200 a lot of people in the government they want to 0:04:12.240 --> 0:04:16.320 talk a lot about oil speculation. It's like, don't bring 0:04:16.360 --> 0:04:20.040 that up, no, um, which is strange because its whole 0:04:20.400 --> 0:04:23.200 you know, there's that whole kicking around Wall Street, um 0:04:23.279 --> 0:04:26.159 during the recession thing that was going on, and that 0:04:26.240 --> 0:04:30.800 seems to have been largely abandoned. Um. But the question 0:04:31.040 --> 0:04:35.440 of whether or not oil speculation is affecting oil prices today, 0:04:36.760 --> 0:04:39.960 it still remains oils up to UH. I think triple 0:04:40.000 --> 0:04:43.240 A saying a national average of three sixty right now 0:04:43.320 --> 0:04:48.600 for unlighted for regular that's a national average. Yea, yeah, 0:04:48.760 --> 0:04:52.200 that's crippling. And and well, I know the recession ended. 0:04:52.240 --> 0:04:57.880 I just made air quotes, um, but people are hurting. Uh. 0:04:58.000 --> 0:05:01.840 Food prices are increasing, oil prices are increasing, Gas prices 0:05:01.839 --> 0:05:05.800 are increasing, and UM, a three dollar and sixty cent 0:05:05.880 --> 0:05:08.520 gallon of gas is crippling to the average American. Yeah, 0:05:08.520 --> 0:05:10.279 and that's average. I mean you've got to some places 0:05:10.320 --> 0:05:13.520 like California and there in the summertime they may be 0:05:13.600 --> 0:05:16.320 creeping up over five bucks a gallon. Yeah, so the 0:05:16.360 --> 0:05:18.600 money for a gallon of gases, it is a barrel 0:05:18.640 --> 0:05:21.320 of oil today is trading for opeque. By the way, 0:05:21.360 --> 0:05:26.040 it stands to make one trillion in revenues in two 0:05:26.040 --> 0:05:29.159 thousand eleven. That's the course it's on right now. Yeah, 0:05:29.320 --> 0:05:35.400 it's a lot of UM. So so uh the there 0:05:35.480 --> 0:05:37.920 there's this idea out there that oil trading at one 0:05:37.960 --> 0:05:42.040 fifteen and barrel should actually be trading at something like 0:05:42.279 --> 0:05:48.240 UM ninety a barrel, and that oil speculation is accounting 0:05:48.320 --> 0:05:51.240 for UM twenty to twenty five dollars on top of 0:05:51.279 --> 0:05:53.600 the barrel price, and it counts for a lot of 0:05:53.600 --> 0:05:57.560 this increase in in UM the price of oil. So 0:05:58.120 --> 0:06:00.279 this is nothing new. This is going on right now 0:06:00.360 --> 0:06:02.840 in two thousand and eleven. But it just happened in 0:06:02.880 --> 0:06:05.160 two thousand and eight. Do you remember when oil hit 0:06:05.200 --> 0:06:07.040 four dollars a gallon? It hit four eleven as a 0:06:07.200 --> 0:06:11.800 national average. This is the highest ever remember two seven, 0:06:11.839 --> 0:06:14.000 So two thousand seven, two eight, Yeah, I remember when 0:06:14.000 --> 0:06:17.560 it took the first big jump, um, whenever that was. 0:06:17.600 --> 0:06:19.320 I was living in l a And I remember it 0:06:19.360 --> 0:06:21.640 got over two dollars a gallon, and it was a 0:06:21.680 --> 0:06:24.560 big jump. It was like one weekend it was you know, 0:06:24.640 --> 0:06:26.520 a dollar or eighty five, and the next weekend it 0:06:26.560 --> 0:06:28.480 was like to thirty five. Then we would have probably 0:06:28.520 --> 0:06:30.560 been like two three or two thousand four. It was 0:06:30.600 --> 0:06:32.479 a big It was like a fifty cent jump or 0:06:32.480 --> 0:06:34.600 something like that. Um, don't quote me, I'm going on 0:06:34.600 --> 0:06:37.480 my feeble memory, but I remember saying at the time, 0:06:37.560 --> 0:06:40.360 you know what, I just had a feeling, said, this 0:06:40.400 --> 0:06:43.800 is something different. Gas is never gonna be this cheap again, 0:06:43.920 --> 0:06:46.280 never gonna go back down. You know, in nine, the 0:06:46.320 --> 0:06:50.800 average was ninety cents a gallon. Nine it was it 0:06:50.839 --> 0:06:54.240 was so twelve years ago a gallon. Now we're all 0:06:54.400 --> 0:06:56.719 we're at three sixty, we've already hit four and change 0:06:56.720 --> 0:06:58.919 for an average. I remember feeling a little hondap for like, 0:06:59.200 --> 0:07:03.359 you know, fourteen dollars. Yes, that was just so beautiful now, 0:07:05.960 --> 0:07:09.760 so um chuck. From two thousand four to two thousand 0:07:09.760 --> 0:07:13.280 and eight, the price of a barrel of crude oil 0:07:13.800 --> 0:07:16.520 increased from thirty one dollars and sixty one cents in 0:07:16.520 --> 0:07:19.840 two tho four, two hundred and thirty seven dollars and 0:07:19.880 --> 0:07:23.119 eleven cents in July two thousand eight. Right, so guess 0:07:23.120 --> 0:07:25.640 prices grew from one to four oh nine over that 0:07:25.720 --> 0:07:29.920 same period. There's a lot of things. There's so much 0:07:30.000 --> 0:07:34.320 that goes into oil production that could affect the markets. 0:07:35.240 --> 0:07:39.600 Instability right right now, people are taking to the streets 0:07:39.640 --> 0:07:42.840 of Yemen, in Syria and once in a while in Iran, 0:07:43.520 --> 0:07:48.920 Um they are um, they are overthrowing the government in Egypt. 0:07:48.960 --> 0:07:51.120 There's a civil war going on in Libya. Libya's oil 0:07:51.120 --> 0:07:56.920 production is virtually offline right now. So so well, it 0:07:56.960 --> 0:08:00.320 depends on who you're asking. It's actually pretty stable. It's 0:08:00.320 --> 0:08:02.440 just socialists, which is why everybody's like, oh, that's a 0:08:02.480 --> 0:08:06.360 dangerous country. If you're America, it is, right, but that's 0:08:06.400 --> 0:08:08.800 one of the reasons that people said, you know, geopolitics 0:08:08.800 --> 0:08:12.000 in these instability unstable regions that produce oil has a 0:08:12.000 --> 0:08:15.360 lot to do with it. But Michigan Senator Carl Levin 0:08:15.760 --> 0:08:19.400 during a hearing said, you know what, yeah, it's unstable, 0:08:19.440 --> 0:08:21.760 but it's been unstable for decades and we've been buying 0:08:21.760 --> 0:08:24.800 oil from them. No problem. But that's how he claimed 0:08:24.840 --> 0:08:28.760 at least right, and Hugo Chavez, remember for through SITCO, 0:08:28.880 --> 0:08:32.680 that's the Venezuelan oil company that's here in the US. 0:08:33.200 --> 0:08:36.080 Through SITCO. Remember, he used to donate like a million 0:08:36.080 --> 0:08:38.760 gallons of heating oil to people in the Northeast to 0:08:38.880 --> 0:08:42.600 keep them alive. And that was like basically him saying 0:08:42.640 --> 0:08:45.240 like this is what socialism gets you, people of Boston 0:08:45.320 --> 0:08:50.400 with UM. Yeah, so it's unstable in that he's not 0:08:50.520 --> 0:08:53.640 a friend of America. We were not capable of pushing 0:08:53.679 --> 0:08:56.560 him around, and we need their oil, right, but we 0:08:56.640 --> 0:08:59.400 have a dayton because people like money, economies like money, 0:08:59.440 --> 0:09:01.760 and we want to their oil. So everybody's chill out. 0:09:02.080 --> 0:09:06.240 What's more with this um recent drop in production that 0:09:06.240 --> 0:09:09.200 that's represented by Libya going in the civil war, Saudi 0:09:09.200 --> 0:09:12.000 Arabia stepped up and said, you know what, that's three 0:09:12.000 --> 0:09:15.360 percent of the oil that's produced every day, and we're 0:09:15.400 --> 0:09:17.320 gonna add an extra three percent to make up for 0:09:17.360 --> 0:09:20.480 this temporary shortfall. So there actually isn't any kind of 0:09:20.520 --> 0:09:23.640 thing in the production or supply side. Well, no, because 0:09:23.720 --> 0:09:25.960 you mentioned in the article like could it be peak oil, 0:09:26.080 --> 0:09:29.520 but now it's not peak oil. Well, peak oil, do 0:09:29.600 --> 0:09:31.079 we not podcast on the end? No, we know we 0:09:31.200 --> 0:09:33.640 have we need to do that. That's the point where 0:09:34.040 --> 0:09:35.640 you know there's only a fine it amount of oil. 0:09:35.720 --> 0:09:38.960 So once we cross that little threshold, it's like all 0:09:38.960 --> 0:09:41.560 of a sudden, there's getting less and less oil. Yeah, 0:09:41.559 --> 0:09:44.960 and there's there's a whole um group of people out there, 0:09:45.040 --> 0:09:47.760 very educated, smart people. They're not crack pots olas. Sometimes 0:09:47.760 --> 0:09:50.200 people look at them like that, who believe we have 0:09:50.280 --> 0:09:52.560 past peak oil and it's gonna take us five years 0:09:52.640 --> 0:09:55.000 or ten years to figure it out. But by that 0:09:55.040 --> 0:09:57.360 time it'll be way too late, and the the world's 0:09:57.360 --> 0:09:59.400 gonna come to a grinding halt for a while until 0:09:59.440 --> 0:10:02.200 we can figure out what to do. UM. A lot 0:10:02.240 --> 0:10:05.280 of people think that we haven't hit peak oil. And 0:10:05.400 --> 0:10:08.760 if you look at UM the at least the published figures, 0:10:09.120 --> 0:10:11.480 Saudi Arabia is often accused of fudging on their numbers, 0:10:11.480 --> 0:10:13.760 and I think they were found to UM a while back. 0:10:13.800 --> 0:10:18.120 But most people say, no, supply still exceeds demand, which 0:10:18.400 --> 0:10:21.160 if you look at Mr Adam Smith's The Wealth of Nations, 0:10:21.200 --> 0:10:27.480 the the basis of the capitalist economy. If supply exceeds demand, 0:10:27.880 --> 0:10:30.880 prices should remain low. And oil, Isn't that the kind 0:10:30.880 --> 0:10:35.480 of thing you want rewriting the rules of base economics. No, 0:10:35.640 --> 0:10:38.920 because ultimately it's a commodity, and a commodity is something 0:10:38.960 --> 0:10:41.240 that we can make things out of, or something we need. 0:10:41.960 --> 0:10:46.080 Wheat is a commodity, we need that. Pork bellies a commodity. 0:10:46.160 --> 0:10:50.080 That's the most delicious commodities. Um, and oil is a 0:10:50.160 --> 0:10:54.560 very very vital commodity. So if Carl Levins saying, yeah, 0:10:54.679 --> 0:10:57.600 that's unstable, but were we we can deal with them. 0:10:57.640 --> 0:11:01.280 If Saudi Arabia is saying, yes, Olivia's off line right now, um, 0:11:01.320 --> 0:11:04.400 but we're gonna make up the shortfall. If if we 0:11:04.440 --> 0:11:07.959 haven't actually passed peak oil and the supply still exceeds 0:11:07.960 --> 0:11:11.120 the demand. A lot of people are saying, why is 0:11:11.240 --> 0:11:14.880 oil so high? Why is it increasing and increasing? And 0:11:14.920 --> 0:11:19.360 there's a correlation that's going on right now. The the 0:11:19.400 --> 0:11:22.240 answer to that, obviously for a lot of people's minds, 0:11:22.240 --> 0:11:24.520 And I'm not taking a position on this because it 0:11:24.600 --> 0:11:29.319 is a very controversial thing to say that is oil speculation. Yeah, 0:11:29.360 --> 0:11:33.800 there's speculation that the speculation is what's driving up the price, right, 0:11:33.880 --> 0:11:36.600 that's perfect chuck uh. And one of the ways that 0:11:36.640 --> 0:11:41.079 it's being. UM, I guess suggested is that from I 0:11:41.120 --> 0:11:44.199 think July of two thousand, eight h there were six 0:11:44.440 --> 0:11:49.000 D seventeen thousand oil futures contracts on the market, on 0:11:49.080 --> 0:11:52.480 the oil commodities market. Can we explain what the future is? Well, 0:11:52.520 --> 0:11:54.760 we'll go back. I just wanted to get this one 0:11:54.840 --> 0:11:57.080 last stat out, and we'll go back to the beginning, UM, 0:11:57.320 --> 0:12:02.080 and then July or January two thousand eleven. So July 0:12:02.120 --> 0:12:07.480 two seventeen thousand, January two eleven, one million UH futures 0:12:07.520 --> 0:12:10.679 contracts on the oil market, it's right. And between those 0:12:10.760 --> 0:12:13.840 two times, after the last bubble burst, it's been creeping 0:12:13.920 --> 0:12:17.800 up and up and up. Prices have basically commensurate with 0:12:18.240 --> 0:12:22.559 oil futures contracts. So it really looks a lot like 0:12:22.640 --> 0:12:25.800 it could be oil speculations driving up the prices. So 0:12:25.920 --> 0:12:28.760 let's talk about oil speculations. Yes, and my mind starts 0:12:28.800 --> 0:12:32.960 to melt starting now, all right, Josh, the future and 0:12:32.960 --> 0:12:34.760 you're gonna tell me with this, But UM, any kind 0:12:34.760 --> 0:12:37.000 of future is a contract between a buyer and as seller. 0:12:37.679 --> 0:12:41.559 Buyer agrees to purchase a fixed amount of a commodity 0:12:42.160 --> 0:12:44.760 that it fixed price, and oil future we're talking about 0:12:44.800 --> 0:12:50.960 oil obviously, So it's different than actually buying into a 0:12:50.960 --> 0:12:54.760 commodity because you're just betting on whether or not it 0:12:54.760 --> 0:12:56.800 will be higher or lower at the end of your contract. 0:12:57.080 --> 0:13:00.000 That correct, A future is a derivative and a derivative 0:13:00.040 --> 0:13:04.120 of as any kind of financial contract or instrument that's 0:13:04.800 --> 0:13:07.080 the value of which is based on the value of 0:13:07.120 --> 0:13:09.360 something else. It's you know what it is to me, 0:13:09.440 --> 0:13:11.800 to my little brain that doesn't think about the stuff, Well, 0:13:11.920 --> 0:13:14.080 is it's a made up way to make money almost, 0:13:14.120 --> 0:13:17.479 That's exactly right. It's like someone created this and said, hey, 0:13:17.600 --> 0:13:21.000 this doesn't even exist, but as long as there's someone 0:13:21.080 --> 0:13:24.199 buying and selling it, it does exist. Because so a 0:13:24.280 --> 0:13:29.040 futures contract is very standard. It's not an exotic financial instrument, 0:13:29.360 --> 0:13:32.480 but the way that it's being used in the derivatives 0:13:32.520 --> 0:13:38.600 market is um extremely exotic and volatile. So, Chuck, you 0:13:38.760 --> 0:13:43.480 have a bunch of oil, and I I have a 0:13:43.520 --> 0:13:48.640 refinery over here in my backyard, and uh, well, I'm 0:13:48.679 --> 0:13:51.640 I'm saving up it for a better life for it. Um, 0:13:51.760 --> 0:13:55.560 So I want to buy some oil from you, all right, 0:13:55.840 --> 0:13:59.520 But I think that oil, the price of crude is 0:13:59.520 --> 0:14:01.600 going to go up. You know, A year from now 0:14:01.679 --> 0:14:04.600 per barrel, right, and I'm going to so I'm gonna 0:14:04.640 --> 0:14:07.679 go ahead and buy it for the market price now right, 0:14:08.160 --> 0:14:10.880 and um, you're going to sell me a futures contract. 0:14:10.960 --> 0:14:13.880 So we have an agreement that a year from now 0:14:13.960 --> 0:14:16.480 in um, at the end of March two thousand twelve, 0:14:17.200 --> 0:14:20.840 the that contract expires because you have to I have 0:14:20.920 --> 0:14:23.600 to buy that oil from you, okay, but not now 0:14:23.640 --> 0:14:27.480 a year from now. Right now, if I'm right and 0:14:27.880 --> 0:14:30.960 oil goes up, say I, I'm buying a hundred barrels 0:14:30.960 --> 0:14:33.120 at fifty bucks of barrel. That's our future contracts, our 0:14:33.120 --> 0:14:36.400 contracts for five grands um. If it goes up. If 0:14:36.440 --> 0:14:38.360 the price of oil goes up to fifty two dollars 0:14:38.400 --> 0:14:41.520 of barrel a year from now, I just got fifty 0:14:41.560 --> 0:14:44.280 barrels of oil for two hundred bucks less than I 0:14:44.280 --> 0:14:46.480 should have paid. It's a good deal for you, it is. 0:14:47.040 --> 0:14:52.800 But the future's um contract is also. Um. Well, it's 0:14:52.800 --> 0:14:56.240 a bet, right because the price of oil could go down. 0:14:56.840 --> 0:14:59.840 I said in two thousand twelve, and the MARCHI done. 0:14:59.840 --> 0:15:02.160 Twe I'll buy those fifty barrels of oil from you 0:15:02.320 --> 0:15:05.360 for fifty bucks. But if the value of oil in March, 0:15:05.400 --> 0:15:08.040 she does twelve forty eight bucks of barrel. Then I'm 0:15:08.040 --> 0:15:09.960 paying two more than I could have if I just 0:15:10.040 --> 0:15:12.880 bought on what's called the spot market, which is I 0:15:12.960 --> 0:15:14.720 go to you, I want your oil right now, and 0:15:14.760 --> 0:15:16.920 you sell it to me for whatever the market prices. Right. 0:15:16.960 --> 0:15:19.400 And if this sounds weird, it's not so different than 0:15:20.080 --> 0:15:21.880 betting on whether or not a stock will go up 0:15:21.960 --> 0:15:24.680 or down. It's the same thing. It is, but in 0:15:24.680 --> 0:15:27.960 a lot of ways, it's just kind of it's it's 0:15:27.960 --> 0:15:31.200 saying it can Also it also comes into play if 0:15:31.240 --> 0:15:33.680 if I don't need oil right now, but I'm gonna 0:15:33.720 --> 0:15:35.600 need it in the future, and I think it's gonna 0:15:35.640 --> 0:15:38.920 go up right now. When the real bet comes in, 0:15:39.080 --> 0:15:41.320 that's when when I'm when I'm saying that I think 0:15:41.360 --> 0:15:44.400 it's gonna go up, I'm gonna go long. It's called 0:15:44.440 --> 0:15:46.360 going long. Yeah. And at the end of this contract, 0:15:46.440 --> 0:15:50.960 you're actually gonna get oil. Correct, if you're holding the 0:15:51.000 --> 0:15:54.560 contract and that I have with you, um, then yes, 0:15:54.720 --> 0:15:56.720 So that has to buy oil from you that is 0:15:56.720 --> 0:15:58.880 a country and be like give me my money, I'll 0:15:58.880 --> 0:16:00.880 give you your oil. Right. But that's an important thing 0:16:00.920 --> 0:16:03.080 to distinguish because that is a future and that means 0:16:03.120 --> 0:16:06.440 actually oil is being traded at some point, right, And 0:16:06.480 --> 0:16:09.720 that's a normal thing. Right. Okay, Now that's going long. 0:16:09.760 --> 0:16:11.880 If I'm betting that oil prices are going to go up. 0:16:11.920 --> 0:16:15.680 If I think oil prices are gonna fall, I'll go short. Right. 0:16:15.960 --> 0:16:19.000 So it's virtually the same thing. We go into a contract, right, 0:16:19.080 --> 0:16:23.560 So Chuck, let's say conversely, Um, you you think that 0:16:23.600 --> 0:16:25.360 oil is gonna go down, so you're happy to sell 0:16:25.400 --> 0:16:30.880 me a future's contract, right, Um, the price of oil 0:16:31.160 --> 0:16:34.680 goes down, right, we we say, we say, for you know, 0:16:34.760 --> 0:16:37.760 five grand, Um, the price of oil goes down to 0:16:37.840 --> 0:16:40.640 forty eight bucks of barrel, and you buy that contract 0:16:40.680 --> 0:16:43.520 back from me at the market price you just made 0:16:43.560 --> 0:16:48.520 two bucks. Okay, Okay, So there's going short and there's 0:16:48.560 --> 0:16:51.880 going long. But as you said, in a standard commodities 0:16:51.920 --> 0:16:55.480 market that there's not a secondary derivative derivatives market going on, 0:16:56.000 --> 0:16:59.480 then ultimately there's going to be an exchange of oil 0:17:00.160 --> 0:17:04.919 the secondary derivatives market. You never get caught with the 0:17:04.960 --> 0:17:08.280 contract when it expires. Your trading contracts day by day, 0:17:08.359 --> 0:17:10.879 moment by moment, as the price of oil changes up 0:17:10.920 --> 0:17:13.600 and down throughout the day. You're making money off of 0:17:13.600 --> 0:17:18.879 those fluctuations by buying and selling, by shorting and longing um, 0:17:19.080 --> 0:17:22.680 the the price of oil on these contracts, and that 0:17:23.240 --> 0:17:29.479 is speculation that, okay, leads to what's called an artificial market. 0:17:29.880 --> 0:17:34.120 Supply and demand no longer applies to the commodity itself. 0:17:34.400 --> 0:17:41.040 Supply and demand is also subject to the two the 0:17:41.040 --> 0:17:43.560 the financial instruments as well. Yeah, the whims of who 0:17:43.560 --> 0:17:45.320 has a lot of money and can affect a market 0:17:45.680 --> 0:17:50.119 with a big purchase. So that's called an unstable market 0:17:50.160 --> 0:17:53.160 because it's you don't it's very violable. It's not it's 0:17:53.200 --> 0:17:56.480 not nearly as steady as a real tangible market. No. 0:17:56.880 --> 0:17:58.639 I mean, if you look at if you look at uh, 0:17:58.880 --> 0:18:01.680 you know, um, it's just a regular commodities market where 0:18:01.720 --> 0:18:05.760 there aren't any futures or derivatives um trading by anybody 0:18:05.800 --> 0:18:10.000 besides the people who actually will end up with this stuff. 0:18:10.080 --> 0:18:13.440 There's the changes, the fluctuations over you know, a month 0:18:13.480 --> 0:18:16.800 or a year or a quarter are you know, pennies 0:18:16.960 --> 0:18:20.960 or a buck or two. Here it's when investment banks 0:18:21.160 --> 0:18:25.440 and hedge funds, who, by the way, when interest rates 0:18:25.440 --> 0:18:28.520 are very very low, tend to turn to the commodities 0:18:28.560 --> 0:18:32.480 market for to safely park their money. Right, because they're 0:18:32.520 --> 0:18:36.040 not gonna make much much money when interest rates are low. Um, 0:18:36.080 --> 0:18:38.440 they turn to the commodities market when they get involved. 0:18:38.680 --> 0:18:41.959 That's when things start going from thirty bucks of barrel 0:18:42.040 --> 0:18:44.320 in two thousand and four two hundred and forty dollars 0:18:44.320 --> 0:18:46.480 a barrel in two thousand and eight. Right, And that's 0:18:46.480 --> 0:18:50.439 what happened with the housing uh bust, all of a sudden, 0:18:50.480 --> 0:18:53.200 Wall Street Housing wasn't a good place to put any money, 0:18:53.240 --> 0:18:58.000 So Wall Street flocked over to speculation futures, oil futures, right, 0:18:58.119 --> 0:19:00.679 and and um, we should say in that this is 0:19:00.720 --> 0:19:03.520 this is all very much debatable. This is if you 0:19:03.600 --> 0:19:08.080 believe that oil speculations affecting oil, this is how it happens. Right. 0:19:08.200 --> 0:19:10.240 They were just explaining that that's what we do. Well, 0:19:10.400 --> 0:19:13.560 what we just explained was how derivatives trading works. This 0:19:13.680 --> 0:19:16.800 is no secret. It's the effect that it has, that's 0:19:16.880 --> 0:19:20.280 what's that's what's debatable. So the people who believe that 0:19:20.320 --> 0:19:25.040 there is consequences for oil for derivatives trading to say 0:19:25.080 --> 0:19:29.400 that here's what happens. Right, if you want, if you 0:19:29.440 --> 0:19:33.600 want to get your hands on actual oil, right you 0:19:33.680 --> 0:19:35.159 aren't going to be able to keep up with an 0:19:35.200 --> 0:19:38.639 investment bank or a hedgephone manager who is buying up futures. 0:19:39.040 --> 0:19:41.199 So you're gonna need oil now, and you're gonna have 0:19:41.200 --> 0:19:43.439 to stockpile. It's one good thing about oil is you 0:19:43.480 --> 0:19:46.080 can stockpile it for a while, right well, and oil 0:19:46.119 --> 0:19:49.760 producers can hoard it. That that's exactly right as well, 0:19:49.880 --> 0:19:54.560 But there's you could also the derivatives market in futures 0:19:54.600 --> 0:19:59.120 can also inadvertently force a horde among people who actually 0:19:59.240 --> 0:20:02.359 use the oil, who are buying oil for use, not 0:20:02.480 --> 0:20:05.919 just trading in the derivatives market by saying, Okay, I 0:20:05.960 --> 0:20:09.359 can't buy futures because they're just too expensive right now, 0:20:09.560 --> 0:20:11.640 so I'm gonna buy whatever I can get my hands on. 0:20:11.880 --> 0:20:15.879 So the spot market that deals in actual oil right 0:20:15.960 --> 0:20:20.040 that moment has a higher demand, which means the actual 0:20:20.160 --> 0:20:22.840 price of oil goes up, which means those oil futures 0:20:22.880 --> 0:20:27.320 go up even further, which means prices across the board rise, 0:20:27.640 --> 0:20:31.480 especially for gasoline. That's right, and when big companies like 0:20:31.800 --> 0:20:35.840 Goldman Sackson City Group are these huge financial institutions are 0:20:35.880 --> 0:20:41.560 buying up tons and tons of uh are speculating. Then 0:20:41.600 --> 0:20:43.439 that's going to have a really big sway on the 0:20:43.480 --> 0:20:48.080 market that alone will right, they stand and gain tons 0:20:48.119 --> 0:20:52.399 of cash, tons of cash. But imagine if you not 0:20:52.560 --> 0:20:55.320 only stood to getting tons of cash from the secondary market, 0:20:55.520 --> 0:20:58.919 but you're an oil producer as well. Yeah, and all 0:20:58.960 --> 0:21:02.399 of a sudden you're aculating on your own production or 0:21:02.480 --> 0:21:04.680 buying oil features. If you buy a bunch of oil 0:21:04.720 --> 0:21:08.680 features from higher price, you can actually the market um 0:21:09.200 --> 0:21:12.920 trades on rumor, right, So people are like, well, somebody's 0:21:12.920 --> 0:21:15.000 buying up a bunch of this stuff, and the prices 0:21:15.080 --> 0:21:17.879 actually rising, right, so that a lot of people are 0:21:17.920 --> 0:21:19.400 gonna be willing to pay more and more and more. 0:21:19.680 --> 0:21:22.560 If you're an oil producer doing that, then you're going 0:21:22.600 --> 0:21:25.439 to stand again through the financial instruments and through the 0:21:25.440 --> 0:21:28.800 actual sale of your oil. And there was an investigation 0:21:28.880 --> 0:21:32.880 into this um the the secondary oil markets that found 0:21:32.960 --> 0:21:35.680 that in the New York Mercantile Exchange alone, which is 0:21:35.880 --> 0:21:39.480 the commodities market, or one of them for the us UM, 0:21:39.480 --> 0:21:43.400 eleven percent of the oil futures contracts were owned by 0:21:43.560 --> 0:21:47.639 vital which is a Swiss oil producer. So how, Chuck, 0:21:47.720 --> 0:21:54.359 how can an oil company be allowed to artificially inflate 0:21:54.440 --> 0:21:57.200 the price of oil for its own gains, And how 0:21:57.240 --> 0:21:59.840 can investment banks be allowed to drive up the price? 0:22:00.160 --> 0:22:02.760 That is, in fact, what's going on. How can they 0:22:02.800 --> 0:22:05.840 be allowed to drive up the price of a commodity 0:22:05.880 --> 0:22:08.440 as valuable as oil If normally it should be something 0:22:08.480 --> 0:22:10.639 like thirty or forty or fifty dollars a barrel, and 0:22:10.680 --> 0:22:14.119 it's double or triple or quadruple, what what experts believe 0:22:14.160 --> 0:22:17.360 it's actual value should be. Well, it shouldn't be able 0:22:17.400 --> 0:22:21.040 to happen, because they're starting in with our congress. There 0:22:21.080 --> 0:22:24.640 was something put in place called the Commodity Futures Trading Commission, 0:22:24.800 --> 0:22:28.399 the CFTC, and they were put in place specifically to 0:22:28.480 --> 0:22:32.919 prevent this kind of thing from speculation artificially inflating prices 0:22:32.920 --> 0:22:35.000 of commodity. So they were like, they've realized a long 0:22:35.080 --> 0:22:36.880 time ago this could be a real problem. Let's put 0:22:36.880 --> 0:22:39.480 this thing in place and let's make them keep it 0:22:39.520 --> 0:22:43.359 in check. So if you were trading on that exchange, 0:22:43.359 --> 0:22:46.200 you gotta file reports every day. The Commission looks them over, 0:22:46.920 --> 0:22:49.280 keeps an eye out for speculation. They know if somebody 0:22:49.320 --> 0:22:51.760 is trying to corner the market. There who and they 0:22:51.760 --> 0:22:54.879 try to stop it. But quite a few things have 0:22:54.960 --> 0:22:59.360