GETTING PREGGY WHILE YOU SLEEP
Late add: gasoline prices dropped for nine straight days --close only---while the price at the pump has risen another five cents here in LA. A few stations added a cent today.
Larry Kudlow has a terrific piece on the overall rosy economy from an economists POV. But economists are always wrong, eventually. While Larry looks the other way, and we all sleep, we are getting fucked and we know it.
What Kudlow is missing are perceptions about the economy, and the perceptions are that gas prices are killing us. Limbaugh and Hannity, together with most of the Right lemmings, would have us all believe that the current run up in gasoline prices while the futures prices are coming down is no big deal; it’s just the markets. Well I know a hell of a lot about markets, and in particular the energy trading pits in New York and London. Every owner of a commodity shorts in the futures markets so their losses are eliminated. Let me explain in an overly simplified way.
Once you own a commodity but not yet sold it (crops in the ground, oil in ground or on tankers) your biggest fear is that you may have to sell it for less than it costs to produce----or what you paid for it---unless.
1. You can rig the retail market and maintain prices by selling the oil at pre-defined high prices. To do this you have to own everything from the tanker to the retailer. The oil companies own everything from the tanker to the retailer.
And/or 2. You sell the oil the second you buy it for delivery at a time in the future when the oil tanker hits port and the oil is delivered. Then you buy the futures contract back for whatever the price of oil is upon delivery. You cannot lose.
To understand how shorting the futures when you actually own the commodity so you can’t lose money—known as hedging---here’s a simple step by step:
Sheik Abu Ginsberg of Arabia sells me oil for $2 a barrel and I sell it right away in the futures markets for $2 and put the $2 cash in my account. When I get to New Orleans the price of oil has dropped to $1. Theoretically I’ve just been ruined. However, at the same time that I sell for the market price of $1 I buy back my futures contract that I sold for $2 for $1. I have lost $1 in the cash market and made it all back on my futures contract that I sold for $2 and now buy back for $1 (remember this is a simplified example).
So these oil companies that own every production and marketing step once oil is pumped from the ground continue to rip us off as oil drops more than $8 and gasoline more than thirty five cents in the futures market. People are pissed. They don’t know what is happening but they know that the major oil companies are making record profits while charging record prices for something that should be much cheaper. This price gouge of the past ten or so days is obscene. Every company hedges in the futures market, the oil companies, the oil users (refineries), and the wholesalers. The companies own all the gas stations so they can rig prices.
Larry leaves out the sure knowledge of the great unwashed that we are being fucked while we sleep and have to pay for the resulting baby. This awareness can kill the economy and the stock market.
I could get a lot more complicated about the hedging---Texas hedges, option hedges, strangle hedges---but just understand that nobody in business assumes risk if they can avoid it.
What if the prices go up after you sold a futures contract? So what. You bought the oil for $2 and sold it for $3; you lost a dollar in the futures market but made a dollar in the cash.
