Okay, here is the scenario: let’s say the hottest, new hip-hop/rock trio, Backyard BBQ, announces a concert tour following the online release of their ground-breaking album. On the schedule is a stop just an hour’s drive or so from your home. This is touted as “one of the best shows in ages”, with DJ Rowdy kicking things off as the opening act, and so, you and your friends have decided to experience the excitement for yourselves. When tickets are going on sale in two weeks, it’s your job, at the first hour of availability, to secure the best spots for you and your troupe in the 2,500-seat arena. It’s all quite simple, right? You plan to click through the official ticket provider’s website, select the appropriate seats, and plug in a credit card number to complete the transaction. The entire affair, you predict, will be done within ten minutes. Unfortunately, you are wrong.
In the minutes before midnight, when the tickets go on sale, you are pacing anxiously, your tablet PC in hand, while constantly refreshing the website of the ticket provider. Though this should be quite boring, you are actually quite upbeat. That’s because you are now on a mission to get great seats. So, when commerce does open on the website, you go on the hunt. Understandably, the website reacts a bit slowly to your prompts, given all the traffic coursing through its pages. But, when you finally make it to your destination, you notice that, within the few seconds since they became available, those great seats were gobbled up. In fact, all the great seats are gone! It appears that another group of buyers used advanced software capable of sequencing the same purchasing techniques in nanoseconds, and they move quickly to purchased nearly all of the tickets for this concert, potentially making it an instant sell-out.
Though you are a bit disappointed, you know that there is still a ray of hope. Those sophisticated buyers who grabbed every good seat, interestingly enough, have no intention of attending the Backyard BBQ concert. In fact, some of those buyers are a continent away. They weren’t buying tickets with expectations to see a memorable show; they were buying with the hope of making a profit. Knowing this, you now quickly leave the original ticket provider’s website, and you head for one of the many secondary ticket exchanges. And there, you find those great seats with a bit of a twist: whereas those seats were originally priced at, say, $199 per ticket (plus fees), the new holders of the tickets are offering them up for roughly $289 per ticket. It is a painful decision, but you accept the new price, figuring that, if you don’t, you run the certain risk of just watching that same ticket price rise later. And there’s just no way you’re going to be the reason everyone misses this event.
That little scenario is one with which most of us can easily relate. In fact, we’ve often blasted scalpers for manipulating the prices of everything from concert tickets to football tickets. Their efforts to run up the prices on great seats leave us either poorer or stuck in the back of the arena. And that’s if you are still able to afford to go, at all, because the market manipulation by scalpers can know no limit. For example, way back in 2007, tickets for Hannah Montana performances during a 50-plus city tour skyrocketed to as much as several thousand dollars, from a maximum face value of nearly $70. Indeed, eventgoers across the country feel justified in their outrage.
However, while we do rail against these scalpers, and work to legally constrain the manner in which they can resell their tickets, we ought to also acknowledge that, from an honest perspective, theirs is a practice as natural and as old as free-market capitalism, itself. These enterprising folks identify an opportunity — in this case, the desire by some to attend a great event. They develop the tools to seize upon that opportunity — in this case, the software that speeds up their purchasing capabilities. And then they execute their strategies. Granted, they may be gouging prices in most cases, by limiting access to the most desirable seats, but the consumers also help those scalpers to skew the reality of the market, by accepting their higher prices, and creating increasingly artificial supply pressure. (There is even more pressure on the demand side, when additional consumers eventually join the market and take the prices even higher.)
We must also acknowledge that, just by their function, these scalpers have a whole lot in common with those individuals who trade for profit in our financial, commodities, and stock markets. Like scalpers, their desire is neither to hold bonds and other debt through their maturity periods, nor to own and grow industries over the long term — or even to take possession of commodities for later use. Rather, they see an opportunity to make a buck. And that reason, alone, while it might be oversimplified, resides at the heart of what really drives today’s markets.
We want to believe that fundamental shifts in demand and supply have caused the great swings we experience in the prices of, well, everything, but we all know better. Having matured from past oil shocks and the financial crisis, we now accept that fundamentals, sometimes, may have little to do with it. Instead, timing, speculation, and — yeah — greed play a far more significant role.
In no place is that more certain than in today’s commodities markets, and in no one sector is the speculator’s anthem being song more loudly than in oil markets. Indeed, as the Russo-Ukrainian War has stoked fears and pushed West Texas Intermediate and Brent crude prices above $100.00, for some overzealous traders, this must be a remarkable moment.
Of course, few are celebrating the impact of higher energy prices. The spike in energy prices has been very painful for many individuals, for many families, and for many businesses, all the same. As an example, higher fuel costs have only served to accelerate the run-up in food prices, which are also bolstered by a post-pandemic surge in demand for commodities, and we have certainly noticed these jumps every time we buy a loaf of bread, a gallon of milk, and even a red slab of yellowfin tuna. And as we discussed in the previous missive, historically high inflation not seen since 1982 is having painful consequences for American families, but for no groups would this be more certain than in working-class, poor, and fixed-income households. For these consumers, food and energy price increases are so high that they are having to make critical trade-offs over necessities.
Higher oil prices have also moved quickly into the fuel markets. Using the 1-to-0.03 ratio, whereupon every one dollar in the price of a barrel of oil translates to 3 cents in a gallon of gasoline, wholesale gasoline prices would now start at $3.2706 per gallon, as of Sunday afternoon, notably prior to taxes and markups before it reaches the pump. (It only takes a few working days for those prices to actually hit retail consumers, but given that prices were already high, perhaps the biggest takeaway from today’s oil price is that relief isn’t in sight.) The average cost for a gallon of gasoline, according to AAA, is at $4.32.
That’s not the end of the story, though. Diesel prices, which ran $2.18 per gallon last March, are also north of $5.00 per gallon, and this has posed a challenge to many logistics businesses, from independent truckers to giants like UPS. At these prices, it can cost well over a thousand dollars to fill up a semitrailer truck. And even the airline industry, which was trying to recover from low demand during the height of the pandemic, is doing its share of nail-biting, as jet fuel has jumped to its highest price in about two years.
No one is immune, unfortunately.
The consequences of higher energy prices have been profound, even life-changing, but it is high time that we focus less on the troubles we are facing and more on the solutions needed to reign in this sector of our fragile global economy. There are so many players in this energy sector, from upstream producers (like private corporations and OPEC) to midstream pipeline operators and shipping concerns, and to downstream refiners, brokers, retailers, and product manufacturers. And then there are also the financiers, lenders, service providers, government agencies, storage and logistics companies, and so on. But here we will focus on the players in the commodities markets. Put another way, the question is, at this point, how do we curtail speculation in the commodities markets, before more damage is done? How do we keep these profiteers from running the wheels right off the very economic system that made them?
First of all, let me say two things. First, though I disdain the profuse speculative actions of many of these professional traders, I acknowledge that we are all among them. After all, when we all invest our money, we do so for the same reason — to make a profit. That said, it is outside of my nature to bash the free-market system or the desire to make profits, because it is from the creation of wealth that the abundance of our world has been derived. But profits at any cost, at the risk of social and political chaos and impoverishment, is not, and should never be, allowed. When people go hungry, when fear and uncertainty make people desperate, and when too much is amassed by too few — the order of the day must be corrected, and equilibrium restored.
Secondly, I concede that there is a glaring distinction between the ticket scalper and the man sitting behind the trading desk or on a commodities exchange. The latter can buy on margin. Now just imagine the outrage you would have, if you lost Backyard BBQ tickets to a bidder who only had to front, say, $10 or $11 of the $199 face value, but then resold it to you for $289. You might want to avoid a bunch of concerts after that, right? And yet, this is precisely what happens in the commodities markets. Virtually no one trading in commodities buys a contract at its full value. In fact, margin requirements for oil futures contracts typically range from 5% to approximately 10% of current market values, while requirements for trading stocks on margin happen to be 50%. Buying on margin enables the traders in commodities to sell futures contracts at larger profits — or even more staggering losses.
This might also be the one area where non-intrusive action can make a serious difference. One of my mentors, Fadel Gheit, a one-time oil analyst from the venerable Oppenheimer & Co., told members of Congress, some years ago, that, because speculation (and not current or projected fundamentals) was the biggest contributor to rising energy prices, it was only appropriate to curtail the behavior of traders in that market. “A family of four is going to have to cut corners to benefit a Wall Street trader who makes $20 million a year,” he said, before a Congressional committee, adding that this was tantamount to a crime. And from there, Mr. Gheit proposed a series of strategies that would tame markets: raising the margin requirement to 50% on each trade; constricting the number of futures contracts traded daily by any given account; and even establishing a minimum holding period for buyers of contracts. Any of Mr. Gheit’s strategies, though unpopular with Wall Street America, would have done a lot to slow the speculative urges of traders and kept prices at sane levels, simply by compelling those traders to look elsewhere for profits. It is just unfortunate, however, that our leaders in Washington, D.C., did not have the foresight or courage to take heed.
As commodities markets continue to run amuck, I am reminded of a statement made by the infamous, and albeit fictional, corporate raider Gordon Gecko, from the movie Wall Street. Though every financier on the planet can easily recall his monologue, proclaiming “greed is good”, I remember another statement on valuations. “The illusion has become real, and the more real it becomes, the more desperate they want it,” Gecko explained to his protege. And he was absolutely right. Indeed, with any asset, whether it is a concert ticket or a barrel of oil, we can manufacture a general belief in its importance and grandiosity, or even conjure up a collective fear in its scarcity, and from these illusions, we can drive their perceived value beyond what is rational or justified.
For scalpers and speculators, alike, building such illusions of greater value have always been rather easy. The hard part is left for those trying to steer the course back to reality without wrecking our economy and our lives in the process.