Swindlers and Cheats

Sanders says the companies are hoarding supplies in order to drive up prices of home heating oil, and they can get away with it because they are not required to report their offshore supplies to the federal government.
    Herald

Most of us are familiar with the idea that we can lock in a price today, say $2.25 per gallon, for the fuel oil we expect to use this coming winter if we expect prices to be higher, say $3.25,  than they are today.  Many Vermonters take advantage of that institutional feature of fuel oil markets by entering into contracts with their local fuel oil dealers.

How do their dealers guarantee that price?  They sign a contract with someone, or some firm or institution upstream that locks in that $2.25 price for the delivery of fuel oil six months from now.  If everyone believes that the future price is going to be higher, then someone has to actually buy some fuel oil today at $2.25 and store it for delivery this winter.  That can be done by physically storing the oil in a fuel depot, in an oil tanker, or by keeping it in the ground. 

If prices do indeed reach $3.25 this winter, the homeowner benefits by paying $2.25 when the market price is $3.25.  The "loser" is the ultimate seller of fuel oil, who could have refused to enter into the contract in the first place and could have sold the fuel oil at a price of $3.25 instead of $2.25.   Of course, if fuel oil prices are less than $2.25, the homeowner comes out on the short end of the transaction and the ultimate seller (not the local fuel oil dealer) benefits.

Notice that if a sufficient number of people believe that prices will be higher this winter, lots of fuel oil will be purchased and stored today in anticipation of delivery this winter. That increased demand will drive fuel oil prices up today--assuming there is not a large supply response.  Since it is difficult to produce more fuel oil in the short run (in the language of economics, supply is inelastic) oil prices will rise.  That price increase gives homeowners advance warning that fuel oil prices are likely to be higher this winter and gives them time to adjust to that higher price by, for example, putting in more insulation, replacing windows, or planning to close off part of their house.

This process hinges on the ability of someone to take the risk (of higher prices) that the homeowner would like to shed.  The Rutland Herald, in an editorial today on this subject, refers to those people as "swindlers and cheats." Participants in futures markets have been called many other similarly pejorative terms, probably ever since organized futures markets began in the Japanese rice market in the early 18th century.

I would expect a more sophisticated analysis, rather than an emotional diatribe, from an editorial in a well-respected newspaper.  But, then, I am easily disappointed.

Comments

[Lazarus Long]

Perhaps the Herald staff and Sen. Sanders live in rentals and never had to heat their homes. The realities of life and their practical solutions seem not to matter to those individuals and groups that wish to manage our lives. I guess I'm an evil hoarding swindler and cheat since I just topped off my two year stockpile of dead tree heating fuel.

[Alec]

I think there is some logic behind the mistrust we see in business.

Fair prouduct or service for a fair price seem to have given way to "how much can I get?".

How many people do "you" intentionally trust? Me? A small handful.

[txgordo]

Alec, if you were in business, wouldn't you want to get what the market would bear for your product or service? What happens in down years, when there is no demand for your p/s? How will you live? If you had received a market-driven price for your p/s, you would have resources to weather the downturns. In low times, people will feel sorry for you, because you've always been 'fair', but they can't afford you even then. In good times, you'll turn away business, that someone else will get paid more for, because the demand is there. Wouldn't you like to retire? Maybe early? Or do you want to work the rest of your life offering a 'fair' price? What if you are unable to work? You have to consider all these things, and accept what the market gives you.

[Alec]

No I wouldn't and no I don't.

I've run my current [successful]business for over 18 years. I have no employees and run all facets myself 7/365. I know other in the same business that do not produce the quality "product" in the fashion I do but they charge quite a bit more.

Could I get away with charging more? Yes.

Why don't I?

I'm comfortable with the price I charge being a fair fee for the service I provide.

I work more then some and less then others and I'm happy with how I run my business. Happier then I would be trying to squeeze every cent out of my clients.

Everyone has to make their own decisions, but to me, clearly many people make decisions I would not.

FWIW: My comments were about trust and the many reasons people have [IMO] to be distrustful.

It's quite the dichotomy that most people want to charge the most for a product or service they provide and pay the least for a product or service they purchase.

[Chris Campion]

Alex, that's not a dichotomy - it's a rational transaction. Why would you want to pay more for a product than you think it is worth? Why would you not want to maximize the price on any item you sell? There's no gun to anyone's head to buy a product - so if the price is too high, no one will buy it.

If you're not interested in increasing net income, that's great - but that doesn't mean that there's something wrong with somebody else who does. I'm still unsure as to why profits are treated like a red-headed stepchild at Christmas - profits keep businesses open. Profits mean mortgages get paid. Profits mean health insurance is available at a reasonable cost. Are these not positive effects of profitability?

[Lazarus Long]

I think some folks wish we could all just be sitting around in a drum circle and making nice with each other. Just like the Eloi.

[Alec]

It's AleC not AleX....

At what point does "maximizing" profit become greed? Is it only when the product is so over prices it won't sell?

I wrote: "Everyone has to make their own decisions, but to me, clearly many people make decisions I would not."

As for the drum circle.....Your point is that things are better when people don't get along?

Yeah, right.

[GreggB]

'I get 3 meals a day and I can't eat 4'
Welcome to VT, show some ambition and we will beat you down, you greedy bastard. That's better- group hug, then it's drum circle time.

[Alec]

Silly me, I thought this blog was above normal web BS. I guess not.

Please go back to patting each other on the back now.

[VTC4L]

Alec-

Have you ever received any assistance for your business from the State of Vermont? Your comprehension of business and economics would seem to me to qualify you for subsidies and grants out the ying-yang. What, pray tell, is the business you are engaged in?

Just for the heck of it, since you asked, I personally trust people most people... especially when they operate in their own self-interest. It's the people who tell me they're working for MY self-interest I have a big problem putting my faith in. This would include most of the politicians in Montpelier and, especially Bernie Sanders....

Talk about a back-patter.. did you ever get one of his newsletters?