RUSH: Baltimore, Maryland, back to the phones, this is Terry. It’s great to have you with us. Hello, sir.
CALLER: How are you doing, Rush?
RUSH: Never better, sir. Thank you.
CALLER: Tom Moore dittos, by the way. Real quick, Rush: Prior to 1978, our oil companies — and with all their products and derivatives — made a profit. In 1978, the Carter administration Democratic-controlled Congress placed all the products and derivatives on the commodity market. My contention, Rush — unless you can teach me otherwise — is, having this on the commodity market does the consumer no good, and I am one who is extremely tired of lining the traders’ pockets with my money.
RUSH: You are of the school of thought that the speculators have more to say about the price of oil than actual producers-
CALLER: Rush, can you explain to me how this is a free market?
RUSH: I’m glad you mentioned this because this is a concept that’s out there, and I really do not discuss things I don’t know anything about. And the reason that doesn’t happen much is ’cause there are very few things I don’t know anything about. But the speculation market… I mean commodities market, speculating and so forth, futures contracts and so forth, their relationship to the actual price up and down; I’m going to have to get some expert answer on this for you rather than do what most hosts would do and just try to BS their way through it and make you think they were really brilliant. You already know I’m brilliant, so I don’t have to fake an answer here.
CALLER: Nah, I don’t expect you to fake anything, Rush. It’s just that it is my contention that they are doing nothing since they do not even hold a contract in their hands when they go and trade in this market.
RUSH: Well, I’ll tell you something else about all this. I did read something last week, and where I read it has escaped me. It might have been the Journal. It might have been the New York Sun. But it was just somebody’s theory that recent spike in the price of oil, after it had dropped nine dollars, was due to the fact that people who normally buy and sell these oil futures contracts were holding onto them and not selling them within the standard frame of time that they usually do, and that that was causing the spike. It had nothing to do with supply and demand. But, again, that’s something that I’m just recalling from my memory. You know, this is the way my mind works. It wasn’t long that George Soros, you know, they had these big Senate hearings (before the Judiciary Committee, I think), on Big Oil and the price here — and there’s George Soros, and George Soros is talking about, ‘Well, this is a bubble,’ which is what I have said. The market cannot support this. If this goes to 150 bucks, folks, for a barrel of oil, the market can’t support that for very long because it just can’t. Certainly not $200. Markets work if they’re allowed to. I know what you’re saying is that the speculators are actually impacting the market in such a way that markets don’t work, that they’re affecting it.
CALLER: Well, prior to 1978, the price of a barrel was around about $30, Rush.
RUSH: Yeah, but, look, just a year ago or two years ago it was 60. You know, normal inflation —
CALLER: All right, that’s a $30 swing from 1978 until the real speculation got in. I’m still lining their pockets, aren’t I?
RUSH: I’m going to find out for you.
CALLER: All I’m asking is what —
RUSH: It’s a good question, but I’m going to have to get the answer. I want to finish the George Soros point. He’s up there talking about a bubble, meaning this isn’t real. It’s gonna bottom out. It’s a top out, and it’s going to plunge, like the housing bubble and high-tech bubble and so forth. Now, I know George Soros got wealthy selling short, and that makes me wonder if he’s selling short in oil and doing what he can to affect this bubble concept so prices will eventually plummet.
RUSH: So the question’s out there — and a lot of people have this question and a lot of people have suspicions about the speculation in the commodities markets, particularly the oil futures markets. Many people think that they are arbitrarily controlling price in ways that have nothing to do with the market and its actual fluctuations. I have consulted three economic experts on this. They all have the same answer, and it basically is, ‘No, that’s not the case. The speculators, in fact, are good for the market.’ Thomas Sowell’s book, Basic Economics, says that speculators play a valuable function in a market; something about accepting more risk so that others don’t have to.
Walter Williams on futures markets, quote, ‘The futures market, which takes into account both the present and the future availability of goods, is a vital part of a smoothly functioning economy. Unfortunately, that fact provides little comfort to people frustrated over the high prices of food and fuel. As such, it provides fodder for political demagogues, charlatans and quacks who rush in with blame and prepare ‘solutions’ for the problems they themselves have created — the high prices for food and fuel are directly linked to the policies of the White House and Congress.’ Now, let me see if I can do, on the fly, here a little different explanation of the futures market.
Let’s say that I am an evil CEO of Big Oil, and I am hated and despised — even though I am one of few people doing everything I can to make sure you have your gasoline, your jet fuel, all of your petroleum products. Even though I am the only one engaged in this, I am vilified. But I still have a business to run. I have a publicly traded business to run. I’ve got shareholders I have to answer to. I have to keep my stock price up. I have to make a profit. I can remember, folks, when I was growing up the pursuit of profit was an admirable thing. In addition to all the wonderful things 30, 40 years ago that we were proud of in this country, we were proud of our auto industry; we were proud of the space industry, NASA. We were proud of so many things.
Today, we’ve been told to hate all these great institutions. They’re all out to screw us. Big Insurance, Big Retail, Wal-Mart. Wal-Mart’s out to screw us. Wal-Mart has to be gotten even with! Big Pharmaceutical. Now, Big Food. And what I find comical about all of this is that if you listen to the critics, the leftists and the Democrats, all these outfits are out to kill us. They want to kill their customers. McDonald’s exists to see to it that you become an obese slob with diabetes and have a heart attack. They don’t care that you might get sick and that you might die. They want you to die. But they want to you die after you have more kids that they can then kill. This is not said directly and so forth, but this is the idea. We think every major corporate entity and even some small businesses — like contractors, painters — are out to screw us.
(interruption) Auto mechanics? Snerdley is going, ‘Well?’ (laughter) Okay, so I’m this Big Oil CEO, and one of my many responsibilities is to continue new supplies. Now, I may decide as the CEO that I don’t want to increase my total supply, but I don’t want it to go down, either; and I may decide that I don’t want to show all kinds of brand-new discoveries every year for a couple of years, and then the third our fourth year have some growth in supply, but not as much; and so I don’t want Wall Street saying my business is down when it’s actually up from my baseline, but it may be down over the previous two years. So if I’m an evil Big Oil guy. I want a steady supply. I want to be able to manage the increase in that supply so that my stock price and my investors continue to go up and they’re rewarded, and I don’t want anything to happen to make it look like I’m running the business in a bad way.
So I don’t want wild fluctuations in supply. If I see a big pool of oil out there, and it’s got gobs and gobs of barrels I’m not going to grab it all as soon as I can. I’ll grab it as often as I can when I need it to show a steady increase in growth. So I need to be able to know — not know, but I need to be able to come close to knowing. I need to be able to get a feel for what the price of my product, my commodity is going to be years into the future in order to have stability. I can’t run my business if I don’t know or have a pretty good idea what’s going to happen with the price in the future, and I also have to have systems in place so that if I’m wrong in what I think the future is going to be price-wise, supply-wise; that I’ve got insurance against, perhaps, more supply coming up and lowering my price and what have you.
So enter the futures market. Let’s say as an evil Big Oil guy that I want to drill and get oil from shale. But that I, as an evil Big Oil guy know that if oil goes below $80 a barrel, I’m not going to get it out of shale ’cause I’m going to lose money doing it. So once oil surpasses 80, and if it goes a little higher than that, I’m going to start buying some contracts on the futures market at prices that I know are going to be what I need to get that oil out of the shale. It’s different than getting it out of the sea bottom. It’s different than getting it out of some dirt track in Texas. If I run an airline, if I’m Herb Kelleher, the former CEO of Southwest — and this is true of any business. A lot of people ask me about this. Let me explain this this way.
A lot of people say, ‘How come these athletes get all these multiple-year contracts? Whether guaranteed or not, how come?’ Because any business needs to know, for stability, what its fixed costs are going to be for as far out in the future as possible to budget other things. So if you’ve got a baseball team and a roster of 25 and you know what your payroll is for as many years in the future as possible given the productivity of your players and so forth, then it helps you price other things in terms of what you have to buy, what you have to spend in order to show a profit, or to at least try to stay ahead of the game. So labor costs, it’s why labor contracts are done with unions well in advance, years out; so people can get a fixed idea what their costs are going to be because only then can they manage for the future and plan for it.
So if I’m Herb Kelleher and I’m running Southwest Airlines, and I know that the fuel price is my number-one expense — close to labor, depending what the fuel price is but now the fuel price is obviously the number-one expense — I need to know what that fuel price is going to be as far into the future as possible. So enter the speculators in the commodities market, and they are taking risks, and they are betting on what the price is going to be in the future. And some of them are getting it’s going to go down; some are betting it’s going to go up. They are taking a tremendous risk because they don’t know what it’s going to be, but people running their businesses take their actions and say, ‘Okay.’ If I’m Herb Kelleher, Southwest, he did a smart thing, he bought a bunch of gasoline, jet fuel. In fact, he bought a bunch of jet fuel way.
He bought contracts for it, even before it had been refined at a certain price. So let’s say that his gallon of jet fuel cost him — this is an arbitrary figure. When he made his deal to buy gallons of jet fuel in advance, years in advance, he made a deal to buy that jet fuel at say three bucks a gallon. After the years pass and jet fuel is now $4.50, he’s got contracts for it at $3 because he bought it way back when, and that’s why Southwest, one of many reasons, has been able to show a profit. Other airlines have tried to do this as well. Everybody tries, but the point of all this is the commodities market, the futures market serves businesses and customers well because it helps businesses plan for the future without such erratic price swings in business expenses.
Now, you probably say, ‘Well, Rush, then how come there’s all this volatility?’ Well, the volatility has come from the rapid increase that’s happened lately. Whatever the increase is, you’re still going to have people betting it’s going to stay where it is — 136 or 137 now, or it’s going to go to 125. If you’re running a business related to oil and if you can find a contract to buy X-number of barrels of oil today at 125, when the price is 137, then you would do it; and there might be somebody risking it’s going to go to 125, who will short and sell it to you, who knows. But the bottom line is the commodities market does not affect the consumer price.
It does not have an inherent harm by intruding on what otherwise would be thought of as the market because the speculator market — the commodities, futures market — is as much a part of the market as you are on the tail end of the process, buying the retail product to put in your tank. Gasoline would be a lot higher if there weren’t these contracts. Look, while the price right now… That’s a good point. The price right now, 136. There are some people buying oil, or refined oil products. When the price was 102 and they bought it way back then, and they’re getting it for that. ‘Does that mean they’re raping me? Does that they’re still raising the cost?’
No, no, no. It does not mean that at all. Gasoline, retail gasoline is a little bit of a different thing. There’s competition in that business even though you don’t think there is. But it hasn’t always been 137, 136. It was 90, and there are people that bought contracts for it in the future when it was 75. And they were betting it would go to 90. And if you can buy something at 90 when you think it’s going to go to 120, you’re ahead of the game as a business. This is fairly close. As I say, ladies and gentlemen, I’m doing this off the top of my head with basically a 30-second explanation of this prior to giving you the story. So allow me the leeway here of being wrong by one or two percent.
RUSH: One more thing about the commodities and speculators market. Everybody’s focusing here on gasoline, and understandably so. I mean it’s five bucks a gallon, on the way there. The national average is past four and it’s altering the way people live their lives, some people. I still look out there and am amazed at how many people were at Belmont Park, the place was overflowing, hundred thousand people, some of them drove there, others took the subway. Look at any professional sporting event, baseball. These stands are pretty packed. You know it’s not cheap to go to these games. People are still driving around but they are making adjustments, but this has been a vastly increased price of a high percentage which has a profound impact on the financial decisions that people make. So everybody is focusing on oil and the futures market and so forth. If the futures market is bad, if the speculation here is bad, let’s just take corn off that market, let’s stop the commodities markets altogether. Let’s get rid of wheat, take soybeans, peanuts, let’s take them off the commodities markets. The same thing happens to those commodities as happens in oil.
Remember the movie Trading Places with Eddie Murphy and Dan Aykroyd? That was about the Duke brothers. It’s a fictional story, but the Duke brothers who had cornered the market, trying to corner the market on Florida orange juice and they had gotten an advance copy what they thought was the agricultural department’s report on the Florida orange crop, and of course Aykroyd and Eddie Murphy found out about it and they got hold of the guy, kidnapped him and put a fake report in the hands of the Dukes, and the Dukes went out there and started buying up these contracts left and right because the price that they had told them was going to be was very low, it turned out just the opposite, and they were bankrupted. Now, it’s a fictional story, but orange juice is in the commodities market. I remember when I started in this business in the early morning hours in Missouri, I’m 16 years old, and I happen to do the barnyard news, and I had to do the stories, you know, the price of pork bellies. I didn’t even know what one was, but I’m dealing with the commodity prices in the pork belly market and this sort of thing. People lose money in this market, too.
The assumption is everybody on Wall Street does nothing but make a lot, exorbitantly so. (doing McCain impression) ‘That’s right, Limbaugh, that’s right, and I’m going to stop it!’ Well, they lose money there, Senator. You gonna insure them against their loss? Let’s take soybeans, let’s take corn, let’s take wheat, peanuts, let’s take ’em off the commodities market. Why not just have the federal government run all of this. They’re the benevolent ones, the federal government, that’s who we’re told to trust. We’re told to trust the federal government because they care and they’re gonna get even, they’re gonna get even with everybody who’s screwing us. They’re going to get even with Wal-Mart. They’re going to get even with Big Oil. They’re going to get even with whoever, Big Auto, Big Drug. They’re going to get even with Big Insurance. They’re going to make sure we don’t get screwed. So let’s just let them set the price of oil. Harry Reid knows a lot about it. Nancy Pelosi knows about the oil business. I mean, they say the price is too high. Fine. Give them control of it.
Doesn’t make any sense, does it? You want to keep doing that in all these other commodities? Some speculators lose money on the commodity markets as well, same with the stock market, same with the real estate market. You know what? Let’s have the government in charge of house prices, and let’s have the government in charge of interest rates. And let’s have the government charge of all these things, so there is never, ever, any risk. And that there’s never, ever, any profit. Everybody will have the same. Not much. They’ll have it all. But if they start messing around in this stuff, it’s going to be like they’ve messed up the Great Society, all these other things. Government, by definition, is a series of bureaucracies. They have no competition. They have no clue what competition is. If there were privatized department of motor vehicles, do you think it would run better than the government? Damn right. Anything, other than the military, would be run better.