Post #1784950

@juglugs This one is complicated. They made a lot of money because they were trading oil futures. Bits of the business are on the supply and demand side for petrochemicals, but not always in their own supply chain. The production side needs to know, in advance, how much it will be able to sell its products for, so it knows how much to produce and where to invest. The demand side needs to know how much it will have to pay for oil so that it can plan distribution and consumer pricing. Futures trading exists to allow companies to outsource this risk. A producer picks a price that they think makes sense and finds an intermediary who is willing to guarantee that price. A consumer picks a (higher) price that they're willing to pay, and someone guarantees supply at that price. The intermediaries trade these instruments. If the price of oil is lower than the price you promised to sell for when the contract is due, you make money. If the price is higher than what you promised to buy at, you make money. But if it's the other way around, you lose money. In both situations, the producer and consumer are able to be more efficient because they can do long-range planning. The reason this is tricky to fix is that this is a very useful thing to exist. A lot of supply chains (especially food!) rely on futures to allow them to operate. Some of the problems started when Morgan Stanley successfully lobbied (Clinton, as I recall) to argue that speculators also needed to be de-risked in the same way that producers and consumers were and so the limits on the number of speculators in a market should be removed. You need some speculators to provide liquidity, but above a certain amount they can introduce a lot of volatility. That bit is probably easy to fix, at least technically (the people who don't want to fix it have a lot of money, so it's hard politically). The other issue is that companies started treating their futures trading as a profit centre, rather than as a derisking strategy. An increasing number of businesses exist to provide a justification for this kind of gambling. I remember many years ago only one US airline making money in one year, and that was because it made money trading fuel futures. Increasingly, airlines operate planes to provide demand that enables the fuel futures traders to make money. Or they make money via other financial instruments derived from their loyalty schemes. To fix this, you probably need to mandate decoupling of futures-trading and operational businesses and place strict limits on the futures trading that an operational business can do. Or perhaps just tax profits from trading at a higher rate and don't allow them to be offset by losses from other activities.