Contango Confusion, Part 2 [UPDATED]

We have demolished a lot of dopey leftists over the years, but my personal favorite might be Contango Confusion, an April 2011 post in which I deconstructed a very silly article at Think Progress by cub reporter Lee Fang. Fang wrote an article titled “The Contango Game” without, it turned out, having any idea what the word “contango” means. Readers joined in on the ridicule; if you need a day brightener, follow the link. Fang left Think Progress not long after, I have always assumed out of sheer humiliation.

But Fang surfaced earlier today in The Nation, attempting to resuscitate his “contango” piece of two years ago. Today’s article is, naturally, about Fang’s bete noire, Koch Industries. It is titled, “Not Just Goldman Sachs: Koch Industries Hoards Commodities as a Trading Strategy.” Fang’s piece doesn’t deserve extended commentary in light of what already has been written at the link above, but I can’t resist making fun of this bit of economic analysis:

As Fortune Magazine reported, when oil prices dropped from a record high in July of 2008 to record lows in December of that year, Koch bought up the cheap oil to take it off of the market. Koch leased a number of giant oil tankers, including the 2-million-barrel-capacity Dubai Titan, to store the oil offshore.

No, you moron, they bought oil because it was cheap! Koch Industries is in the business of refining crude oil into various petroleum products. If they think the price of crude oil is cheaper today than it will be in 90 days, it would be stupid for them not to buy some and store it, as long as the storage cost is less than the predicted increase in cost. Now, Lee, try to follow this closely: They do this in order to save money, not because they have some weird desire to “take it off the market.”

Let’s try a homey analogy that poor Mr. Fang might understand. Suppose you go to the supermarket and find that steaks are on sale, marked down $4 a pound. What do you do? You buy six of them. You and your wife grill two steaks tonight, and you put four in your freezer to eat later. (Or if you’d rather, you can sell them to a neighbor after the sale is over, at a price which is more than you paid for them, but less than the current price at the supermarket.) Now, try to follow this, Lee: you didn’t buy the steaks “to take them off the market,” you bought them because they were cheap!

It is remarkable how left-wing publications like The Nation and Think Progress publish drivel by people who not only don’t have the most elementary understanding of economics, but don’t have the common sense to understand the most basic transactions that the rest of us engage in on a daily basis. People this dumb would likely be unemployable in any field other than left-wing “journalism.”

UPDATE: A trader writes to say that I somewhat underestimated Fang’s cluelessness:

It’s actually a bit better than that. It’s not that we “think the price of crude oil is cheaper today than it will be in 90 days” but that we simultaneously purchase the crude for prompt delivery and sell the crude (using futures) for future delivery. This is potentially profitable in a contango market because buyers will pay more for deferred delivery than prompt delivery. That creates an incentive to buy prompt and sell deferred if you can lock in storage and financing at less than the contango price difference. There’s no need to guess or speculate as to future prices.

Recommend this Power Line article to your Facebook friends.

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