Speculation in Oil Markets

On Monday congress will hold hearings on speculation in oil markets. Politicians hope this will boost their image with voters as it creates the impression that they’re doing something to bring the price of gas down, but as usual, the government has found a convenient scapegoat who they have no real intention of going after, because they know it’s not the real source of the problem.

Who are these speculators anyway? Well, do you own any stocks or mutual funds? Do you have a retirement program through your employer? Have you ever bought something and then sold it for more than you bought it for later? Have you ever bought something because you thought it might be more expensive later and you wanted to save money? Then you’re a speculator. Perhaps not an oil speculator, but a speculator nonetheless.

Speculation is a good thing for markets because it smooths out the bumps. With oil and other commodities like corn, wheat, and pork bellies, “futures markets” allow farmers to sell their product before they have them so that they can sell at what they feel is the best price during the next year, rather than whatever the price happens to be when their crop is harvested. If it weren’t for the futures market, the price of commodities like corn would go up dramatically when corn was not being harvested, and would then crash dramatically when it was being harvested and brought to market. Being able to sell corn at a “future price” smooths out those peaks and dips.

Speculators are people who invest based on what they think will happen in the future. If they think the price of something will go up, they buy more of it. This in and of itself drives the price of the product up, and theoretically a group of speculators could get together and agree to all buy futures at the same time, which would artificially drive the price up. This is what politicians are taking aim at. But this type of collusion is rare and if it were happening we would likely have seen a crash in the price of oil as speculators would have gotten nervous that they would miss out when the time came to sell. The prolonged high price of oil is evidence that prices are not being driven up artificially but are based on real changes in the world such as devaluation of the dollar and increase global demand. This is why it’s foolish for politicians to make a sideshow out of going after speculators who are doing nothing more than forecasting where the market is going.

It’s a distraction from the real issue, which is the policies politicians have created the prevent oil companies from being able to increase oil supplies. As always, it’s easier and more convenient to blame somebody else.