Misguided carping about oil speculators
E. Thomas McClanahanPresident Obama has groused from time to time about oil speculators, but former Rep. Joseph Kennedy has taken all this to its doofus conclusion. Ban all “pure oil speculators” from U.S. commodity exchanges, he suggests in a New York Times piece; that will bring the price down.
Nonsense. Markets exist to create prices and prices are about the future. They reflect the available information about the likely movements of supply and demand for the product being traded.
If we hear on the news that a tanker has blown up in the Strait of Hormuz, the world price of oil will skyrocket, and rightly so. The rising price would reflect the likelihood of sudden scarcity due to the risk that terrorists or the Iranian government may have decided to choke off the world’s most important petroleum gateway.
If we hear later that it wasn’t an explosion at all and the ship merely ran aground, the price will drop rapidly. Why anyone should think these price movements reflect some malignant plot is a mystery.
Kennedy argues that speculators are to blame for high oil prices because so much trading involves paper oil rather than the real thing. This trading, he seems to think, serves no real purpose, other than creating price swings that wouldn’t otherwise occur.
But as James Hamilton points out many of the positions taken at the NYMEX are closed out by the end of the day; buyers sold their contracts before the close.
If buying makes the price rise, selling should make it fall. “It is unclear by what mechanism representative Kennedy maintains that the combined effect of a purchase and subsequent sale produces any net effect on the price,” writes Hamilton.
And if speculators are to blame for making the oil price rise, why has the price of natural gas fallen so much, when natural-gas trading also involves a lot of trading of “paper” rather than real gas?
Kennedy’s idea that “pure” speculators be barred is impratical in any case. First, how is “speculation” to be defined? Second, it would create huge problems, as Hamilton notes. Take an oil producer who wants to make sure he can still get today’s price five years from now, so he commits to a contract obligating him to sell a given quantity five years in the future. If speculators are banned, who’s going to take the other side of that trade?
Kennedy’s policy would greatly reduce the number of market participants, meaning the oil producer above may find no one willing to take that trade. Diluted markets create jerky price movements, with fewer buyers and producers able to properly hedge their risk — with attendant economic costs.
People have complained about evil speculators since Adam Smith wrote about the hostility directed at grain sellers 200 years ago. Odd, though, that no one gripes when the price goes down, even though the market has hardly been purged of “speculators.”
Mark Hastert
1 year agoThank you, E. Thomas, for explaining to your fellow conservative posters why they can’t blame Big O for high oil prices. It is a free market dependent on a thousand different variables on any given day.
George Hunsucker
Northland
1 year agokennedy, as is the case with the big 0, as in ZERO, shows his total lack of understanding of markets. Having never had a real job, like jimmy II, this should not surprise.
Who has helped created all the uncertainty mark, which HAS influenced the price of oil??? hint: THE BIG ZERO!!!!
Brian Mehnert
1 year agoOil speculation is no more than guessing which way the price of oil will move… it has nothing to do with setting the price of oil.
If I speculate where the Roulette ball will land, did I affect the outcome?
Steven Fetter
66223
1 year agoPresident Obama needs to educate the country on his changing rational concerning oil prices. As candidate Obama campaigned for POTUS, he and the entire Democratic party blamed Bush/Cheney for high gasoline prices. It was promised a President could impact prices. Now, he has determined it is strictly an economic equation that dictates the price at the pump.
Perhaps a similar epiphany will occur with respect to other free market forces being unleashed to solve the housing, banking, and energy issues we face.
George Hunsucker
Northland
1 year agoThat’s just more “change we can believe in” Steven… brought to you by jimmy II and his merely band of “I’ve never had a real job” jokers….
Kent Mueller
1 year agoMark, are we to take your comment seriously? The bids and the asks that determine the price represent the demand. There is also the supply which liberals have restricted for years. You knew that, didn’t you?