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What Does Speculation Have to Do with Oil Prices?

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There are some politicians and news commentators clinging to the notion that speculators are the reason for high gas prices.  If speculation had anything to do with prices every investor who speculated on a stock, any gambler who speculated on the turn of a card and every fisherman who speculated on making a big catch would be able to derive riches just by taking a risk.  Speculation is based on risk.  The risk is in buying something in the anticipation its price will increase.  Notice I did not say it would automatically increase but that might increase which means it might not.  When you bet on oil future prices going up you place a call order and when you bet on it dropping you place put order.  Now how does that raise prices.  You as a speculator are not setting prices but betting on them moving one direction either up or down.

According to the misguided and misguiding, speculators could also get prices lower by betting they would go lower.  If there was any validity to this why wouldn’t a speculator first drive the price lower then run it up after buying it cheaper and then do the same thing over and over again?  This doesn’t happen as you can see by the long advance in oil prices so either the speculators don’t have an effect or they are so stupid they just want to bet one way.

The word speculator has a connotation of a sinister endeavor that is somehow manipulative and effective.  This connotation is convenient for anyone who doesn’t fully understand the meaning of the word and wants to blame someone other than simple supply and demand which is really what speculators look at when deciding whether to buy or sell.  If a speculator sees there is a growing demand for some commodity and the supply will not be sufficient for the price to remain stable he will buy a contract for that commodity in hopes that he is making the right prediction of the future price movement.  If he is wrong he loses, if he is right he profits.  Does this sound like there is any prices being driven higher because that is how he is predicting?  Because there are many speculators betting the price will go up based on the increase in demand and the poor supply outlook, those who continue to believe this is ongoing will continue to bet this way and those who think it will reverse are betting the other way.  Only the speculators that are correct are making money.  But no speculator is setting the price.

If you just look at speculation from a common sense viewpoint you realize that whenever you take a chance on the future price of anything you are speculating.  For instance, if you think the prices of cars will go down and you wait until you think the price will drop and if you are right you buy a car at a cheaper price than if you hadn’t waited.  But if the price doesn’t drop you will end up buying a car at a higher price than you anticipated.  You have indulged in speculation but you had no effect on the price and neither do oil speculators.

Another thing about speculation is there are always buyers and sellers.  If you think the price of the commodity you have will increase why would you sell it?  Simple because you may need what the commodity is worth today.  A farmer can store his grain and not sell it hoping the price will go higher.  It costs him to store the grain so he has to hope the price will be greater than the investment he has in the crop but he cannot hold it forever.  He has loans to pay and mouths to feed.  He needs seed and fertilizer for next years crop.  He has to buy machinery and fuel.  So he sells when he can no longer afford to bet on a higher price.  Likewise any speculator sells when he needs the money for current expenditures.  Maybe he sees a better investment and wants to get in on the action but hasn’t the credit or the cash to do so unless he sells some of his holdings.  And when he sells the buyer is now the bettor on the future price rise.  If he cannot find a buyer that will buy at more than he paid then he must sell at a loss. Does any of this sound like some nefarious scheme to raise oil prices?  Hardly.

Speculators are being used as a diversion for those who don’t understand the issue or who are afraid that their effect on restricting supply will be made public.  The fact that even Saudi kings are talking about the role of speculators as a contributing cause of high oil prices should tell you something.

Whenever you hear someone talk about the role of speculators in raising the price of oil ask them to explain exactly how that works.  I got a reply from a person who was harping about speculators the other day and he said I wouldn’t believe it if he told me.  I get suspicious with these kinds of explanations and so should you.

It is time to exonerate the role of speculators and lambaste those who have jumped on this phony explanation and have not been able to tell anybody how it works.  They haven’t announced how it works because they are bluffing.  They have no idea how speculation can raise prices but they are willing to spread the theory because they think it appeals to either their audience or it gets them off the hook ( temporarily ) as a supply detriment.

We have had low gasoline prices for many years before other economies began to expand and demand more gasoline and been willing to pay more to get it.  Now we must pay more to compete and this simple fact is being obscured by ignorant people who don’t want to face the fact that we do not have enough supply for the worldwide demand.  This evasion makes it possible for the environmentalist to rationalize that the restrictions they have advocated had nothing to do with restricting supply.  As for the commentators theirs is far more puny excuse.  They just think the “folks’ are satisfied with bashing oil companies and the supposedly endless profit taking of speculators.  This is  just tired cheap unproven blather based on nothing.  It falls into the category of advocating universal health care when all the evidence proves it has failed.

People are wondering why things are getting economically worse yet they don’t question the ideas being tossed around as acceptable and “popular”.  Someone says, “its the speculators” and suddenly there is a new scapegoat that will need a thorough investigation and regulation and the fundamental problem will not be addressed and the prices will continue to rise.  Tired old ideas keep reappearing like the windfall profit tax ( which failed ) and the finger of blame keeps avoiding the real culprits.  Its all about supply and demand.  And those who don’t want the suppliers to supply want to blame the problem on someone else.  Had we been concerned with having an adequate supply of gasoline instead of pie in the sky alternative experiments this issue would not be upon us.  As long as we have machinery that moves with gasoline or diesel we need gasoline and diesel   There is not time to piddle around with windmills and solar panels as replacements for the basic energy we are now set up to utilize.  Telling the auto manufacturers to lower fuel usage and passing laws that just make more laws and policemen necessary is not the American way ( Europe maybe ).  This country didn’t get to where it is by oil producers being told by a bunch of toady legislators what to produce and where to do it.  You drill where the oil is and hang the varmints that have to move their nests or take another migration path.

If you have a commodity and you are willing to sell it because you need the money now why should the government be concerned?  Only if they sell a bill of goods to the gullible and can get them to buy into the idea that it is a demon called a speculator that is really at the fault of the pain.  And all it takes to stop this nonsense is to call them on it and ask them to explain exactly how it works.  All you will hear is a huge silence.

The opinions expressed in this commentary are solely those of the author and are not not necessarily either shared or endorsed by iPatriot.com.

Dale Netherton

Author of four published books, former Marine, forester, former plant services manager,former KT facilitator, former campgound builder and manager, handyman now retired to writing , chess , golf and fishing. ISU graduate, M.B.A. from Nova University and longtime supporter of ARI. http://www.amazon.com/Dale-L.-Netherton/e/B00G1T6A26/ref=dp_byline_cont_book_1

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