Posted by
Andrews on Tuesday, July 15, 2008 10:53:34 AM
I have a question, does anyone who criticizes oil speculation have any idea how investing works?
The reason I ask is that they seem to think speculation can only drive prices up, not down. However, traditionally the futures market does not work that way. And it really can't.
Think about it. You are a rich oil speculator. You buy oil, and keep on buying, all the while driving up prices. Prices rise and rise, your stockpile of oil grows, and your money supply dwindles. So, what do you do? Just sit there gloating over how much your oil is worth?
No, you then SELL. That is that is the part of speculation most seem to ignore, the selling. Which then drives DOWN the price. Meaning that the price is also reduced by speculators.
Now, in reality, speculators don't buy oil to drive up the price. The market is too large for that to work. Instead speculators buy oil because they EXPECT the price to go up independent of their actions. Then, when prices are higher, they sell. This serves the valuable function of LEVELING prices, making them higher when they are too low and lower when they near the peak. So, if speculation is driving up prices, it is because they think prices are rising, and when they sell it will serve to lower the price.
Not that speculators will get credit for the lowering of prices, of course.
The one situation where this system really breaks down is when there is an unfounded belief in a rising market. Then the actions of speculators can serve to drive prices higher when they should be selling or not acting. I suppose that is the situation the politicians are imaging. (Assuming they have enough economic knowledge to be thinking even that clearly.)
But, I have to ask, why are they concerned? Such bubble are always self-correcting, tend to be of limited scope. Afterward prices are actually lowered significantly as everyone drops out of the market. So, if the problem is self-correcting and tends to last but a short time, is it worth destroying the free market in oil to correct? And isn't it just easier to allow drilling to lower prices rather than impose all kinds of new taxes and fees?
Also, I have to ask, is this criticism leveled only because most people are not oil speculators, so they are a safe minority to attack? The reason I ask is that when everyone was getting rich on a similar bubble in the housing market, that is when speculators were driving up the cost of houses, no one raised any objections. Maybe because then it was not a small, easily demonized group.
And that, I think, explains it all. Speculators make a convenient scapegoat. They are a small group, and their name suggests great wealth, allowing for envy to make the public hate them. But, best of all, by criticizing "speculators", the politicians get to avoid any blame for their own bad policies in the rising price of oil. Add to that the economic illiteracy of the public, their failure to understand the real role of speculation, and you get a winning game plan for politicians seeking to avoid blame.