There was an error in this gadget

Friday, April 22, 2011

Speculating About Speculators

There's much noise about "speculators" allegedly driving up the price of gasoline. In this context "speculator" simply means "gambler". That is, there are people guessing what the price of oil is going to be in the future, and then buying up rights for that oil at a specific future date, at a specific price. If they do it right, they buy a future oil contract for less money now, and sell it for more money later. If they guess the price of the oil is going up, they are willing to pay a higher price for that future oil contract. If they guess correctly, they make money. If they are wrong, the price of the oil at that future date will be less than the price of their contract. The contract then becomes worthless and they lose money.

If a lot of speculators are trying to buy future contracts for oil, the price of those contracts will go up. The very fact that future contracts are becoming more expensive will cause the price of real, live oil to go up today. Hence the speculation (I couldn't resist) that speculators may be causing the current spike in oil prices.

This analysis (or wild-assed supposition) misses a critical point. Why would all these speculators believe the price of oil will be higher in the future? It seems to me they merely have to look at the fact that the US government is purposely allowing the dollar to de-value (thereby increasing the relative value of others things - like oil), we have seriously irritated of the Saudi Arabians (who have in retaliation lowered their oil output), we have signaled that America will not increase its own oil production, and we are running around like fools in Libya, thereby keeping that country's oil from entering the world market.

If people are betting that the price of oil is going up, it isn't because they are necessarily evil; it is simply that they are not stupid. Of course the price of oil is going up and the American government has - as if by design - created many of the reasons that will cause the price to continue to climb.

This focus on "speculators" is absurd.

No comments: