President Obama is trying to deflect blame by claiming rising gas prices are due to wicked speculators.
This is a theme pursued by Democrats every time oil prices peak. The investigations that follow have yet to find evidence of misbehavior in oil prices. Notice, this alarm is never sounded when oil prices bottom out, even though speculators actively trade at both the peaks and the troughs.
Since speculators are so obviously bad, why not outlaw all commodity speculation? We could call it the “Obama Anti-speculation Act.”
Our first difficulty will be distinguishing between “investment” and “speculation” unless we want to inadvertently outlaw investing at the same time. Investors and speculators both seek to buy assets at a low price and sell them at a higher price. There are two types of buyers and sellers in all commodity markets: those who physically take possession and provide the commodity when they buy and sell, and those who never intend to take possession and provide the commodity when they buy or sell.
Let’s identify the latter as “speculators” and outlaw them; is there any downside to this?
Oops! We just blindfolded the commodity markets! It is the speculators who make commodity markets forward-looking, and this is the real reason President Obama does not like speculators. They buy and sell oil futures contracts based on what they expect to happen to future oil prices.
Suppose I believe the spot price (the price you would receive for oil if delivered today) will be $120 a barrel on Dec. 1, and I can buy a futures contract for that date today for $100 a barrel. If I am right, I can make $20 per barrel in seven months; I can also be wrong, of course. I also never have to take possession of the oil; it is just a digital transaction.
Another important point to remember is that for every speculator who buys oil contracts, there must be another speculator who is selling a futures contract. Further, one speculator’s gain is another speculator’s loss. Therefore, when the outlook on future oil prices is in balance, speculators have a neutral effect on prices; they push the market price up or down only when there is a consensus prices will be higher/lower in the future.
The forward-looking behavior of speculators makes commodity prices more stable than they would be without speculators. For example, if no one is anticipating supply and demand conditions in the future; then no one is anticipating future shortages or surpluses, and commodity prices would alternately explode and collapse, making for a great deal more volatility and more physical shortages of commodities than we actually see. Remember, the last time we had gas lines (physical shortage) was in the 1970s when the government was regulating prices.
If speculators see less drilling for oil on federal lands (lower 48 and Alaska), less drilling on federal offshore leases, the president blocking the XL pipeline, the president bashing the oil and gas industry, the dollar continuing to weaken against other currencies, and the global economy beginning to work its way out of this deep recession, they would be foolish not to think oil prices will be higher in the future.
That is what President Obama does not like: the markets’ collective judgment that his energy policy will not work.
Bob Martin is emeritus Boles Professor of Economics at Centre College
