High gas prices not caused by speculators

Why are gasoline prices going through the roof? Whatever the reasons, oil speculation isn’t one of them. That’s the conclusion of Cato Institute senior fellow Alan Reynolds in a column published by the New York Post on June 20th. Reynolds starts out saying:

“Senator John McCain recently called for a “˜thorough and complete investigation of speculators’ to see if they’ve driven up oil prices. And Senate Democrats plan a new bill aimed at commodity speculators – a witch hunt that’s clearly about oil.

“But, much as politicians would like to blame speculators, it’s just not so.”

Read the full column at:
Scapegoating the Speculators

Founder and Senior Policy Analyst at Cascade Policy Institute, Steve Buckstein is Director of Cascade’s Government Transparency Project and the Oregon Economic Opportunity Project. Based in Portland, Cascade Policy Institute is Oregon’s free market research center.

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Posted by at 01:00 | Posted in Measure 37 | 10 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Steve Plunk

    Aren’t many commodity investors buying oil contracts as a hedge against inflation? With such a large amount of cash having left housing and moved into commodities couldn’t that have pushed prices higher? As prices moved higher didn’t that attract more money into oil? How can the explosion of the number of oil contracts be explained as not having an effect on price? Can demand for the contracts themselves push up prices?

    Reynolds piece failed to address these and I’m sure other questions. I don’t doubt the fundamental blame rests with the politicians but like many things there can be other players in this drama. I wonder if it is wise to allow non-users to buy contracts? Given the size of many hedge funds could they manipulate the oil futures market for a while and then bail out when other investors enter?

  • dean

    The larger question is whether the run up in oil prices is a result of a speculative bubble, or whether it is the result of demand having outrun the available supply (peak oil).

    If it is a bubble, then money going into futures speculation will by definition increase its size….up until the point enough people cash in their margin to take the bottom out of it. See the great 17th century Tulip mania results for instruction.

    If it is prices reflecting demand outrunning supply additions (peak oil) then it will take some time for still rising global demand to drop below the ever declining supply.

    Or…it could be some of both. Increasing speculation based on expectations that peak oil is here.

    Like the Chinese curse…we appear to be living in interesting times. Think I’ll go for a bike ride.

    • Crawdude

      I believe its a combo. of many things: Lack of refining capacity, even if we have more oil, we can’t process it any faster. Speculation, though a smaller player.

      I don’t believe we have hit peak oil, OPEC still regulates the output of it members, S.A. stated yesterday that it would / could increase production if asked.

      The pressure some of the developing nations are putting on existing supplies are helping to drive up the cost.

      Exploration, drilling in known reserve areas, increasing the CAFE , finding alternative energy sources and conservation are all keys to equalizing energy cost increases.

      Unfortunately, all sides are working against each other instead of with each other, a recipe for disaster I think.

  • Bob Clark

    Speculative activity is a symptom of demand and supply inbalances. Politicians, particularly democratic politicians, want to treat the symptom and not the underlying demand and supply balance. Currently, not only does fuel efficiency need to be encouraged but supply is also needing enhancement.

    Speculation actually may aid in adding supply by allowing small, medium and large oil and natural gas producers to sell futures and lock-in a revenue stream for what would otherwise be marginal or risky oil and natural gas projects. Moreover, if the U.S government changes the rules and retards speculation at this point, they might actually slow a correction in energy prices downward at some point in the future. Speculation actually works both ways: it not only can accentuate a rise in energy prices but accentuate a decline in energy prices. Just look at the short selling occurring in financial stocks currently, and how precipitous their share prices have declined. It’s happened in oil and natural in the 80s and 90s.

    Besides, the U.S can not stop speculation occuring offshore outside its control. So, Senator Lieberman should get real and stop playing the populist drum.

  • morris

    The prices are controled by the distributors. Always have been.

  • Jerry

    Anyone willing to deal with the facts rather than emotions will know that the primary cause of high fuel prices is government interference.

    • sybella

      Oh please, don’t confuse thr politicians with facts

    • pk2

      Oil companies, the consumer and consumer trends play a role in prices.

  • David from Eugene

    Mr. Reynolds’ report seems to be at odds with a number of other news reports on the Commodities market in general as well as the price of Oil Futures. Last night an economist being interviewed on the News Hour estimated that the true price of oil is in the 80-90 dollar a barrel. He predicted that when the speculative bubble bursts that oil will drop below that value. That value seems to be consistent with statements attributed to unnamed Saudi oil ministry officials and Saudi OPEC staff that state that the current demand for oil would support a price in the 70-80 dollar range.
    Stories on commodities speculation and the Futures market on Spiegal Online International (How Speculators are Causing the Cost of Living to Skyrocket, 13 June 2008, https://www.spiegel.de/international/world/0,1518,559550,00.html and Four Faces of Speculation; The Farmer, the Baker, the Banker and the Hedge Fund Manager ,13 June 2008; https://www.spiegel.de/international/business/0,1518,559377,00.html ) attribute the rise in Oil futures as well as other commodities to speculators. They point out that in the case of coco that there are amble supplies available on the market. The story also reports a spectacular rise in coffee, corn, soy and gold futures again attributed to speculation. They indicate that the source of this speculation is American Pension funds, Banks, Investment funds and Hedge Funds. More significantly they report a 1,900% increase (13 billion to 260 billion dollars) in the investment in the food commodities between late 2003 and March 2008. They also report that many of the fund managers do not understand the market they are investing in and thus over react to news they believe might affect the price of a commodity in the future, news that the knowledgeable market investors discount as unimportant.
    The money that is fueling this speculative bubble seems to have come to the commodities markets from the Dot Com bubble via the Home Mortgage Bubble. This crisis is rooted in a supply and demand imbalance but not an imbalance in the supply and demand for oil or any of the other commodities but rather in a shortage in investment vehicles offering a high yield and a large amount of money seeking those vehicles.
    There are two problems with our current situation, the short term problem is that this speculation is adversely affecting the real market (a grain farmer selling a future on his crop to a baker) and raising the price consumers pay for food and fuel. The second is long term, speculative bubbles burst, and historically that causes major economic disruption. And with pension funds being a major player there is a possibility that a lot small people will be hurt.

  • Jerry

    Gas right now is underpriced.

    Driving should be a privilege for only the very rich. Once only rich people can afford to drive the roads won’t be crowded and driving will once again be a pleasant experience.

    I think about $10 a gallon should do the job.

    Bring it on!

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