Something is bothering me. It’s the bad rap “speculators” are getting these days because of skyrocketing oil prices. I feel compelled to defend these speculators, some of whom are my former colleagues – good ‘ole floor-traders. The politicians and pundits blaming them for high gas prices don’t seem to understand how they contribute to smooth market functioning.
Speculators are the reason an Iowa farmer has the option to sell his or her product in Chicago well in advance of harvest. While the decision to sell might turn out to be a good or bad one, there’s no doubt speculators are the folks who provided that farmer with the option to manage his or her risk. A good speculator will research supply and demand conditions, predict future prices, and then take future “positions” in products like corn or oil with the intention of making a profit.
Liquidity and price discovery are the benefits of this type of speculation. Think about an online auction. As more and more people take part in the auction, the greater the likelihood the item for sale will be priced accurately. That’s the point where supply and demand comes together. Yet in the current environment some of the legislative proposals being tossed around in Washington would actually reduce the number of speculators in the market. Puzzling…
Oil prices are increasing simply because world demand is growing faster than supply. World oil demand jumped from 82.5 million barrels a day in 2004 to 86.8 million barrels a day in 2007. Yet world supply grew only from 83.4 to 85.5 million barrels a day during that time period. If demand is growing faster than supply, prices rise. The people bashing speculators must be assuming that oil price hikes are the result of someone hoarding oil somewhere. But where’s the evidence?
By: Wade Rousse