This article is from Don Boudreaux of George Mason University who publishes the Cafe Hayek blog. This op-ed piece was published in Newsday.
Don’t Curse the Oil Speculators
Nothing sparks spasms of poor economic commentary like rising oil prices. From left to right, pundits and politicians outdo each other at accusing evildoers of hurting good people. This week, a Democratic congressional committee held a hearing on the issue of high gas prices and excessive oil speculation.
Speculators are easy targets. They seem to produce nothing. They merely buy and sell and hope for prices to move in directions that will bless them with big profits.
In fact, though, speculators also bless the rest of us with significant benefits — although too few Americans understand this truth.
Speculators should be celebrated — not so much for their motives (which are no better or worse than normal) but for the socially beneficial, if largely invisible, consequences of their activities. Speculation makes resources more abundant when there is great scarcity by encouraging people to use those resources more sparingly when there is relative abundance.
Suppose a village on the west side of a mountain range has an unusually good wheat harvest, but a village on the east side loses most of its crop to drought. Everyone agrees that wheat should be shipped from where it’s relatively abundant to where it’s in short supply. Commerce and market prices ensure that such shipments occur.
Wheat prices in the drought-stricken east village will be high, while prices in the village with the good harvest will be low. So merchants will buy wheat on the cheap in the west — causing its price there to rise — and ship it to the east village, where it will be sold at a profit.
It’s true that these merchants are motivated by self-interest. No matter. They perform the beneficial task of distributing supplies more equally and sensibly. Because of the merchants’ profit-seeking response to the difference in prices between the two villages, people who need wheat less urgently are encouraged by higher prices to use less of it, so that people who need wheat more urgently get what they need. Surely this result deserves applause.
Speculators perform the very same task. The only difference is that, with speculation, people who need resources more urgently are separated from people who need them less urgently not by a physical barrier, but by time.
Speculators who anticipate that oil will be in shorter supply tomorrow than today can profit by buying oil today and selling it tomorrow. Oil is transported across time from today (when it’s relatively abundant) to tomorrow (when it will be less so). Barrels of oil that would, without speculation, have been used today when they aren’t so desperately needed are, with speculation, conserved for use tomorrow when they will be more desperately needed. Surely this result deserves applause.
Speculators do cause oil prices today to rise — but these higher prices merely reflect the reality that oil supplies tomorrow are expected to shrink (if, for example, tensions continue to rise in the Middle East). Over the time span that includes today as well as tomorrow, oil has become more scarce. By understanding this, speculators drive up prices today, thus encouraging us to use oil more sparingly today. And that conserves more oil for tomorrow.
Today’s higher prices not only prompt us to conserve more, they also prompt oil producers to intensify efforts to supply more. Oil deposits that are unprofitable to exploit at lower prices become profitable to exploit at higher prices.
Speculators might, of course, err. They’re human. But such errors are kept to a minimum because when speculators err they wind up buying high and selling low. The wish to avoid such losses, and to earn profits, keeps speculators ever on the lookout for opportunities to transfer resources from times when they’re unusually abundant to times when they are unusually scarce.
And surely this result deserves applause.
When OPEC controls the price of oil and there is no free market in that commodity, you can’t defend speculation on that product. And since when does a libertarian defend “conserving oil for tomorrow”? This incoherent essay is bad apologetics for market manipulators.
Oh, but I just did. If they could control the price why did it fall to $35 from $150?
Scoring a first round knockout and still World’s Heavyweight Economic Champion, Jjjefffff Harding!
Very kind of you to say that, Hans.
Because they wanted to get the world out of recession and because the previous round of speculation needed to be flushed out. Hans, you’re a hack.
Who be “they”, Mr Johnson?
Since we are over-weighted in oil, would you kindly advise us as to which direction the manipulation will go; we would like to adjust our portfolio accordingly..
Thank you kindly,
Hans H Hack
Great article. The only challenge to your analysis is that crony capitalists hate markets and do everything posiible to creat oligarcy.
Most people have no clue that the U.S. basically banned inter-state utility companies in the 1930s because many of the leverage stock companies that cost the public their life savings in the stock market crash were utilities that sounded safe, but were leveraged stock pools.
The U.S. is rapidly moving to energy independence for natual gas and oil. The cost of lifting natural gas in the Ballen Field in North Dakota is less than $1 per cubic foot of gas and $16 per barrel of “light sweet crude”. High prices has driven massive cash into these markets and spurred incredible technolgy advances in drilling.
But domestic producers do not want competition from new supplies and “alternative energy” is already imploding. The cronies can work their money magic to have the U.S. government delay national distribution pipelines for another year or so, but soon the pressure from speculators to build the pipelines will be over-whelming.
Mr Street, the Bakken field are overwhelmingly a liquid reserve..
Moreover, it is dependent upon on high goo prices, since the development cost per well generally is between $45 to $55 pb..
Because of carry-away issues, Bakken producers have to discount their production, which has run as high as $28pb, off the WTI rate…
Jeff harding said- “Oh, but I just did. If they could control the price why did it fall to $35 from $150?”
Paul’s point is a good one. But that plunge was likely due to the fear Obama would investigate/ place limits on the commodities markets. At the time Obama was an unknown.
The oil plunge can be correlated (to the day) with a speech Obama gave on rampant speculation in oil. Gas fell to less than $2 bucks a gallon from that point.
But this article is so flawed it makes your head spin (hence the publication in the rag Newsday).
Speculators who use Fed printed bubble money to leverage massive commodities bets with out of control leverage are to be applauded? Where can I get some of that money? This is nonsense and a clear example of price fixing.
True markets (where supply and demand seek an equilibrium which accommodates human life/ business) cannot function when you’re paying $5 for gas one week and $2 the next week.
Bad rec Jeff.
I believe that all happened during Bush II. In fact, commodities prices collapsed across the board at that time. So while I understand your frustration with Obama, it was a matter of supply and demand. Thank you for your comment.
Yoda: Really? The crude oil market is how big, and it plunged more than four-fold due to unfounded fears of Obama??
While talking heads love to commit the fallacy of ad hoc ergo propter hoc, seeing two correlated things and giving a sound bite “story” of how one caused the other, that just is not how real markets work in reality.
Yo Yoda, that decline under $2 occurred under the last days of the Bush administration…
Yes, we can thank his recession for being the cost under two, for me and you…
Gentlemen and gentlewomen, in the long term, there is a clear relationship between the US Dollar and goo…
http://www.macrotrends.org/1335/the-dollar-gold-and-oil-last-five-years
They’ve made the word “SPECULATORS” so evil but they serve such an important function for the market. Free individuals making bets without harming anyone, why should we want to stop them?
There was rampant speculation at the time that commodities limits would be put in place. It was the talk of the town. I stand by my comments. My guess is that pressure was put on certain parties.
You’re losing money if you think supply and demand rules the markets.
http://www.nytimes.com/2008/06/23/us/politics/23campaign.html
The typical leftocrats answers to problems more regulations and oversight…
Yoda, just like the other fellow, you enter the debate with no supporting evidence of any kind: all you offer the reader is conjuncture and wild, empty claims…
You, yourself, are a speculator..