Did speculators fuel the oil run-up?
Supply and demand are all well and good, but are overeager investors really to blame for skyrocketing gas prices? Commentator David Frum gives his take on the speculation about speculators.
Commentator David Frum (David Frum)
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TEXT OF COMMENTARY
Kai Ryssdal: Whether oil prices are going to go up or down is one of those random things we can't really know until it happens. Anybody who tells you otherwise is probably trying to sell you something.
But even after you factor out supply, demand and the dollar, there's a lot of speculation out there that speculation might be driving the run-up in crude.
Commentator David Frum says that might not be far from the truth.
David Frum: Maybe it takes a speculator to recognize a speculative bubble?
Over the weekend, George Soros gave an interview to the Daily Telegraph in which he described today's oil prices as a bubble ready to pop. Most analysts pooh-pooh the role of speculation in today's oil market, but some new evidence suggests that Soros may well be right.
My American Enterprise Institute colleague Desmond Lachman observes that institutional investors own and hold more than a quarter trillion dollars worth of oil today, up from virtually zero half a dozen years ago. If these positions were ever unwound they could exert an abrupt downward jolt to the price of oil.
Here's how it could happen: Imagine that you're a speculator. You own a bunch of oil you bought at prices ranging from $75 to $125 a barrel. You are hoping that the price will go to $200. But nothing lasts forever; already Americans are driving less and switching to more efficient cars. A recession in the United States would slash Chinese export earnings and slow the growth of the Chinese automobile market. As the U.S. and Chinese economy weakens and oil consumption dips, the price of oil begins to soften. It dips back below $125, then $120, then $115. As a speculator, you've lost money on your last purchases, yet you could still score a huge profit on the earlier ones if you act fast. But uh oh: your competitors have the same idea. You all rush for the exits at once and after a year of frenzy on the buy side, it's pandemonium on the sell side.
It's happened before. Between December 1985 and July 1986, the price of OPEC oil plunged by more than half, from $23.29 to under $10. They still remember the shock in Texas. I wonder if they remember it at the trading desks in London, New York, and Hong Kong?
Ryssdal: David Frum is a resident fellow at the American Enterprise Institute. His latest book is called "Comeback: Conservatism That Can Win Again."
Comments
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From CA, 06/14/2008
http://www.beyondthemargin.net/2008/06/do-speculators-cause-oil-price.html
From Chipley, FL, 06/02/2008
I believe that we all can help drive down oil prices by using less gas by sticking to the speed limits. We all know that automobiles to use more gas every mile per hour that we go over 60 miles per hour. I have noticed an improvement in my gas milage since I started driving 55 mph instead of 60 mph. Going 55 mph forces drivers behind me to slow down too and forces them to save gas - at least as long as they remain behind me. I even drive 55 in 65 mph zones. It takes a little more time, but saves more and more money as gas prices rise.
From Belmont, MA, 05/31/2008
Mr. Frum's statement that "institutional investors own and hold more than a quarter trillion dollars worth of oil today, up from virtually zero half a dozen years ago" needs some context. The context is the invention and peddling of exchange traded funds (ETFs), which have greatly magnified the capacity of ordinary and institutional investors to become players in commodity markets about which they otherwise would be clueless.
In my opinion, tapping this bottomless pool of capital to purchase futures for oil and other commodities such as wheat, corn, rice, and soy has stimulated incredible levels of price inflation we have witnessed in these markets this year. But rather than stimulating demand, ETF and related securities have simulated demand, and the consumers of these commodities and the products which use them have been victimized to a tragic extent.
Where are the market regulators when we need them? Kicked out of the Bush administration, it seems, on the advice of Mr. Frum and his happy band of free enterprise advocates.
From Bethesda, MD, 05/29/2008
Finally a way to get a sense of the magnitude of the impact of speculative buying on the price of oil. Although I'm sure that increase demand for oil is a contributing factor to the speculators buying into the oil market there are two other factors that have played an equal if not more significant role.
First the weak dollar and secondly concern over the potential for another major confrontation on the world scene.If I am correct another factor that will contribute to the decrease in the price of oil will be come in January when the new president (regardless of which of the three candidates wins) takes office. Unpredictability and "irrational" behavior spooks everyone and these are characteristics of the current administration. Speculators havebought into oil in order to maximize their profits in these uncertain times.
From Los Angeles, CA, 05/28/2008
To counteract the bad effects of speculation in oil futures, I volunteer to buy oil pasts. Others buy oil that doesn't exist yet, and so I will buy oil that doesn't exist anymore, say at $50 a barrel. I get cheap gas, and the average price of fuel goes down. Everyone wins!
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