Tuesday, July 22, 2008

Why Are Speculators the Scapegoats for Gas Prices?

A faithful Check with Chip listener forwarded a commentary by Dick Morris about the need to crack down on oil. I must be missing something because I see the fuss about speculators as a smokescreen generated by politicians to hide the real problem: their unwillingness to permit more oil drilling and progress in nuclear energy in America.

The Morris commentary did not connect enough dots for me to understand how rising prices for future oil contracts push up prices for what is available today at the gas pump.

Even if there is a connection, speculators react to market forces -- and forces inhibiting market evolution. If you won't tap your own oil reserves and you won't increase your nuclear capacity and the rest of the world is developing a bigger appetite for the same oil supply on which you rely, then speculators correctly conclude that the price of oil is going to rise.

President Bush starts to show some backbone about tapping American off-shore reserves and, what do you know, the price of oil futures and the price of gas at the pump go down.

Get mad at speculators if you want, but the polices of American politicians have created the current distorted market.

1 comment:

OmaSteak said...

Being a "speculator" by trading crude oil futures contracts is an almost 100% guarantee of losing lots of money in a big hurry compounded by trading on margin (borrowing the money with only 5% cash required). The Fed regulators should raise margin requirements on futures trading in-line with those required in other markets. Beyond that, they should do nothing. Smart traders, as opposed to speculators, do make money on all sorts of futures contracts...crude oil, natural gas, corn, beans, wheat, cattle, pigs, etc. Companies in those various industries are the biggest players as they wisely use futures contracts to manage price risk of the commodity upon which their business is based. The Feds do need to take a serious look at "hedge funds" and update both their regulations and tax treatment. Beyond that, let markets operate as they are the most efficient way ever found to set future price and production expectations. Just make sure all the players are operating on a level playing field and have the required capital to fulfill any/all market obligations made.