America's major airlines are currently urging their customers to write to Congress about the evils of oil speculation. But as Associate Editor Katherine Mangu-Ward explains, one man's speculator is another man's entrepreneur.
New at Reason: Katherine Mangu-Ward on Oil Speculation
Comments to "New at Reason: Katherine Mangu-Ward on Oil Speculation":
stuartl | July 25, 2008, 3:13pm | #
About a week ago, our local all news radio station, WTOP, followed a breathless story on how evil speculators were driving up the price of oil with a breathless story on how the cost of metro fares would soon rise due to locked in contracts (at $2.70/gallon) expiring.It didn't occur to them to wonder about the pain the evil speculators were currently going through in supplying the gasoline.
Those bastards! The gall of them, making money off our insatiable appetites.
Lost_In_Translation | July 25, 2008, 3:54pm | #
Red Herring Alert!!!! Red Herring Alert!!!!P1t | July 25, 2008, 5:07pm | #
I wonder what newspapers those people are reading. From an article in the Financial Times (Unfortunately, I cannot find the article), there is evidence that prices are rising for commodities that are not subject to speculation (I think it was tin), therefore speculation is not a very good scapegoat. Furthermore, the same article mentioned that regulating speculation does not preventing prices from varying wildly. (I think it was the onion). I can see why airline companies want to regulate it: they just want form a club of legit speculators and they want to be the only members. Unfortunately, I can see the average Joe and Jane agreeing to them without giving a thought. For those types of regulation, the only ones who are getting royally screwed are the consumers. But who does have the time to do a cost-and-benefit analysis on a regulation?Kwix | July 25, 2008, 6:02pm | #
Sadly many(most?) people are ignorant of basic economics and even more so of futures markets (I fully admit I have no clue about futures).The sad fact is that most people are afraid of what they don't understand and are easily swayed into thinking something or someone is "evil" if they don't comprehend all of the facts. Oil speculators and the oil futures market is no different.
Brandybuck | July 25, 2008, 6:09pm | #
So why are all the airline speculators telling you to tell congress to stop the speculators? Because as large corporatiosn, they have the advantage of size. They have the legions of lawyers necessary to wade through the upcoming speculation regulations. They're big enough to afford the pay spot prices if they have to, especially when the same regulations prevent small startups from entering the industry.James Butler | July 25, 2008, 6:24pm | #
From the LA Times: "The Commodity Futures Trading Commission on Thursday alleged that Dutch trading firm Optiver Holding manipulated trading in New York futures contracts for oil, gasoline and heating oil in March 2007 -- and turned a profit doing so. The case comes a day after a CFTC task force issued its preliminary report on high oil prices and found no basis for blaming speculators."Nice. I guess with "dozens of investigations" going on, it's tough to get them all to line up with the wonkifications ...
lpcowboy | July 25, 2008, 6:34pm | #
It is typical of progressives to characterise invesments they don't like as speculative. THe truth is all invemsnets are speculative; even government bonds speculate the debt won't be repudiated and inflation will be low.What is odd is the airlines are promoting this view. Regulation won't reduce prices, but may increase overhead, and volitality. The airlines may have some trading algorithm that performs well with high volatility, but those things tend to suffer from the problems depected in the movie pi.
John | July 26, 2008, 11:47am | #
I think its a bit disengenious to call everyone using a market speculators in this sense. Southwest's use of a Futures Market like this is what it was developed for. If SW played it better than American then that's totally fair. Outsiders who will never actually take delivery of the oil combined with unsubstainable hedging levels is a distortion of that market.I thought this was an article about how I could get into the game, but it was an equivocation on "Speculate."
I agree with John, "..Outsiders who will never actually take delivery of the oil combined with unsubstainable hedging levels is a distortion of that market."
JMR | July 28, 2008, 5:04am | #
Conservatives are also whining about a need for more regulation on oil speculation, with the usual exceptions like Walter Williams being ignored...JMR
New World Dan | July 28, 2008, 10:26am | #
But the real question is... does demand for futures contracts affect the spot price of oil. And my sense is that on a short term basis, the answer is yes, and on a longer term basis, no. That is charachteristic of markets in general. They make a lot of short term mistakes, are prone to groupthink and herd behavior, and can be subject to short term manipulation. After all, tech stocks and housing prices certainly weren't basend on irrational exuberance.Gabe Harris | July 29, 2008, 4:57pm | #
to whatever degree speculators push up prices in the short run...they also create additional incentives on the demand side to investigate ways to cut demand and on the production side to increase supply...thereby actuallly lowering longer term prices.Healy | July 29, 2008, 8:51pm | #
What should be the proper margin requirement for trading in oil futures? 1%? 50%? Or should the individual trading firms decide themselves what margin to require from their customers, if any at all?Bruce Majors | August 6, 2008, 5:16am | #
Research shows more oil drilling will lower pricesProfessor Morris Coates and another professor recently conducted a study to examine what the impact of opening up ANWR would be on today's oil prices. Their conclusions speak for themselves:
"We find that oil that is expected to reach the market some years hence has an immediate impact on oil prices," and that "if oil firms were allowed to drill in ANWR and many of the other areas that are currently off limits to oil production, it is possible that these areas together might have a significant impact on world oil prices."
That is, "will lower prices." When these two authors - both economics professors - submitted their findings for publications to a prestigious energy journal, what was the response from the rarified world of economists? It was rejection -- but not for the reasons opponents of opening up new areas for oil and gas exploration would like to believe. No, their study was rejected because their conclusions were so obvious and so well-known - since the 1960s in the field of economics -- that the two authors were not offering up anything new that merited publication.
Letter from Energy Journal
Although the referees, and I, are in agreement with your basic argument, I regret to say that we will not be able to publish this work. Basically, your main result (the present impact of an anticipated future supply change) is already known to economists.
If Hotelling didn't exactly spell this out in his original article, certainly Herfindahl and others had done so by the 1960s. It is our policy to publish only original research that adds significantly to the body of received knowledge regarding energy markets and policy.
All the economists know it. How about distinguished Senator Maria Cantwell?
How about the people of Alaska? Governor Sarah Palin says that developing ANWR would benefit them.