By JLP | June 30, 2008
There’s a very interesting Fortune article entitled In Defense of Oil ‘Speculators’ that I recommend checking out.
I am not an expert on the energy markets, and therefore I appreciated this article, which explains in simple terms some basic economic and futures trading principles – and common misconceptions. Here are a few interesting quotes:
If our representatives did understand the oil markets, they’d know that the true telltale sign of a speculative bubble is not rising trading volumes but rising oil inventories. Speculators would be hoarding oil – building up inventories either in anticipation of higher prices or as part of a scheme to drive prices there. Yet according to the Department of Energy, U.S. oil inventories are now at below-average levels. U.S. oil stocks stand at 309 million barrels, versus 330 million in June 2005.
By providing a mechanism for locking in prices, the futures market makes it easier for oil companies to make costly investments in new production – which is the key to lowering prices at the pump.
Futures trading also discourages hoarding in an otherwise tight market. Without speculators willing to take the other side of so many futures contracts, oil refiners and other end-users might be inclined to ramp up their spot-market purchases and store more oil as a hedge against further price increases.
Even if you believe there’s no way that oil trading volumes could be soaring without influencing oil prices, remember that influence then has to run two ways.
If an index fund is indirectly driving up spot oil prices every time it buys a future, then the converse must be true, too – there must be an equal and opposite downward push on spot prices every time that future is sold. In other words, futures market critics can’t have it both ways.
There’s something else politicians conveniently overlook: futures trading requires two to tango. For every investor who is betting oil prices will go up, there also needs to be an investor willing to take the opposite side of that bet.
There is a lot more in the article itself. Read it for yourself and share your thoughts. Do you think oil speculators are to blame for volatility in the energy market? And, more importantly, what effect do you think increased congressional legislation on the matter will have?
More from Meg at The World of Wealth