Jack Beanstalk Commodity

Just a few months ago, reactionary leftists were eager to blame “evil speculators” for driving up oil prices. Mark Perry asks: why don’t leftists give any credit to speculators when oil prices fall?

In the spring, there were concerns about Iraqi and Libyan oil supplies, as well as the usual seasonal increase in gasoline demand. In fact, under such conditions, it is never in any speculator’s interest to bid oil prices upward to “excessive” levels, above what is justified by underlying conditions. That would be a losing bet for the speculator. But when they bid prices upward in anticipation of tightening market conditions, speculators and market prices are broadcasting a forecast, providing information upon which other interested parties can act. In particular, the upward price movement encourages reduced consumption and conservation, and it creates incentives that bring forth additional supplies. Thus, by taking risks, the speculators play a valuable social role. Don Boudreaux of Cafe Hayek posted a letter he sent to Senator Ben Cardin on this topic back in June. It’s a fun read, but I doubt that it had any influence on Cardin.

As it happened, oil prices peaked in June. The increase in U.S. production from the shale boom has helped to ease conditions, as has strong Saudi production. Speculators can profit under such conditions by taking short positions in oil. In so doing, they encourage prices to fall, sending a signal to the market that production is too strong and that costly conservation measures have less value. The upshot is that such price adjustments prevent a surplus of oil and wasteful use of resources. Again, speculators take significant risks in the hope of earning an adequate return, and in so doing they fulfill a valuable social function. If anything, they should be lauded, not vilified.