Don’t Blame Me! Blame Those Damned Oil Speculators!

Obama has inserted himself into the oil speculation debate, adding his voice to the baying mob demanding that the usual suspects be rounded up for causing excessively high oil prices:

President Barack Obama on Tuesday blamed speculators for driving gasoline prices higher and straining American consumers, saying there was enough oil in world markets to meet demand.

. . . .

Obama said that global oil supply is adequate and that speculators are driving up prices significantly.

“It is true that a lot of what’s driving oil prices up right now is not the lack of supply. There’s enough supply. There’s enough oil out there for world demand,” Obama said.

“The problem is … speculators and people make various bets, and they say, you know what, we think that maybe there’s a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we’re going to bet that oil is going to go up real high. And that spikes up prices significantly.”

Glad that The All Knowing All Seeing Obama is able to assure us that “There’s enough oil out there for world demand.”  Was that before Libya, after, or both?

But let’s consider that last paragraph, about “speculators and people mak[ing] various bets.”  (Are speculators not people?  Or are some people who bet not speculators?  I’m confused.  Not least by the fact that we’ve been told repeatedly that Obama is so0000 articulate.  Or at least his teleprompter is.)

I say: don’t damn these people, but thank the Lord for them.  They are looking  to the future, and evaluating factors that could impact supply and demand in the future.  They are collecting and evaluating information to attempt to determine the likelihood that oil (and other commodities) will become more or less scarce.  This is essential because expectations about the future are crucial for our decision making today: how much oil to store, how many wells to drill, what kind of cars and machinery to build and buy.  You can’t do things right today unless you evaluate future risks carefully.

Yes, sometimes speculators arrive at pessimistic conclusions that cause prices to go up today.  But here’s the thing: without this “speculative” price impact, there will be no adjustments today to the risk of potential future shocks, meaning that the impact of these shocks will be even more severe in the future.

For instance, a rational response to a real risk of a future supply disruption in the Middle East–and does any sentient being believe that the risk of such a disruption has not increased?–is to store (and produce) more oil today.  That increased storage does tend to drive up current prices.

But let’s say that there is no informed speculation, and as a result no additional oil is stored or produced.  If a supply disruption indeed occurs, that oil that isn’t stored isn’t available to cushion the price impact the disruption causes, meaning that prices will spike more without the speculation than with it.  This speculation has made the present a little less pleasant, but only in order to reduce the likelihood of much greater unpleasantness in the future.

Indeed, if there is a criticism to be made of speculation, it is that too much information is collected and prices are too accurate.  Individuals collect information to earn a profit at the expense of the uninformed.  The expenditure of real resources to obtain a transfer is welfare reducing, all else equal.

Even if you buy that critique, though, you can’t criticize speculation on the grounds that Obama chooses.  By collecting information related to future supply and demand conditions, speculators acting as Obama describes ensure the more efficient allocation of resources over time.  Sometimes that indeed causes prices to be higher today–but that’s not a bad thing because it reduces the likelihood of even greater price spikes in the future.

Obama’s resort to populist anti-speculative boob bait is a piece with what we’ve seen in the last days.  I thought Obama and his people had figured out that he was overexposed and had limited his appearances.  But then he gave two speeches–one on Libya, the other on the budget–that went over like lead balloons.  Obviously acting presidential didn’t work, so Obama went back to the one thing he thinks he can do: campaign.

So in April of 2011, we’re seeing appearances and rhetoric that you’d expect to see in October, 2012.  Indeed, apparently the Ryan plan has stung him deeply, and he is responding in full Alinskyite “Pick the Target, Freeze It, Personalize It, and Polarize It” mode.  The level of mendacity is astounding, and in a perverse way, Ryan should be flattered.

How long did that era of new civility last?  Just asking.

This is distressing and revealing.  It is distressing because the nation faces a truly existential fiscal crisis.  It is revealing because it is now painfully obvious that the only thing Obama knows how to do is to fall back on political demagoguery and dishonest personal attacks, delivered in campaign settings long, long before the campaign should begin.

The fact that Obama has joined the anti-speculation know nothings reveals that he’s not the least bit interested in doing anything serious about energy either.  It’s so much easier to blame speculators who are actually providing the signal service of (a) ensuring that market prices reflect information about future supply and demand, and (b) thereby encouraging immediate responses in consumption, production, and storage that will mitigate the adverse impact of those future supply and demand risks.  That’s because it’s so much easier to shoot the messenger than to do something constructive about the message.

About Craig Pirrong 223 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

Visit: Streetwise Professor

8 Comments on Don’t Blame Me! Blame Those Damned Oil Speculators!

  1. Speculators are killing this country. OPEC has already upped supply to offset any losses caused by unrest going on in the middle east. The speculators are simply destroying the economy by artificially and unjustly driving up the price of oil.

  2. “They are looking to the future, and evaluating factors that could impact supply and demand in the future.”

    Right, like the one sole speculator that was proud to push oil over $100 for no other reason then he wanted to tell his grandchildren he was the first to buy oil over $100, a sound system built upon solid market fundamentals would never allow such scams flourish.

    • Also keep in mind that the speculators use no fundamentals at all. 1% of the oil supply is disrupted and they drive the price up by 5% or more. I understand the need for speculators, but to say they aren’t to blame is simply false.

  3. oh my God! Really. You are going to defend oil speculators?! They are buying these stocks, and raising prices, because they see a profit potential there. It has NOTHING to do with supply and demand. They say, “hey, the cost of a barrel of oil jumped $3 today, I think it will go up $3 tomorrow. I will buy more stock.” If enough people do that it becomes a self-fulfilling prophecy. In the meantime, the ENTIRE COUNTRY suffers due to high gas, food and other costs just so these people can have a better profit. I hope the bubble bursts and they ALL LOST ALL OF THEIR MONEY!! That would be the ultimate justice AND we would finally get even with them for the crimes they are committing.

  4. How can traders of ‘paper barrels’ of oil properly reflect demand? Maybe if they took delivery, otherwise they are spoiling our summer vacations or trying to drive down stocks to scrape up bargains.

  5. You boys would not be whining and crying if speculators drove crude oil prices downward right into bargain basement range. Those speculators would be your heroes!

    This is extremely difficult to manipulate prices of commodities and stocks short of committing criminal acts. Our stock markets, our commodities markets are simply auctions, highest bidder wins. There are sellers and there must be bidders willing to pay whatever price is asked.

    Interesting none are whining and crying about “manipulators” running the price of gold up. None were crybabies when home values skyrocketed. Public union workers such as government workers and teachers are manipulating their wage and benefit packages upward, not much complaining there although this is bankrupting America.

    Only reason you boys are complaining is gasoline prices are emptying out your wallets.

    Obama and Holder, shoot, they are simply lying to America, are simply campaigning for 2012 election year. Nothing will come of this except for those two wasting a lot of taxpayer money creating a false facade.

    Okpulot Taha
    Choctaw Nation

  6. End the oil subsidies with our tax money. Gasoline is the root of cancer. The oil industry spends tens of millions annually bribing congress according to published PAC records. Every known use of petroleum can be replaced by other green products. Have you seen the proof at:

    • That is not correct. There are thousands upon thousands of items that will not be replaced by ‘green’ technology, thermoplastic polypropylene composites is just one example. The simple fact is ‘green’ technology cannot exist without massive tax dollars subsidizing it. This tells even the most challenged investor to STAY AWAY.

      If ‘green’ technology was worth %50 of its hype it would not need stimulated and subsidized with my taxes and would surely not need its source data “science” protected by a team of lawyers.

      One thing I have noticed people are buying into these days is PROPAGANDA and there is surely no shortage of it in the “Climate $cience” stage.

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