Just listening to CNN, one of the talking heads listed speculation in the oil markets as one of the reasons for high oil prices, the implication being that the situation would be better without speculation.
Let’s be clear about what speculation is, it’s people buying oil today, betting that its price will increase in the future, and in doing so they make the price increase today.
I would argue that speculation is generally a good thing, because it tends to make the future happen sooner than it otherwise would. In other words, speculation is capitalism’s foresight, it makes the markets try to predict the future, and adapt accordingly.
Of course, sometimes it can get out of control, where people start to speculate based on predictions that are themselves the result of speculation – as with various bubbles over the years, causing behavior that may be rational at the individual level be irrational at the group level.
In this case though, I think the high oil prices are likely to do what no amount of regulation would ever do in the US – which is to force people to find ways to use less oil, to force them to change their behavior.
Most people don’t like to be forced to do anything. A change of career can mean retraining, and sometimes a pay-cut. A change of location means a lot of effort and money to move your stuff, not to mention waving goodbye to your social circle (something I’m painfully familiar with). A change in your company’s expenses can mean lower revenues until you figure out a way to compensate, and that may cost money.
Nonetheless, change is often necessary. The alternative, which often involves protectionism or other forms of government manipulation of the market, tends to delay rather than prevent change and exaggerate the eventual trauma when it happens. Look at the British miner’s strikes in the 80s for an example of this.
Speculation, on the other hand, will tend to force change earlier than it might otherwise occur, and often make it occur more gently. In the US, the high oil prices already have the automobile manufacturers scramling to catch up with their Japanese and European counterparts in-terms of fuel efficiency, something that can only be a good thing for our long-term future.
June 12, 2008 at 4:43 pm
“Let’s be clear about what speculation is, it’s people buying oil today, betting that its price will increase in the future, and in doing so they make the price increase today.
I would argue that speculation is generally a good thing, because it tends to make the future happen sooner than it otherwise would.”
Hmmm, but what if a group of organized speculators placed heavy bets that oil (or another commodity) would rise by buying lots of futures contracts, drove the price up, sold the contracts, heavily short-sold the commodities to try to drive the price down, bought again at the reduced rate etc?
Should we try to legislate against this kind of behaviour, or is it all fair game? One can certainly make the case that all’s fair in love and war, that buying futures necessarily involves other parties agreeing to sell them at that price, ditto for the shorts etc. And you can make an argument that many kinds of behaviour (rent-seeking, arbitrage etc.) serve the useful purpose of forcing us to strengthen the system, shoring up the weak points that the arbitrageurs so kindly illuminated for us. But does this mean the behaviour is valuable in and of itself, as you seem to be suggesting? Because you can make a similar argument about the creators of computer viruses: those guys certainly keep us on our toes! And necessity being the mother of invention, certain useful technologies will surely have been driven further and faster as a result of the gadfly activities of virus creators.
You also seem to be proceeding on the assumption that speculators will act to drive the price in the direction in which it is in any case heading in the long term. This doesn’t have to be the case; it is clearly possible to try to engineer a temporary reverse of a longer-term trend, and to profit by it.