Gary Weiss has a column over at Salon, praising the efforts of Senator Bernie Sanders to intervene further in the market. Sanders penned a letter calling for the Commodity Futures Trading Commission (CFTC) to tighten its grip on the commodities market and Weiss thinks it’s a wonderful idea. Weiss also calls for president Obama to use the same force being applied to Iranian markets in order to put an end to oil futures trading. You read that right; he wants Obama to impose the very same crippling economic sanctions on domestic oil traders in order to “hold down gas prices.”
He writes: “Frankly, given their destructive impact on consumers, I’m not really clear why we even need an oil futures market in the first place, or why speculation can’t be banned from the oil market entirely.” As ridiculous as that statement is, Weiss isn’t as ignorant as he lets on. In the same paragraph he notes that speculation exists in part as “a method of hedging against adverse price changes.”
The way this works, as I’ve written about previously, is described in part, in the middle of Weiss’ column. He quotes from a study produced by the St. Louis Fed that found “As producers expect a higher price of oil for future delivery, they will hold oil back from the market and accumulate inventories….” It’s precisely because commodity futures traders do this that prices remain as close to equilibrium as they do. Without a speculator, wild fluctuations in prices would exist such that it would become incredibly hard to price other goods accurately or budget for energy expenses.
All else equal,* during times of excess inventory, the price of a good will tend to fall, but as that inventory diminishes, the price tends to increase. This increase in prices sends a signal to entrepreneurs to either increase supply or find a substitute good to offer consumers. Because of inherent volatility, such as natural disasters, international conflict, etc., supply and demand can shift rapidly. (Think of the demand for generators or water following a hurricane or tornado.)
Speculators help to relieve these problems by purchasing some of the inventory during the times of plenty, and holding it until times of want. During the period where supply is unable to keep pace with demand, speculators have an incentive to sell their holdings, thereby increasing the supply of the good in question. The speculator, if he accurately forecasted the wants of the consumer, provides a valuable service and is in turn rewarded for his investment. If, on the other hand, he does a poor job of forecasting, he loses and is pushed out of the market.
Just imagine the difficulty a shipping company or airline might have in offering consistent prices if such activity weren’t allowed. If there weren’t middlemen willing to assume the risk of buying large quantities of fuel, shortages and surpluses would be pronounced, and planning around such fluctuations would be maddening. It is the middleman who bears the risk, thus allowing other actors to focus on their particular business.
*As I wrote a few weeks ago, all else isn’t equal. The Federal Reserve policy of QE has greatly expanded the money supply, thereby devaluing the dollar, which puts upward pressure on prices, in general.
But just for the sake of argument, let’s assume that Weiss is correct, and that speculators truly are a public menace. He quotes another St. Louis Fed study, writing “that speculation ‘played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse.’”
Well, as it turns out, the Fed was holding rates well below the market level during this period too, thus providing speculators the means by which to make their “destructive impact on consumers.” Without low interest rates and easy access to credit, how else would the evil speculators have been able to ply their nefarious craft?
So, we see that just as the Fed is the real culprit behind high oil prices in reality, so too are they the culprit in Weiss’ make-believe world.
Finally, I would like to note that my defense of speculating refers to the theory behind such activity in a free market. No doubt, some behavior in the current centrally-planned, quasi-fascist market is less than honorable. However, this is an indictment of the intervention and the very notion that an economy can be managed by technocrats in the first place, not of the spontaneous order that emerges absent government control.
As Tom Woods has noted, there were 115 separate agencies overseeing financial markets in the federal bureaucracy prior to the housing collapse in 2008. Adding a 116th isn’t going to suddenly “fix” everything; no amount of government regulation can substitute for the most powerful regulator – the market – and it certainly cannot reverse economic laws any more than it supplant the laws of physics or mathematics.