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From the Chicago Tribune on Wednesday, July 2:
Presidential candidates Barack Obama and John McCain don't agree on much, but they've decided to blame speculators for soaring oil prices.
More than a dozen bills on Capitol Hill would restrict what Saudi King Abdullah described at a recent oil summit as the "abhorrent act of speculators acting for their own selfish interests." So there. If we stopped the speculators in the futures markets, oil prices would plunge and all would be right in the world. Right?
At the risk of incurring the wrath of Obama, McCain, Pelosi, King Abdullah and just about anybody who fills up his or her tank today, we're going to venture some reasons why you should love speculators.
Well, at least why you should respect what they do.
Southwest Airlines is about the only airline making money in America these days. One reason: Southwest locked in more than 70 percent of the fuel it expects to use this year at a price of $51 a barrel of oil. Southwest made a bet that oil prices would continue to rise and that $51 would look cheap by July 2008. Southwest looks pretty smart right now. But that hedge would have been impossible without somebody willing to speculate on the other side of that trade, to make a bet that prices would fall.
That's how futures markets work. Trades are matched or they don't happen. Farmers try to lock in high prices for their crops; food companies try to lock in low prices. Speculators bet prices will rise even more when they take the other side of the farmers' bet and that they will fall further when they take the other side of the food manufacturers' bet.
Speculators can try to make money betting prices will fall or by betting prices will rise. If they bet wrong, they lose money. Ever since oil topped $100 a barrel, more speculators have been betting the price will drop than that it will rise, Alan Reynolds, senior fellow with the Cato Institute, pointed out in the New York Post last month. So, if prices continue rising, those speculators will lose money. Commodity markets without speculators cease to be markets.
That won't keep the candidates, the Saudi king or Congress from railing against the evils of speculation. But it should give you reason to recognize why they are wrong. |
