Fuels on the Hill
Congress has always had a soft spot for “experts” who tell members what they want to hear, whether it’s supply-side economists declaring that tax cuts increase revenue or climate-change skeptics insisting that global warming is a myth.
Right now, the welcome mat is out for analysts who claim that out-of-control speculators are responsible for $4-a-gallon gas.
Back in May, Michael Masters, a hedge fund manager, made a big splash when he told a Senate committee that speculation is the main cause of rising prices for oil and other raw materials. He presented charts showing the growth of the oil futures market, in which investors buy and sell promises to deliver oil at a later date, and claimed that “the increase in demand from index speculators” — his term for institutional investors who buy commodity futures — “is almost equal to the increase in demand from China.”
Synopsis
- In May, Michael Masters, a hedge fund manager told a Senate committee that speculation is the main cause of rising prices for oil and other raw materials.
- Master further stated “the increase in demand from index speculators is almost equal to the increase in demand from China.”
- politicians are eager to pin the blame for oil prices on speculators because it lets them believe that we don’t have to adapt to a world of expensive gas.
- buying a futures contract doesn’t directly reduce the supply of oil to consumers it “may” however encourae “some” producers to hoard oil.
- the usual telltale signs of a speculative price boom are missing
- growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included (iron ore is a good example because it is not traded in the futures market but its price has surged)
- Oil prices will fluctuate in the coming years but the long-term trend is surely up.
Why is it so hard to understand that there could be several different mechanisms at work on oil prices? We tend to want to talk in terms of absolutes but in reality there are complex competing mechanisms at play and oil is no exception. Each effect has different sensitivity to price. We can have speculation, rebel groups, war, falling dollar, etc factors that are all at play but the underlying cause with the highest effect is geologically and politically restricted oil supply.
