I’m tired of people blaming speculators for the rising cost of fuel. Futures traders play two very important roles that keep our economy strong.
First, they work for firms that consume that commodity and help them hedge against future price shocks. For example, the airline industry buys and sells futures on jet fuel every day. The result is stable, relatively predictable airfare. Families going on vacation, small businesses sending their sales representatives abroad, investment bankers preparing to fund new startups, and government officials returning to their districts from Washington can all do so because the futures traders, the hack press demoralizes them by calling them speculators, keep the price predictable.
Second, speculators not only drive current costs up quickly when future prices are expected to rise, but they have the opposite effect when future prices are expected to fall. If the government would release a plethora of new drilling permits as well as new refinery permits today, though it may be 2-3 years before those new supply lines come online, futures traders would start driving the price of oil down immediately. Firms sitting on oil and fuel reserves, using the price signals generated by futures traders, would realize that their hopes in making greater gains by selling their inventory at a later date have been dashed. They would dump their supply immediately, and immediately gas prices would drop… rapidly.
The real cause of increased fuel prices is the Fed. Look at this chart. I plotted the average retail price of gasoline in the US against the M2 money supply for the last two decades. Then I generated a trend line for the gasoline to smooth out the volatility. The result? Almost a perfect match.
As you can see, the trendline for gas prices is nearly a perfect match against the M2 money supply. The Federal reserve is 100% to blame for our rising pain at the pump.
A futures trader is not a gambling fiend like the pundits on MSNBC would have you believe. They are 100% rational, and they trade in the future cost of commodities based on the information available in the marketplace. They serve a wonderful role and give entrepreneurs price signals for the future cost of commodities. Put the blame where it belongs.
——- Additional Resources ——-
Peter Schiff predicting $10 – $20 gasoline: [LINK]
Me predicting $7 gasoline by year’s end: [LINK]
John Stossel on Innocence of Speculators: [LINK]
I enjoyed this article. It is refreshing to hear someone else out there not trying to pawn of the blame to corporations rather where it should belong. Oil would drop if we Started drilling again in the USA. In Utah, Wyoming and Colorado we have Trillion of barrels of Oil and we are not doing anything to get to it. We have so much oil there that it rivals OPEC Nations. Since the New Demand is coming from China and India But no thanks to the short sightedness of the Feds all our permits are canceled.
We could stop importing so much oil and Satisfy our needs and then export the rest. Then we could take the extra profits and reinvest in Alternative energy Projects so one day when oil is all used up we are not hurting at all to make the eventual change over. And then we can export the new alternative energy technology.
Thanks for commenting, Kris. The internet is full of refreshing people! Imagine how alone we would be in the freedom movement without the ability to connect online!
You are right, there is plenty of oil available, though I don’t really have a problem that we are importing so much and I am thankful that India and China are ramping up demand. Those are two very populous nations with some impressive entrepreneurs. Eventually someone will find a solution to the oil dependency issues developed and emerging nations all face. One thing is for sure, foreign dependency on oil is as much their problem as it is ours.
Thankfully, as more individuals are priced out of the fuel market, individuals will start doing what individuals do best: innovate. We just need to get the government off our back, out of our lives, and back under our thumbs where it belongs.
you people are a bunch of wackoffs, these speculators are whats driving up the price of oil just as much as the feds. Yes i agree with your point on drilling for more oil in the US and Canada but you speculators need to stop worrying about tomorrow and worry more about today.
Robert, with all due respect, you are absolutely wrong. Futures traders communicate to business managers, from the smallest sole-proprietor to the largest multinational corporation, the need to innovate alternative solutions before shortages occur. For example, if a major copper mine collapses in Utah, how is a plumber in New Hampshire to know that he should consider mastering the installation of PVC pipes rather than the traditional copper pipes? He isn’t an expert in mine output, refining, pipe fabrication, or wholesale logistics. He has no way of knowing whether or not there will be an affordable supply of copper pipe in the future. He has no way of knowing if he should learn a new skill. Enter the futures traders. Perhaps he is employed by a pipe fabrication firm. He instantly cranks out the math the very minute he receives news, and being an expert in mine output, copper inventories, and industry demand schedules, determines that the price of copper will increase 75% in the next 3 months due to the decrease in output from this one facility. So he enters into a contract with a local foundry to purchase 10 tons of copper in three months for 50% more than its current price, ensuring his firm a hedge against the coming price shock.
This futures contract sends positive signals in all directions of the supply chain:
This was an example in an different industry, but oil “speculators” serve the same function. They send price signals up and down the petroleum supply chain allowing innovators to do what they do best. Speculators can only be blamed to the degree that artificial price supports, easy credit, and moral hazards are made available to them by virtue of the Federal Reserve.