I read with skepticism an editorial in a prominent paper today entitled Stop the Speculators about how we should blame "Big Wall Street Banks" (a direct quote, as juvenile as it sounds) for the price of rising oil. This is essentially a reprint of every populist gripe about the high price of oil (and hence, gasoline) that Americans experienced last year. Here are some quotes from the editor that essentially sounds like a politician looking to curry favor with ill-informed constituents prior to an election to rile them up and put an evil face on traders, energy companies and well, anyone but 1) the US population, 2) a complete lack of a comprehensive energy policy and 3) a Fed that's printing money like it's goin' outta style. Rather than giving a page to consumers on say, how to hedge fuel prices as an individual consumer, instead they printed this dribble. I could nitpick this thing apart line by line, but I'm just going to try to stick to a few key paragraphs:

"One of the most basic concepts of economics is the law of supply and demand, which helps determine the price of goods, services, and commodities. Unless, of course, that commodity is crude oil.

Just ask the motorists getting gouged at the pump by soaring gas prices what happened to basic economics."

OK, so first of all, this editorial starts off like my 8th grade term paper...um, so, word X is defined in Webster's as... but I digress. Oil is arguably the most efficiently traded commodity on the planet. To claim that the law of supply and demand breaks down for oil more than any other traded instrument (like swine flu stocks jumping 100% in a day was based on rationale supply OR demand of anything other than hype?) is misguided. Oil trades on perceptions of everything from future supply and demand, interruptions to supply, growing demand in emerging markets that previously did not consume oil to the degree they will in the future and so many other factors that the actual price movement of oil simply cannot be predicted with any degree of certainty. Current supply and demand is an afterthought. I mean, look at the macro view of the market now. Is it logical that with unemployment hitting 10% soon, the market has rallied 40% since March? Does this make sense in the author's model of "supply and demand" for beginners?

Consumers getting gouged at the pumps? Is that what you call it when the country hasn't built a new refinery in how many years? NewsFlash! Oil and Gasoline don't have a perfect 1.0 correlation. Take a look at this chart comparing the price of oil with gasoline via their respective ETFs. Gasoline has its own capacity constraints, crack spreads, and oh yeah - those evil speculators as well! They are each their own beast and let's see, now perhaps we can blame two evil sets of speculators. And really, is gouging such a bad thing? As controversial as it may sound, if it did occur, it actually might help temporarily restrain demand, hence lowering prices for those who really need it. I mean, how did those gas lines work out for everyone in the 70s with price caps on gas and the subsequent rationing that occurred? It's as simple as letting the free market dictate the prices - if one gas station tried to gouge, there's one up the road looking to take away those customers with lower prices.

"Then, there are the Wall Street speculators.

Big Wall Street banks, like Goldman Sachs and Morgan Stanley, as well as pension funds and hedge funds, are helping to drive up prices. These firms are buying up oil futures contracts as a hedge against inflation.

Aren't these some of the same investment firms that drove the economy over the cliff, and then needed a taxpayer bailout?

Now they are back in action."

Those evil speculators. They're "helping to drive up prices". Are they? I started posting in 2008 about the oil contango which ended up resolving itself with higher prices, but this was seen from a mile away from a part time blogger. Was this me "driving up the prices"? The last time I checked, there were no pension funds or hedge funds participating in a taxpayer bailout, just the big Wall Street Firms with the real lobbying dollars and ex-CEOs in cabinet positions. But really, what does a bailout have to do with their ability to trade oil? Shouldn't they be TRYING to turn a profit so they can actually PAY BACK the bailout money to begin with? I'm not sure what the author's getting at. If their energy analysts predict a rally in oil, shouldn't they trade on that advice? Oh, let's see, if you took bailout money, you shouldn't try and execute a profitable trading policy to fulfill your fiduciary responsibility to shareholders (including the government). I just don't see the connection and it's just more juvenile fodder for the gullible reader. Oh, and why do we have inflation on the horizon? Hmmm. no mention of our government's monopoly money game or perhaps the prospect that our currency won't buy what it used to in the future.

The article then goes on to cite some government-sponsored reports blaming speculators for part of the oil runup last year, which I'm sure won some praise from angry consumers. This article, and others like it fail to recognize the reality of complex, volatile markets such as this:

• Speculators have always been able to speculate on the price of oil - they've been doing it for over a hundred years and they'll continue to do so into the future. Investors can speculate now on 3X Leveraged ETFs with no collateral!

• Why is it that 2008, and again in 2009 - these are the only times that the evil speculators chose to wreak havoc on oil prices? Why weren't they doing this in 2006 or earlier this year as oil prices sank? Oh, and how were those speculators doing when oil dropped from $140 to $30 a barrel? They got slaughtered. There IS risk to speculating and the speculators aren't getting a free ride since prices can decline precipitously as was evidenced recently. In short, if it were this easy and the "evil speculators" could manipulate prices upward at will, wouldn't oil be on a continuous upward slope to infinity? Well, perhaps they all conspire together in the "evil speculators' fraternity" as they conjure up a cartel-like manipulation of the oil markets.
  

Congress, with their dog and pony hearings and the naive gas boycott movement each summer - it's all pretty silly when you consider the facts.


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