How can the oil speculators be responsible? | Hacker News Reader

How can the oil speculators be responsible?

There has been a lot of noise (in Washington, in the media, on reddit, and everywhere else) about speculators being responsible for the rising price of oil. Of course, it is true that speculators help set the prices. But, I cannot imagine how the world's consumers can be tricked into overpaying for the liquid supply.

There is one obvious way this could be accomplished: but, it doesn't seem practical for speculators to take physical delivery of a meaningful amount of oil and drive up the price by restricting supply.

So, as far as I can tell, if speculators drive up the price of an oil contract beyond the natural price point they lose -- not the consumers.

Am I missing something?

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There are lots of ways to profit from causing fluctuations in prices. One is the classic "pump and dump" scheme where some speculators profit at the expense of others. In this market another way to make money would be to profit at the expense of companies that buy oil futures for their own use, like airlines.

Not so fast.

There are two kinds of futures contracts. One type is an obligation to buy at a future date at a specificed price. The other is an obligaiton to sell at a future date at a specified price.

Until said date, the only thing that one can do with such contracts is buy/sell them. When the date arrives, the only thing that one can do is pay and accept delivery or provide product and accept payment.

Speculators who are unwilling to accept delivery and store product can't cause a shortage.

Note that Southwest Airlines is paying a lot less for fuel than many of its competitors because it bought futures contracts with a delivery price that is lower than the current market price. (Southwest can accept delivery.)

Note that Southwest gets to decide when to buy futures contracts, so it's unclear how a "speculator" can make money by timing Southwest. (A speculator, of course, can make money by predicting future prices better than Southwest.)

You're assuming that the price of physical oil is independent of the futures market. In reality, the major gulf producers have set their prices using the futures market since '99. There's a good explanation of the mechanism here:

http://peakoildebunked.blogspot.com/2008/07/366-futures-pric...

In addition, though it's admittedly circumstantial evidence, the run-up in oil coincides quite nicely with this and the relaxation of restrictions against large-scale speculation in the futures markets.

gallon of gas cost was 1/4 ounce of silver in 1968, 1978, 1988, 1998 and is still the same in 2008. The only speculator here is Ben Helicopter imposing inflation tax on Americans, so they pay for all the stupid wars and bail outs.

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