New Op-ed up at Fox News: Defending Speculators

You can read the entire piece here:

With oil prices closing above $125 a barrel of oil on Friday, angry politicians are blaming the higher prices on everything from speculators to greedy oil companies. Last week some Democratic Senators demanded “urgent action . . . to adequately investigate whether speculators are driving up prices.”

Democrats are proposing to protect the American people from “greedy oil traders who manipulate the market.” Senator Barack Obama wants price gouging by oil companies to be a federal crime.

Everyone wants lower prices, but many politicians seem unable to understand that speculators actually smooth out wild swings in prices. Speculators make profits by buying oil when the price is low and selling it when it is high, and doing that protects consumers. Tensions rose last week because of Venezuela financing Columbian terrorists. Columbia looked like it might retaliate and send troops into Venezuela, the world’s sixth largest oil exporter. . . .

More on the recent tensions between Columbia and Venezuela can be seen here.

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Blogger Cleary Squared said...

Hi John!

Excellent article! It puts speculators into a much clearer light, much more so than Congress ever could!

Cleary Squared

5/12/2008 8:34 PM  
Blogger John Lott said...

Thank you very much.

5/13/2008 12:58 AM  
Anonymous Anonymous said...

John, while I am a big supporter of your work as well as a strong conservative and proponent of the free market system, this speculator issue really troubles me. In my opinion, the supply and demand relationship is being held hostage by a handful of people who scour the earth for any conceivable reason to create an artificial shortage simply to make more money. For instance, simply the formation of a tropical storm in the eastern Caribbean, 3000 miles away from any oil rig sends the traders bidding up the price for fear of a supply interruption that will likely never happen. It seems to me that if they error enough on the high side, a wrong guess here or there won't hurt their bottom line, all at the expense of the consumer and the health of the economy.

Furthermore, if the oil companies are simply passing onto the consumer the market increase in the price of crude oil, there would be no increase in their profits. Since their margins also increase as the price of crude increases (as has again recently been the case), there is another sinister variable in the system that accounts for the increased profits.

Don't get me wrong; profit is a good thing. I think what bothers me the most is that it sure seems that the greed of a handful of privileged traders is perpetuating the market manipulation. This is not supply and demand; it's something else.

5/13/2008 8:55 AM  
Blogger John Lott said...

Dear Anonymous:

Thanks for your note. As prices go up, the inventories that oil companies have will also go up in value. The oil companies also make more money as the oil that they produce can be sold for more. But these companies aren't controlling the price of oil. It is the overall supply and demand that is determining that.

5/13/2008 1:38 PM  
Anonymous Anonymous said...

Precisely. And it's the speculators that are artificially manipulating the supply. If there was a true shortage, you wouldn't be able to buy what you need no matter how high the price rises.

5/13/2008 3:30 PM  

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