Speculators: Not to Blame for Higher Gas Prices

Written when spiking airfare prices prompted airline CEOs to blame speculators, this analysis applies to President Obama’s blaming of high oil prices on speculators:

Dear Sirs:

As if lost baggage, no legroom, and pathetic pretzels weren’t bad enough, airline customers now get to suffer through boring policy sermons from airline CEOs. Though most of us are used to witnessing economic confusion emanating from the Congress, having it delivered to my email box by Delta is a new experience – though one that I could do without in the future.

As they have since Lysias protested corn traders in Ancient Greece, speculators make a convenient target for Americans fed up with high energy prices. Of course, they have nothing to do with the real cause of high energy prices – vastly increased demand (to the tune of an increase of 9 billion barrels per day worldwide since 2000) and negligible increases in supply.

Oil speculators have virtually no impact on the price of oil because they do not ever hold any actual oil back from the market (my understanding is that pension funds, which buy futures contacts as a hedge on inflation, would find it both cumbersome and expensive to store oil in the stock room next to the printer toner). As such, speculators have as much impact on the price of oil as InTrade users had on Hillary’s chances of winning the Democrat nomination.

To the extent speculators have any impact on the price refineries pay for oil – and thus, what we pay for gasoline – the only means available to neutralize that impact is to allow for new energy production opportunities. Those who have staked out an aggressive, long-term position on the price of oil going up would lose their shirts – some much more – if they read portions of the OCS were to be opened for exploration. They’ve made a bet that oil will continue to rise, offset by other bets that oil will come back down to earth. Want to scare the long-bets? Unlock new supply.

While $490 cross country flights may be frustrating, many of us understand this price point as the consequence of airlines struggling with the same gas prices we all face at the pump. What we can’t understand is airline executives peddling economic illiteracy to us in our email boxes.

Sincerely,

Michael A. Needham

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