Oil Prices and Speculation

President Obama today proposed new measures to curb oil speculation, which he seems to believe will help “protect consumers.”

Unfortunately, that dog won’t hunt; there is little chance that any such crackdown will have any material impact on gas prices.

As Paul Krugman once explained:

Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won’t. What direct effect does this have on the spot price of oil — the actual price people pay to have a barrel of black gunk delivered?

 

The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn’t make any difference.

 

Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that’s true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.

Author: Brandon Dupont

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