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(Some) Speculators Are People Too

by Michael Levi
March 8, 2011

Here’s an iron rule of oil politics: when gasoline prices go up, calls to crack down on speculators increase alongside them. The current situation is no exception. Some who are calling for an SPR release argue that it would succeed by punishing, and thus deterring, speculation. (In the memorable words of one man interviewed by the New York Times, an SPR release would “spank the speculators”.) Others are calling for direct restrictions on speculative activity.

Set aside whether you think that it’s healthy to have lots of money sloshing into oil funds. (Daniel Ahn does a great job of explaining the arguments for and against in a recent CFR study.) If you go after speculators with blunt tool like the SPR, you have a second problem: you will hurt bona-fide hedgers too.

What do I mean? There are lots of firms that are exposed to oil price volatility. (Think airlines and petrochemical plants.) We want them to be hedging against oil price risk in the current (highly uncertain) environment. If we “spank the speculators”, we will deter them from doing that.

That’s fine if everything turns out okay in the oil markets. But if prices blow up, those firms will be exposed. A clumsy crackdown on “speculators” will have ended up doing exacerbating damage to the real economy.

This isn’t by any means an argument against all regulation of financial players in oil markets. Financial speculators have a mix of positive and negative impacts on the markets. But in deciding what to do about them, it’s important to remember that they aren’t the entire picture. Indeed the more that we can do to help and encourage actual consumers to hedge their exposure, the better.

Post a Comment 2 Comments

  • Posted by David B. Benson

    Just impose a small transaction tax on commodity price trades. A small tax will not deter those with an perceived need to hedge against future prices but would be enough to deter the presumed ‘speculators’.

    I have in mind around 1/2 of a percent of the strike price.

  • Posted by abarrelfull

    Paul Krugman on food speculation
    http://krugman.blogs.nytimes.com/2011/02/07/signatures-of-speculation/

    …….Many people on the “speculators did it” side like to point to financial data, especially large purchases of futures by various players. But food is a physical commodity, and plays in the financial markets can only move the price to the extent that they affect physical flows and stocks…..

    Based on this argument, speculators will only impact the spot price of a commodity if they create increases or decreases in physical inventories. As much of the speculation is in deviratives only, its very questionable as to how much they impact the price.

    [ML: Unless producers index their contract prices to the futures market, which implicitly will lead them to curtail production (or at least exports).]

    My explanation of the wish to blame hedge funds last time

    …….The reason that so much was blamed on the hedge funds, was basically nothing more than a good scapegoat. The oil companies discovered that there was actually one group of people less popular than themselves, and they took every opportunity to pass the buck…….

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