Why We Need Speculators


We’ve frequently seen the role of commodity speculators questioned this spring while gasoline and crude oil prices rose. But now that crude prices have dropped  9 percent in May, where does the argument against speculation stand? Mark Perry makes this point on his Carpe Diem blog:

 Since oil speculators got the blame for rising prices in February, do they now get the credit for falling oil prices in May?  How exactly does the “speculators cause high oil prices” crowd now explain the falling oil prices?  Do speculators somehow contribute to only rising prices, but not to falling prices?

That got me thinking about the consensus around this issue among those who’ve studied it closely.  Following is a collection – but by no means all —  of the recent pieces that highlight the important part speculators play in the marketplace, with some thoughts from each:


James Hamilton in The New York Times: “Even if there are no dramatic geopolitical events, continuing to increase production to meet the world’s growing demand is a daunting challenge. It is time we stop blaming the speculators and start to acknowledge the reality that we are highly dependent on a critical resource whose ready supply is not something on which we can count.”

Robert Samuelson in the Washington Post:  “We should exorcise the politically convenient notion that high oil prices result from the market maneuvers of greedy “speculators.” It’s convenient because it suggests that a solution to high pump prices — or a partial solution — is to banish the offending speculators from the marketplace. That’s fantasy.”

Tim Worstall in Forbes: “There’s just as much futures speculation in the natural gas market as there is in the oil market. How can such speculation in one market drive up prices while in the other it drives them down?”

Bloomberg Editorial:  “Yet speculators aren’t inherently bad. Quite to the contrary: They serve a vital purpose, helping create a market of buyers and sellers. Many academic researchers have found that speculators, by anticipating future price moves, can reduce volatility.”

Blake Clayton in Foreign Affairs: “What critics derisively refer to as “oil market speculation” is all too often a nebulous, epithetical catchall meant to bring to mind clandestine profiteering by financial tycoons at the expense of the rest of the nation. But casting the blame for high gas prices on speculators is sloganizing populism, not serious oil policy.”

Scott Irwin in The Washington Times: “There is no “smoking gun” connecting speculation to the rise in gas prices. In fact, just the opposite is likely to be true: Expanding market participation by different kinds of speculators likely reduces the cost of hedging, dampens price volatility and better integrates commodity markets with financial markets.”

Commodity Online: “The oil futures market cannot function without speculative traders providing liquidity and assisting in the price discovery.”

Donald Boudreaux in Newsday: “Speculation makes resources ore abundant when there is great scarcity by encouraging people to use those resources more sparingly when there is relative abundance.”

Howard Becker in American Thinker: “The fact that consumers benefit from the activity of speculators is not obvious, but it is true.”

Matthew Philips in Businessweek: “Do we really want to go back to 1973, when one morning we wake up and the price of oil has quadrupled overnight?”

The list goes on…


Gary Morsches is managing director of energy products at CME Group.

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