Oil Speculation

Everybody is complaining about oil prices. Congress, of course, feels it is their job to do something about it (why leads to inane proposals such as the gas tax holiday that I have written about before).

Republicans, predictably, are demanding more drilling, which doesn't really do anything about prices in the near term, and almost certainly won't do anything in the long term: by the time that oil reaches the market in 8-10 years, demand will have grown to the point where that capacity won't affect the supply/demand balance, it will simply help meet the overall appetite. It's also not really a solution to the extent that it only extends our dependency on oil overall. (My personal opinion is that we should use all of the oil from the Middle East and Africa and save our own oil for last. But I digress...) But at least the Republican proposal is somewhat rational in that it recognizes that prices are basically set by supply/demand and attempts to affect the supply side.

The Democrats, on the other hand, are blaming rampant speculation for the run-up in oil prices. They're almost certainly right about this. But the problem is that they want to do something about it, to "solve" the problem. And on this point, they miss the point altogether.

Speculation is not a "problem to solve." It is healthy, and necessary to the functioning of markets. Yes, it leads to bubbles (and I believe oil prices are in a bubble right now), but when the bubble pops it is the speculators who get punished. "Speculation" is nothing more than investment with a dirty-sounding name. But without risk takers who are betting on the price, the markets would be less liquid and less likely to arrive at the "right" price over time. Speculation is fundamental to almost all investments - holding any share of stock for the long term is a form of speculation, and we never refer to that as being a bad thing.

I have no problem with keeping oil commodity trading open and appropriately regulated, but I haven't heard of any true problems with these markets in this regard. But the Democrat's response here seems to be that because a (basically) functioning market is producing prices that we don't like, that something must be wrong with it and done to "fix" it. Remember how well price controls worked for the problem of inflation? The idea of reigning in bogeyman "speculators" has me more scared than the price of oil itself.