It's All About Speculators?

On oil prices, many of our big "D" politicians seem to be on a stationary bike; complaining, jaw-flapping, and peddling while going absolutely nowhere on lowering gasoline prices. For months, they have tried to blame the current oil situation on big oil company profits and CEO salaries. Then, they tried to blame the oil companies, again, by saying that oil companies have 68 million acres of un-drilled oil leases. Now, they are blaming the speculators.

The Democrats, now think, by using the term "speculators", they will deflect public opinion and they can "dodge" any new drilling in off-shore locations and in the Arctic National Wildlife Reserve. These political do-nothings think they have latched on to something "real" (this time) because the word "speculator" has such a negative connotation; almost (but not quite) as negative as the word politician!

However, they should know that not all "speculators" are equal. Some have absolutely no concept of what they are doing and no concept of the true risk of their "speculative" investment. These are called "blind" speculators. They just know that the value of something is rising rapidly and they want to jump on the "bandwagon" to make a quick buck. Their action is mindlessly based on what they have either heard or read. The world of commodities trading is littered with the dead bodies of people like this. A good example of this is in the Real Estate market with all those "house flippers" who got caught up in the "sub-prime mortgage crisis" and got stuck with a house or houses that they couldn't sell after the housing market collapsed. However, occasionally, based on good advice from "someone in the know", these "blind" speculators actually make good money. For example, Hillary Clinton managed to "turn" a hundred thousand dollar profit on a $10,000 investment in one year's time based on the advice of a professional commodities trader (See Full Story). Typically, though, most blind speculators are small players in the overall scheme of things. They are bit players, with limited funds and, who, generally, don't have any significant influence on prices.

What our politicians don't seem to understand is that the majority of those people they call "speculators" are cold, calculating traders. They are millionaires and billionaires with the money to make a difference. They understand the "thing" (housing market, corn, gold, oil, or whatever) that they are investing in. They minimize their risk through their expert knowledge. And, most importantly, they are nimble and wary enough to pull the plug on their investment when things start going awry(as opposed to the fools that lose big money and usually keep telling themselves: "It'll come back!"). These people are professionals. It is these people that clearly understand "that" the oil market is teetering on short supply. That makes oil an attractive investment for them with only limited risk.

They are "betting" two ways that the price of oil will keep rising (if you can even call it betting!).

First, they know that oil demand is growing faster than any new supplies. This is especially true because of the burgeoning economies in China, India, and Indonesia and throughout the Middle East and Asia/Africa.(See Full Story). Additionally, they know that the existing "old" economies in Europe and the United States can't conserve or provide additives (like biofuels) fast enough to offset any of the new growth in those developing areas of the world.

More importantly, these "professional speculators" know that big money will be made (over-and-above the current explosive growth in demand), if there is any major supply disruption in oil. This is what they are "speculating" on. It could be a destructive hurricane in our own Gulf of Mexico. It could be war between the Israelis and Iran or between other parties, elsewhere, in the Middle East. It could be successive "wins" by the rebels in Nigeria. It could be a terrorist attack on the oil production facilities in Saudi Arabia. It could be Hugo Chavez who makes good on his threat to stop oil deliveries to the United States. It could even be a successful terrorist destruction of any of our oil delivery ports or any of our oil refineries In fact, it is absolutely unbelievable that a commodity, like oil, that is so important to the health and welfare of the world's economies, is in such danger of being made unavailable. But, that's the "speculation" piece that the oil traders are banking on. And, our own politician's inactions (any new drilling) are feeding into this speculative "money machine" and big profits for the oil traders.

In recap, what makes "oil" an attractive trade for the speculators is: (1) the scarcity of any new supply, (2) the unbridled growth in demand, (3) the potential of any serious supply disruption, and (4) no real short-term alternatives to oil. If our politicians really want to send the speculators home packing, then they need to address the issue of supply which would negate the effect of items (1), (2), and (3), above. At the same time, we need to build a path to future alternatives (point 4). Realistically, you are not going to wave a magic wand and immediately eliminate the existing base of nearly 200 million vehicles (cars, trucks, trains, and planes) in this country that have no alternative energy resource other than oil. That base will take as much as 20 years to be replaced through normal obsolescence and attrition.

Our politicians may think they can "legislate" speculation out of existence. However, the world's biggest oil trading exchange is sitting in London; with another fast growing exchange in Dubai in the Middle East. And, believe me, Dubai is not going to do anything to abate oil speculation. If we try to clamp down on trading and speculation in this country, the speculators will just move off-shore to less hostile (less regulated) exchanges. Because oil is a world-traded commodity, the price will still go up or down; whether or not it is being traded in New York. The days where this country controls the price of oil are long over. Maybe when we produced more than 50% of the world's oil, we had influence. Now, we are a "buyer" in a "sellers" market and a "buyer" who "imports" more than 70% of its oil. We are the "junkie" who has to pay the price that the "pushers" ask. And, until there are more pushers than junkies, the price ain't going down. That's the crux of our problem!

See my related entry of yesterday on this same topic (See Full Story).

Image by siansparkles on Flickr with Creative Commons Licensing.