Tuesday, July 1, 2008

Should we Blame Speculators for High Gas Prices?

Many politicians and people are blaming speculators for the High Gas Prices. Should we really blame the Speculators?

In a previous episode of Mad Money, Jim Cramer does not mention speculators as one of the reasons for high gas prices.

In an interesting article by a Senior Writer (Jon Briger) at Fortune magazine, the writer makes a case for not blaming the speculators.

Two of his points:

  1. If our representatives did understand the oil markets, they'd know that the true telltale sign of a speculative bubble is not rising trading volumes but rising oil inventories. Speculators would be hoarding oil - building up inventories either in anticipation of higher prices or as part of a scheme to drive prices there. Yet according to the Department of Energy, U.S. oil inventories are now at below-average levels. U.S. oil stocks stand at 309 million barrels, versus 330 million in June 2005.

  2. There's something else politicians conveniently overlook: futures trading requires two to tango. For every investor who is betting oil prices will go up, there also needs to be an investor willing to take the opposite side of that bet.

    In the past, there have been times when the overwhelming majority of speculators were "longs" betting on higher prices, while their commercial-trader counterparts - i.e. traders working for oil refiners, airlines, and other end-users of oil - were the "shorts" betting prices would fall.

    But as New York Mercantile Exchange Chairman James Newsome explained to Stupak's Congressional committee, today's speculators are evenly split between shorts and longs. Moreover, the percentage of futures contracts held by speculators (as opposed to commercial traders) "actually decreased over the last year," Newsome told the subcommittee, "even at the same time that [oil] prices were increasing."

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