In Praise of Speculators

This article was originally published at Values and Capitalism.

In recent years, the purported effect of oil speculators in raising the price of oil has sparked much debate and concern. Pundits of various political bents have sought an explanation for the rising price of oil among the activity of speculators, and legislation has recently been considered by Congress that would limit the profit margins of oil speculators with the goal of suppressing costs.

Summarizing perhaps the most prevalent belief about the role of speculators in altering the price of oil, President Obama argued this spring that the American people “can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.”

Additionally, initiatives like Stop Oil Speculation Now (now part of the National Airline Policy Campaign) have gained considerable support from industries that rely heavily on oil for operations, such as transportation and energy companies. These industries allege that financial speculators drive up the price of oil by buying and selling it with no intention of using it, and that such speculation must end if their corporations are to function efficiently—or “based on supply and demand fundamentals instead of profiteering strategies.”

But these critics of speculators grossly misunderstand the role of speculators in the modern economy, and if their attempts to limit speculators’ activity succeed, the economy will suffer.

To understand why, it is critically important to understand what a speculator does…

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