With the recent unrest across the Middle East and the ensuing steep rise in the price of oil, a great deal is being said and written about U.S. oil companies and speculators in the oil markets. The same rhetoric was being thrown around back in 2008 when gas prices topped four dollars per gallon nationwide. Of course, no one likes paying through the nose to fill the tank of his or her car. But let’s take a step back and look at the issue.
On Monday, Bill O’Reilly argued on his show that oil companies are using the unrest in the Middle East as an excuse to drive up the price of oil. This is a commonly heard sentiment among Americans and has been since the oil crises of the 1970’s. But the reality is that the price of oil is responding — and always has responded — to fluctuations of supply and demand. Demand for oil, while not frenzied, has been fairly steady with the ever-so-slightly improving economy. The shutdown of supply, or even a perceived potential shutdown, is enough to drive up prices.
But probably the larger factor in the uptick of prices is the role of speculation. Back in 2008, the oil speculators were vilified and denigrated to the point that legislation (sponsored by Sen. Carl Levin, D-MI) was being proposed that would have curtailed speculation in the oil markets.
But what, exactly, is speculation? Merriam-Webster Online defines it as, “assumption of unusual business risk in hopes of obtaining commensurate gain.” I might take exception with the word “unusual,” but it basically boils down to this: investing money (real or borrowed) with the express purpose of realizing a substantial gain in the process by selling the article or commodity for a profit.
It is possible to speculate in just about any market: Some people speculate in real estate. A builder will often build a “spec home” meaning that he or she puts up the money (or credit) to build a home hoping to turn it over for a profit when the right buyer comes along. One might look at this as, “Build it and they will come.” Other people speculate in rare metals such as gold, silver, or platinum. Gold has received a great deal of attention over the past few years with its unprecedented rise — going from less than $325 per ounce in early 2003 to $1,400 today. People who speculated in gold early on have done very well indeed. Others speculate in soybeans, sugar, cotton or other agricultural commodities.
Playing the stock market is, in the literal sense, a form of speculation. But uncertain economic times such as we have seen for the past three years are a fertile environment for speculators who are looking to shelter their money in tangible assets as the dollar continues to decline in value.
Stock prices have gone up over the past year or so. Soybean prices have risen. Sugar prices have skyrocketed. Why are the investors in these markets not denigrated and vilified? Why does Sen. Levin not espouse outlawing speculation in gold or silver or sugar or soybeans?
The media and mainstream America should point the finger where the blame needs to be pointed: (1) at failed federal policies that have stifled domestic oil production and refining; and (2) at the Federal Reserve, which seems hell-bent on destroying what little is left of the U.S. dollar’s value.
James Sharp is a middle-aged, middle-class, middle-management sales guy. He believes in a strong military, limited government and unlimited opportunity for all US citizens.