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As oil prices fall, do speculators deserve credit?

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Michael Bastasch DCNF Managing Editor
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The price of oil on the futures market and the spot market has been falling rapidly, after rising sharply in the beginning of May, tumbling 21 percent this month.

It was only back in February when rapidly rising oil prices produced fears of a prolonged recession and stunted global growth. Many politicians, including President Barack Obama, blamed oil speculators, who bid on the future price of oil.

Obama said he wanted to protect consumers by “doing everything we can to ensure that an irresponsible few aren’t able to hurt consumers by illegally manipulating or rigging the energy markets for their own game.”

“We 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,” he said.

Democrats in Congress have echoed this sentiment as well. “We’re seeing gas prices rise long before the peak summer driving season — and excessive oil speculation is a key source of these cost spikes,” Democratic Ohio Sen. Sherrod Brown said.

Now that oil prices have been fallen 12 percent this month, how much credit do speculators deserve for the price drop? If speculators can be blamed for rising oil prices, do they deserve praise when oil prices fall?

Those are the questions Dr. Mark J. Perry, a University of Michigan economics professor and visiting scholar at the American Enterprise Institute, asked facetiously in an email to TheDCNF.

“[O]il speculators never get credit for falling oil prices, only blame for rising prices,” Perry wrote.

“To the extent that there is any influence on prices from speculators, that influence is very minor, and the speculators will be punished with losses if they bet against market forces,” he said.

Perry argues that blaming speculation for bidding up oil prices, while not crediting them for bidding down oil prices is a flawed argument. “The logic of the “speculators cause high prices” crowd is so inconsistent and flawed,” he said in a blog post.

Perry stressed that blaming speculators either way misses the underlying economic reality that oil prices are overwhelmingly determined by market forces, not speculation.

“I’m not convinced that speculators drive commodity prices away from market fundamentals. So when prices are rising, speculators are betting on the market, and the same when prices are falling,” he said in the email.

“Speculators are typically betting on the market forces of supply and demand and not against the market,” he said. “To the extent that they anticipate a continuation of weak demand and increased supply, they would be betting with the market, and helping to bring spot and futures prices down.”

Global market forces are responsible for driving the price of oil down, according to Perry. Global economic forces from the turmoil in Europe to slower growth in China and an increasing oil supplies have been driving down oil prices.

“We’ve also seen increased conservation efforts by both consumers and producers for oil/gas, which has keep demand down,” he added. “Further, there’s been a huge shift from oil to natural gas for heating homes and factories, another moderating factor on demand … with decreased or flat demand, and increased supply, we are seeing gas [and] oil prices coming down due to market forces.”

Perry does recognize that speculators play a role in oil and energy markets, but he’s sees it as a largely beneficial one. “Overall, speculators help markets behave more efficiently, by providing liquidity, increased volume of trading, and greater price discovery,” he said.

Blaming speculators for high oil prices, but then not giving them credit for low prices, makes political sense, but doesn’t reflect reality. Next time a politician blames oil speculators for high prices, remember that it’s global market forces, not speculators, that impact the price of oil the most.

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