Oil Speculators

Tweet

As the oil price continues to rise we hear of the evil speculators who are forcing the price up. Who are the speculators, as we learned the Oil Companies are owned by pension funds, it is time to look at who the speculators are. First a short lesson in the stock and commodity market. What the people are buying are called Future Contracts. A futures contract is buying something at a set price for delivery at a future date(Usually 3, 6, 9 or 12 months in the future). The advantage for the seller is that you get a set price for you product and for the buyer you are paying a set price. The seller wins if the price goes down at the time of delivery and the buyer wins if the price gores up. There are some people who are gambling that the price is going to rise and they can sell their cheap oil for more than they paid for it. But there is something happening in todays market. People or companies are buying and holding their future contracts and not selling them. Some experts believe what is happening is that companies that depend upon oil or gasoline to do do business are buying up now to set their prices and know what their costs will be for the next year. If I own a fleet of trucks and will need gasoline or diesel fuel in the future, with the market the way it is going I might want to buy today for delivery in 6 months and know what my cost are going to be so I can set my contracts with my customers. Many airlines have purchased futures contracts for their jet fuel to be able to project their ticket prices 9 months out. What is the answer to the problem of Speculators? Do we tax them for making a profit or do we take some of the uncertainty out of the market by announcing that we will drill where we find oil and reduce the restrictions on exploring and drilling. Do we look for alternative sources of energy? Do we develop new technology to reduce energy consumption? the answer is yes to all of these. One alone will not solve our problems.