According to press reports, France, the UK and the US want to limit speculation in oil futures to reduce price volatility.
1. To what extent can speculation actually influence the oil price?
2. Is it bad if "speculators" drive up the price?
As discussed in previous posts, the way it works is like this: If people expect the oil price to go up, they can drive up the price for future deliveries, thus encouraging others to store physically available oil as opposed to selling it to end users. This reduces the oil available for consumption today, and therefore drives up the spot price. It's hard to say what the effect on price is, but in a tight market, rather marginal supply changes can have big price effects.
So we established that "speculators" can potentially drive up the price if they think prices will anyway rise in the future. In theory, they can create a "bubble" on the spot market, but only if they encourage enough people to put oil into storage. But if so, is this a bad thing?
I would argue it isn't: If we all agree that oil is a finite resource, and will become progressively more scarce in the future, then it is the job of a functioning market to drive up today's price so that people use oil more efficiently today and leave more of it unused for tomorrow. Arguing for a low price today is shortsighted (and selfish, if the argument is made by people beyond a certain age).
In other words: "Speculators" that drive up the oil price don't cause harm. Quite the opposite: They help to achieve efficient intertemporal decision-making.
Though of course there's always the "us vs. them" argument: "We" (the people from oil consuming countries) don't want to pay too much money to "them" (the people from oil producing countries), even if that means inefficient intertempral allocation.
2:00PM Water Cooler 3/29/2017
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