Statement by Leo Melamed on Oil Speculation and Politics
June 25
, 2008

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Accusing futures market speculators as the main source of the problem for high oil prices is the modern equivalent of beheading the messenger of bad tidings.

Legislation or government action which meaningfully interferes with the ability to speculate in the futures markets at best will prove to be a political embarrassment, and at worst will materially harm the US free enterprise system. Any lower price effect it will engender will be chimera.

Speculation, such as occurs on the futures markets, can only effect underlying prices in a temporary fashion, for a day or two, and then only on the margin. There are speculators who believe oil price are going up and who buy futures contracts. An equal number of speculators believe that prices will fall and they sell. The idea of blaming those who anticipate that prices will rise for the subsequent time period is not rational. To achieve a long-term or permanent effect in underlying prices, such as has occurred in oil, has to be based on either supply demand fundamentals, an unusual natural dislocation, government action, or manipulation.

In the case at hand, the oil rise is a consequence of both fundamentals and government action: A global increase in demand, and the debasing of the US dollar. That, coupled with government inaction: A failure over many years to institute a coherent and comprehensive national energy policy.

If the price rise is the result of manipulative activity then someone is intentionally buying and hoarding the underlying physical supply in question. That may be a legitimate action or illegitimate. If illegitimate, then it is a criminal matter and should be turned over to the CIA or FBI.

Blaming the futures markets is scapegoating, pure and simple.

Leo Melamed

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