Speculating On Stupidity
Here we go again!
Political leaders on both sides of the big pond have once again begun to look for scapegoats in the lack of sufficient or immediate economic recovery. And once again their focus has turned to oil. Well, not so much oil, as those who make money speculating on oil.
UK Prime Minister Gordon Brown and French President Nicolas Sarkozy wrote an opinion in The Wall Street Journal that mirrors the sentiments of the clueless in the United States who believe oil speculators are the leading cause for the dramatic and volatile swings in oil prices.
To be sure, a massive influx or outflow of cash into or out of a commodity can play a part in the volatility of that commodity. But that holds true for all commodities not just oil. Some commodities are more susceptible to a higher volatility than others. Oil, for instance, has a higher volatility than copper, but both are driven by market conditions and demand. Watch the new home building forecasts and see what happens to copper futures.
I have no dog in this fight. While I do invest in oil stocks and ETF’s I am by no means a speculator. Commodity speculators are a rare breed and pretty smart cookies to boot. It doesn’t take much in the way of gray matter to figure out that since gasoline prices have dropped more folks are driving more miles. But speculators don’t look at the line in their local Amoco to figure out if oil is going up in demand. Their decisions are based on global forecasts and worldwide market trends. Commodities are global and so speculators must focus globally.
The massive run up in oil prices made a lot of people a lot of money. Conversely, the drop from over $140 per barrel to the low of $35 per barrel lost some folks more than their shirt. If speculators truly had the ability to control the commodities market you would probably see far less volatility and far fewer of them on the wrong side of the trade. Oil has since run back up to $73 per barrel and is now trading at around $63.
In every one of these cases, from the very high to the very low, each of these moves can be traced to the economic news coming out at the time.
The concern stated by the UK and French leaders and others is that oil plays a key role in the economic recovery. In what has become all too typical political rhetoric, Democrat Senator Byron Dorgan called for “curbing oil speculators looking to make a quick buck at the expense of American consumers.” The blatantly uninformed Senator Dorgan may know how to make a good sound bite but is completely sans common sense when it comes to commodity trading. Speculators are looking to make a buck by risking their own money, not the American publics. Risking the American public’s money is Congresses job.
It is estimated that a sustained 10% increase in oil prices can knock 0.4% out of any global economic recovery over a 12 month period. That is the last thing a commodity speculator wants to do. When it comes to oil and the economy one must first look at which is driving which. I am firmly in the IDS camp – It’s Demand Stupid.
As the economic indicators continue to improve, oil will continue to increase in value. Also, let us not forget that oil is trade in American dollars. As the US dollar slumps in value oil will conversely increase. The outrageous deficit spending undertaken by the US Congress, devaluing the US dollar has probably had far more to do with oil price volatility than speculators could ever dream of.
China is continuing with their unprecedented growth in both industrial and civilian areas. Millions upon millions of rural farmers have moved from their rice paddy to the big city and are now driving cars instead of ox carts. Iran, in the center of the oil producing Middle East is building nuclear weapons threatening stability in the entire region. Manufacturing forecasts for Asia, Europe and the US are all improving. And the oil related news goes on and on.
I am not looking for political leaders to be as savvy as oil speculators when it comes to what makes the price move. But for crying out loud, could you at least pick up a newspaper.
