All the Op/Ed activity on this is being driven by all the political hand-wringing, which is fun to watch. Always good to know what the “right answer” is though, so one can make even more fun of the politicians as they run around in circles. Heh heh.

When someone buys an oil futures contract at $150 a barrel to be delivered in 6 months, he’s counting on the fact that the spot market price, or the price paid for “on the spot” delivery, of oil will be at least $150 a barrel in 6 months. If it’s less than $150, he’s obviously paid extra. If it’s more, he can be happy that he bought it for a lower price negotiated beforehand. If he’s an oil speculator, he can resell that oil for the spot market price of more than $150 a barrel. Supply and demand still drives the spot market price of oil, but all that happens in the futures contracting process is that either the speculator or the oil producer will lose a bit of money they could have otherwise had if they hadn’t agreed on a contract.

The only part in which he argues that speculators aren’t to blame is when he says that the data isn’t showing that speculators are indirectly affecting prices by causing sellers to hold back inventory… I’m not really sure you could attack this argument unless you looked at the data.

With respect to the massive jump in the price of oil per barrel, Terry’s libertarian keyword-laden paragraph certainly touches on (what I think is) part of the problem. Broadly speaking, in my opinion it is both the depreciation of the dollar and double digit inflation in the Gulf region that have driven this massive jump in prices. (That’s really all that I have to say about that, since both phenomena are widely reported.) The key thing to remember, as Terry says, is that the people who sell oil receive payment for it in USD.

Thanks for bringing up this factor (which I forgot about)!

You are thinking in USD here and the US Fed has been totally out of control printing Fiat money to fund the US Govt.’s profligacy due to all the wonderful demands for funding this and funding that the American people make of their representatives (attempts to bail out Countrywide and bankrupting Fannie Mae is the newest version of that one). The end result has been a major deflation of USD value in world markets. As Oil is priced in USD (still as of yet being the reserve currency of choice for petroleum producers – not much longer I bet), you and neither has that total economic idiot Paul Krugman (sorry couldn’t resist) haven’t looked at the effect of the dollar’s depreciation on oil prices. And yes, demand has had a major impact on price, but also restrictions on petroleum product production, misguided biofuel/ethanol substitution concessions to Iowan farmers in order to be seen to be “doing something” about “global warming” (junk science in my book). In fact, I would go to say that govt foolishness in intervening in markets and in irresponsibly printing money is perhaps the major factor in rising prices.

ChinaMatt, consumer consumption of oil products is only one part of the equation and not necessarily the major one. While it is fun to rail against profligacy or wealth, including the do gooder birkenstock Sierra Club crowd not willing to give up their SUV’s , the major driver of demand is industrial and the growth of mass consumption as China and India’s economies grow. BTW, I too hope that the recent increases will decrease demand here, but am doubtful. One reason for the increases is to correct for shortages, as the govt. mechanism of price controls inevitably led to shortages as the producers (even state owned as they are here) had no incentive to increase production of petroleum products to meet demand when every gallon of gas they sold was sold at a loss.

Just read an interesting short and concise article on price controls that explains things way better than I…. http://mises.org/story/3025

Now, the reason for the rapid increase lately isn’t the growth rate of the Chinese and Indian economies, but rather the growing wealth of individuals. It has more to do with the wealthy purchasing more gas guzzlers as status symbols and embracing a wasteful lifestyle.

I’m hoping that the recent increase in prices in China will help decrease demand, but I’m not holding my breath.