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Speculation on Oil



Thoughts in the manner of Hazlitt:

Any commodity market is of necessity about hedging from more than one side, as well as about speculating.

An industry that consumes a lot of energy (say, an electric utility) wants to hedge against the price of its supplies spiking up, just as the suppliers, in Texas or Saudi Arabia, want to hedge against the possibility of a sharp downward move. So the markets can serve both hedges.

No: there is no reason why this should artificially drive prices up. Anymore than it artificially forces them down.
 
The risks of fluctuating crude oil prices will be borne by somebody. The risk exists, nobody other than an advocate of central planning believes that it can be ordered to go away. Somebody will bear it. Utility company, oil producer, speculators, or some combination.

Under normal conditions, then, by letting speculators come in to play a role between the two hedging operational parties I have mentioned, commodity markets perform the valuable role of taking some of that risk away from the operating companies. They aren't doing it to be nice, of course. They are doing it because they are looking for a return.

Still, it is nonsense to suggest as some individuals always do that the whole process drives prices up. Why would it not drive them down (since speculators can bet on a price fall as easily as they can bet on a price rise)?

You might ask, "whence comes the profit speculators make, when they do make a profit?" This question, when unanswered, may stand behind a good deal of the suspicion that the process of exchange listing and consequent speculation drives prices up. So let's answer it.

In addition to the obvious answer: the profit to speculators who are right comes from those who are wrong! -- there is a slightly less obvious, and less Vegas-like, answer: the profit comes as a reward for providing predictability. Both the utility company and the oil producer want to be able to rely on a particular price, or at worst a reasonable band, for their revenue or cost estimates for the next quarter or the next year. Day to day uncertainty is tough on them both. Here their interests coincide. The successful speculator allows them both that assurance, as does the market in which all three parties meet, and in which the speculator lives and breathes and has his being.

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