In Defense of the Speculator

Truth be told, I get a kick out of defending those who are routinely pummeled by the left and the mainstream media, i.e., the pope, President Bush, "big oil," etc. Especially when it comes to matters of an economic nature, most of the left's criticism is purely emotion-based, rooted in nothing but good intentions. Brought to you by Prof. William Luckey:

After showing in the last article that the “greedy oil company executives” do not set oil prices, and to say they do is not only ignorant but calumnious, it is left to demonstrate that so-called speculators do not set the prices either.
To understand the whole thing we must examine what’s called the futures market. If you needed 1000 “pork bellies” today, you would have to pay what is called the spot price. That is the current, going price for pork bellies needed right away. Today one would have to pay 66.4 cents per pound of pork bellies. But supposed you needed the same amount of pork bellies in three months. You could purchase them now for delivery in three months using the futures price--63.5 cents per pound. The delivery might be for 10,00 pounds. Holding supply of pork bellies constant, i. e., there are no biblical plagues or miraculous increase in farm animals, you would pay a lower price for those future pork bellies, because it is a guaranteed sale for a pig farmer. So he would let these go at a discount. This is done by a contract, which means when the contract time is up, you get the pork bellies, which, if you are a butcher, you are glad to get.

One may, however, purchase pork bellies in the futures market without ever intending to actually receive them. One can contract for the same amount of pork bellies at the futures price, set to deliver to the holder of the contract in three months. In this case, the contract purchaser wants to hold the contract, but sell it to someone else prior to delivery, hopefully at a price closer to the higher, spot price, thus making a profit. Holding supply constant, those who need pork bellies now will look to you to sell them your contract. If demand increases, they will be willing to pay more for your contract, than they otherwise would. If the supply is greater than expected, they can get a better deal elsewhere, and if you sell, it might be below the futures price you paid originally.

It’s the same with petroleum, but the market is in a situation where the demand is increasing and the supply is more or less constant. If I buy a futures contract for 1 million barrels of petroleum for a three month delivery, which I do not want, the likelihood that the spot price offered prior to the delivery date will be higher than the futures price I paid today—due to the increased demand and constant supply. As a speculator, I will make a profit, not because I cause the price to increase, but because I correctly guessed that petroleum demand would be outstripping supply in the future. (This is not rocket science) Again, it is supply and demand, and the speculators are merely gamblers, although, for the time being, higher petroleum prices are almost a sure thing.

So, our Catholic television commentator and the Congress are completely wrong headed in wanting to control speculators. They do not control the price of petroleum. If, suddenly, the supply increased noticeably, the speculators would lose money because the price would go down due to drastically increased supply.

What some people won’t say to get viewership, or do to get votes.

http://www.drwilliamluckey.com/