Interesting take on how oil is traded, what influences the price, and how the media never seem to get it right, all against the backdrop of Hurricane Irene. Not so sure about his seeming support of the Dodd/Frank Bill. Any bill with their names on it portends disaster for danger for the American taxpayer.
h/t Living The Dream
Thanks to Laura for the inspiration.
Whether it's fair for giant hedge funds and other speculators to influence the price of commodities is a complicated question, which is probably why it's so rarely addressed in the media. It's certainly not fair if one or more parties can exercise enough influence to manipulate the market. That's why Congress tried to make this type of trading more transparent with last year's Dodd-Frank Wall Street Reform and Consumer Protection Act.
But markets as big as the oil market aren't easy to manipulate. And having free and open markets is the core of capitalism. Not only is having speculators in the market fair, it's essential. Because by helping to establish clearing prices, speculators actually keep the supply of oil flowing.
Think of it this way. When speculators buy, they drive up the cost of oil. That, in turn, provides an incentive for Big Oil to go out and dig it out of the ground. When Big Oil digs more than is needed, those same speculators sell oil, forcing prices down.
In short, speculators help keep markets in balance -- as long as the trades they're making are transparent and they don't have the ability to manipulate prices, they're a healthy addition.
So the next time you hear some talking head on the evening news tell you that oil prices are higher because of unrest in the middle east or elsewhere, remember: That's not why oil prices went up. They went up because people on a trading floor decided that for whatever reason, they were willing to bet prices were heading higher, and they wanted a piece of the action.
Of course, even if these markets are ultimately fair, and you have the means to hedge against higher prices by buying stocks or commodities, the vast majority of Americans don't. What do we say to the people who are now cutting back on groceries so they can pay for the gas to get to work?
Most Americans are way more interested in what they can do to keep their Homes rather than what they can do about Oil and Gas prices at this point.
Posted by Brian