Speculation is a part of a natural business cycle
It was interesting to look over the newswire today and see that Barack Obama is speaking out against oil speculation and threatening to tighten “loopholes” in the oil trading industry that keep the government from investigating the effects of speculation. The market to Senator Obama: speculation is just a natural part of the business cycle.
As much as we hate it and its effects on prices, speculation is a part of a much larger economic cycle. The natural business cycle is full of speculative investments that bubble out and then pop, eventually leaving lower prices than were seen before the bubble. If oil is a bubble, its burst should bring prices back to $60-70 a barrel, but it might not be and we could be stuck at $140 forever.
Speculation should not become a political tool, if people are willing to pay $140 a barrel then the market has set the right price. We’re still willing to pay $4 for a gallon of gas, gas prices aren’t too high yet. And perhaps the market has better use for $140 oil than we do. Speculators are making a racket out of $140 oil, if the market can pay $140, then that should be the price.
Prior to the FED’s intervention and even existence, bubbles busted regularly. The markets and even banks would go through short, 6 month periods of panic where a large majority of the market would be wiped out then replenished as prices dropped and people reinvested. Now the speculation periods last years due solely to the influence of the Federal Reserve and interest rate manipulation.
No matter what the case, rising prices and speculation are not political events but a natural occurrence in a free and open market.
