If you want to stop speculators you first have to identify them

The hedge fund manager who told the US authorities that the current oil price is twice as high as it need be thanks to speculators, told them what they wanted to hear and made international news. Readers of this blog will know that I think there is speculative money behind the latest rapid rise of the oil price: at some point the speculators will try to take their profits and the price will fall. Readers will also know that here in the UK the government and its taxes accounts for a far bigger part of the petrol and diesel price at the pumps than the oil producers and the speculators put together, which makes Mr Brown’s preaching on this subject rather difficult to accept. As the BBC pointed out today, a barrel of mineral water or a barrel of Coca Cola would still be dearer than a barrel of oil at current prices.

The problem with telling legislators there are speculators in sensitive markets like oil is that they will want to do something about it. They will want to look for ways of banning speculation. This is unwise, because it is technically very difficult to distinguish a pure speculator from anyone else.

People like to think that speculators are a breed apart – often seen as rich foreign traders capable of running a market ever higher, with impeccable senses of timing and access to vast funds so they can get in and out at huge profits to the detriment of everyone else. As a legislator I can see the attraction of trying to identify such people, and trying to stop them or tax them – it would be popular.

In practice, there are two major difficulties. The first is, if we stopped or taxed them more heavily here in London the business would just transfer somewhere else where there were not the same constraints. The second is that in a rapidly rising market as oil has been many people become speculators.

If people fear a price rise they fill their home oil tanks and keep them full. They are speculating on the future price by buying forward more than they would usually do. If people fear a petrol price hike they go out and fill their car and any reserve tank they hold. Businesses relying on road or aviation fuel buy more forward. When you get the annual report of your pension fund you may find it has bought into oil and commodity investments, trying to exploit the speculative trend. Charities, widows and orphans are as likely to be part of this speculative pressure on the oil price as our fabled rich slick foreign trader.

It is best to leave well alone when so many people have directly or indirectly, knowingly or unwittingly become oil speculators. You may be one yourself in a modest way. All such bubbles come to an end. If you want to help the oil price go down, buy less oil based products and find something else to invest in if you have some savings. (Please take appropriate advice – this is not investment advice!)

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15 Comments

  1. Kit
    Posted June 24, 2008 at 10:57 am | Permalink

    Coyote Blog is worth reading on this issue: So Where Are They Storing All the Oil?

  2. Neil Craig
    Posted June 24, 2008 at 12:29 pm | Permalink

    Speculation only happens if there is something to speculate about, otherwise they would just be buying dear & then having to sell cheap which doesn't work. My guess is that they are speculating that Bush, or McCain if he gets in &/or the Israelis are going to attack Iran, at which point Iran will not only turn off its own taps but close the Gulf to tankers.

    The fact that western refinery capacity is running at virtually 100%, in fact there is a shortage of capacity for Saudi heavy oil, also makes the system subject to hard knocks. This is because, for the last couple of decades "environmentalists" have prevented building more.

  3. Derek W. Buxton
    Posted June 24, 2008 at 12:36 pm | Permalink

    There was a programme on Channel 4 last evening where the presenter made a similar mistake. Talking of the high food prices he spoke to a "speculator" who boasted of making lots of money on corn futures, saying that they could only go up. Well up to a point, one good harvest or when the profits are enough, he will take the profit and then prices will collapse. Mind you if they go south first he takes the loss.

    Incidently, it was a really poor programme, more like the BBC than the "fearless" Channel 4.

  4. Mark Wadsworth
    Posted June 24, 2008 at 12:44 pm | Permalink

    Exactly. We won't know for sure that oil and food price rises were a speculative bubble until the bubble pops, if ever. So right now, it's too early to say.

    And, to those people who are sure that 'evil' speculators have doubled the price of oil (which is quite possible…), if they are so confident, then why don't they just sell oil or food futures, and make a mint when the bubble bursts? Do they have the courage of their convictions? Why did Al Gore buy a beachfront property? Continued page 94.

  5. Martin
    Posted June 24, 2008 at 12:57 pm | Permalink

    Totally agree John…..If nothing else the situation has made Joe Public realise at last, the appalling amount of tax levied on petrol. Martin

  6. APL
    Posted June 24, 2008 at 1:41 pm | Permalink

    JR: "It is best to leave well alone when so many people have directly or indirectly, knowingly or unwittingly become oil speculators."

    Well said Mr Redwood. I would qualify that:- it is best to leave well alone.

    Why is the government never called a speculator when it drives up the price of fuel for its own benefit? I suppose it isn't realy speculation which involves a element of risk, what the goverment does is form a cartel of one and fix the price of fuel for its own benefit.

    Imagine if BA and Easy Jet got together and decided a flight to Frankfurt would cost £1000? Can you imagine the outcry, the competition commission would be on to them PDQ.

    The price of petrol would be 75% lower if the government wasn't fixing the price at an artificially high level.

    Oh and one other question, why does the government think speculation in the oil market is bad, but speculation (which it has encouraged) in the housing market is good?

    The fact of the matter is, if the government hadn't debased and destroyed the value of the currency using its 'twin weapons of mass destruction', inflation and tax, over the last sixty years speculation would be on a much reduced scale.

    Where was the cash that is now flowing into oil speculation a year ago? It was in property and real estate, that bubble has now burst and sensible people are trying to maintain the value of their investments.

    The source of the speculative bubbles we see at the moment are not the speculators, they are just reacting in a rational manner to the climate set by the real culprets, government.

  7. Richard
    Posted June 24, 2008 at 2:42 pm | Permalink

    And lest we forget, the government "take" from oil is manifold. Under labour we've seen an increase in tax on the Oil producers, the refiners, the transport companies, Garages and at the pump. While nearly 70% of the cost of a litre of petrol is direct tax (fuel duty) almost 90% of the total cost comes from indirect taxes levied at every other stage of the production process.

  8. Derek
    Posted June 24, 2008 at 2:53 pm | Permalink

    More a case of stop it I like it by the government. I can't belive anyone thinks the government is really interested in cutting the price of something, that in doing so will reduce the amount of their own, desperately needed, tax revenue. All a lot of hot air, how unusual.

  9. mikestallard
    Posted June 24, 2008 at 5:35 pm | Permalink

    One thing bothers me.
    Everyone understands that China and India are demanding "our" oil.
    But why is the price rising so fast and so suddenly?
    We are told that Iraq is now more or less pacified. There do not seem to be many suddenly urgent problems either in the rest of the world – Iran has been going nuclear for some time now.
    So why is there this huge, sudden increase in the price?
    Could it be that people who need to save money are putting it into something safe (not housing, not specie, but oil and food?)

    It is so refreshing to hear a politician resisting the urge to interfere! For that I can speak for all of us and say that we are both surprised and grateful!

  10. Acorn
    Posted June 24, 2008 at 8:02 pm | Permalink

    I have just watched the best speech you have ever made – cost of living debate – and without notes!!!

    I have doubts about these nasty oil speculators. Say, today, about 82 million barrels of crude will have been sold into the world market. At 135 dollars a barrel, on average, that comes to about 11 billion dollars worth. In order to speculate on a price rise in the next three months say, your Hedge Fund, or whatever vehicle you are using for "futures" investment, would have to have access to a considerable pile of credit at current "margin" trading terms. Frankly, I don't see speculators affecting the price that much – what say you?

    In my day job, I get to talk to a lot of people in the energy business. Those people have one refrain, they don't know where this government is going. We have a situation where the UKs nine principle refineries are not prepared to invest large quantities of money, to correct the imbalance in product output because the risk is too high.

    Refineries have more gasoline (petrol) and heavy fuel oil than the UK requires. They have a shortage of aviation fuel and diesel fuel and are importing it. This has been caused by the the electricity industry's change from heavy fuel oil to natural gas for generation; but, most of all by the governments ad-hoc tax and duty legislation.

    If I owned a refinery in the UK, I would not be investing large amounts of money to change the product mix, I would not trust this government to give me a stable fiscal base to get my required return on capital employed.

    Redwood fans may be interested in a some background reading from UKPIA. Crude supply is not the problem, refining is.
    http://www.ukpia.com/publications.aspx

    Reply: Thanks for your comments. The main problem is growth in demand, but there could also be some speculative/investment money helping push up prices.

  11. John
    Posted June 24, 2008 at 8:57 pm | Permalink

    As Derek states, this government aren't interested in cutting the cost of anything. The Labour benches, void of MPs during the Cost of Living Debate today demonstrates their arrogance on the subject.

  12. William B.
    Posted June 25, 2008 at 4:44 am | Permalink

    As a humble retired lawyer I know precisely nothing about the technicalities of dealing in stocks and shares. What I do know is trading in stocks and shares is an established business on which many pension funds are dependent and in which individuals can make or lose a fortune from the decisions they take.

    It seems to me that the very nature of the business means everyone involved is a speculator in that nothing is guaranteed, the players have to use judgment when placing their bets then keep their fingers crossed. There is nothing more objectionable about players betting on the movement of oil prices than betting on the movement of a horse around Epsom.

  13. F0ul
    Posted June 25, 2008 at 4:30 pm | Permalink

    two points need to be made.

    Firstly, the oil speculators are mainly found in the oil futures market – The best link in the mainstream press is possibly this one – http://business.timesonline.co.uk/tol/business/co

    The article confirms that most futures deals are done using a deposit, rather than the whole amount. This allows traders to just gamble – knowing that they will be earning the rest of the cost when the future matures. – Its the oil equivalent to the 125% negative equity mortgage!

    Secondly, many of the biggest markets for oil in the world have a subsided price for their citizens. China recently increased their price on the street and the price of oil futures dropped!

    If our government wants the price of oil to come down (which they don't because the extra duty has been a god send) they would be best talking to India and China about removing this subsidy!

  14. Adrian Peirson
    Posted June 26, 2008 at 12:49 am | Permalink

    Another reason is that Prices are rising because the value of our money is going down, Printing more money devalues it hence adding to the inflationary process.
    Public Borrowing too adds further to inflation because Interest must be paid on Public Borrowing.
    Include Speculation and you can see that the Majority of the Price rises are avoidable.

    http://www.youtube.com/watch?v=GLnryKeQ16A

  15. Gordy
    Posted July 16, 2008 at 4:54 pm | Permalink

    In today's age where these speculators have forced high prices, governments run cowardly with thier tail between their legs, the best practice for any person feeling the inevitable pain and pinch of day to day living, should do as many are beginning to do – "BORROW" the gas wherever and whenever you can. Yes that's right, however, no worse than the oil companies and banks with their record profits. What is your return from your money they borrowed to make the profits.. 2%, maybe 3% of your bank savings… yes, if you don't touch it, but keep in mind, they made billions!
    Since the price increases, I have been forced to put a locking cap on my vehicle fuel tank. I have had my tank emptied 3 times, and yet my neighbourhood has not seen any crime and is quite well to do. So you tell me, who's the real theif? Maybe if it runs rampant enough, cities, states, and federal government may get a clue… aim to borrow from them first!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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