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!)