Boudreaux: Don't curse the oil speculators
Nothing sparks spasms of poor economic commentary like rising oil prices. From left to right, pundits and politicians outdo each other at accusing evildoers of hurting good people. This week, a Democratic congressional committee held a hearing on the issue of high gas prices and excessive oil speculation.
Speculators are easy targets. They seem to produce nothing. They merely buy and sell and hope for prices to move in directions that will bless them with big profits.
In fact, though, speculators also bless the rest of us with significant benefits -- although too few Americans understand this truth.
Speculators should be celebrated -- not so much for their motives (which are no better or worse than normal) but for the socially beneficial, if largely invisible, consequences of their activities. Speculation makes resources more abundant when there is great scarcity by encouraging people to use those resources more sparingly when there is relative abundance.
Suppose a village on the west side of a mountain range has an unusually good wheat harvest, but a village on the east side loses most of its crop to drought. Everyone agrees that wheat should be shipped from where it's relatively abundant to where it's in short supply. Commerce and market prices ensure that such shipments occur.
Wheat prices in the drought-stricken east village will be high, while prices in the village with the good harvest will be low. So merchants will buy wheat on the cheap in the west -- causing its price there to rise -- and ship it to the east village, where it will be sold at a profit.
It's true that these merchants are motivated by self-interest. No matter. They perform the beneficial task of distributing supplies more equally and sensibly. Because of the merchants' profit-seeking response to the difference in prices between the two villages, people who need wheat less urgently are encouraged by higher prices to use less of it, so that people who need wheat more urgently get what they need. Surely this result deserves applause.
Speculators perform the very same task. The only difference is that, with speculation, people who need resources more urgently are separated from people who need them less urgently not by a physical barrier, but by time.
Speculators who anticipate that oil will be in shorter supply tomorrow than today can profit by buying oil today and selling it tomorrow. Oil is transported across time from today (when it's relatively abundant) to tomorrow (when it will be less so). Barrels of oil that would, without speculation, have been used today when they aren't so desperately needed are, with speculation, conserved for use tomorrow when they will be more desperately needed. Surely this result deserves applause.
Speculators do cause oil prices today to rise -- but these higher prices merely reflect the reality that oil supplies tomorrow are expected to shrink (if, for example, tensions continue to rise in the Middle East). Over the time span that includes today as well as tomorrow, oil has become more scarce. By understanding this, speculators drive up prices today, thus encouraging us to use oil more sparingly today. And that conserves more oil for tomorrow.
Today's higher prices not only prompt us to conserve more, they also prompt oil producers to intensify efforts to supply more. Oil deposits that are unprofitable to exploit at lower prices become profitable to exploit at higher prices.
Speculators might, of course, err. They're human. But such errors are kept to a minimum because when speculators err they wind up buying high and selling low. The wish to avoid such losses, and to earn profits, keeps speculators ever on the lookout for opportunities to transfer resources from times when they're unusually abundant to times when they are unusually scarce.
And surely this result deserves applause.
Donald J. Boudreaux is a professor of economics at George Mason University and author of the forthcoming "Hypocrites & Half-Wits."