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Oil and the Futures Market

There’s been a lot of hoo haa recently in Congress and on some of the cable news networks about going after the speculators on the futures market.  Some say that trading oil on this market is a large contributor to the recent spike in petroleum prices, and thus, gas prices.

I’m going to be the first to admit that I don’t know a lot about the futures market myself.  I think it’s often misperceived as “this guy says oil will be $200 in four months, so watch out.”  At least, until I started doing some actual research, that was my perception.  Actually, it’s a lot more complicated than that.  Some libertarians think that Congress is frankly foolish to go after the speculators, arguing it won’t do a lot.  Tarran over at The Liberty Papers has an excellent post that should give anyone a primer on the futures market and how it affects oil prices.

I enjoyed receiving a bit of an education on the futures market, but I did notice one flaw with his post.  I’ll just cross post what I put in his comments section:

I think in the case of oil, you’re making it far too simplistic. The problem that I see is you argue that the speculators keep oil off the market to encourage more production.

The problem is that it’s not happening in this case. And until either domestic production gets ramping up again (with drilling on the continental shelf, ANWR, or whatnot), foreign producers increase their production, or both, this theory is hard to apply. I think everybody knows there’s a political aspect of it that you haven’t considered here, whether it’s the unwillingness of Congress to allow more domestic production, the war, or strained relations in the Middle East.

I think what is written here would work for a commodity not so politically embroiled. It’d be perfect in a true laissez-faire society, but in reality, it’s a lot more complicated.

Yet, after reading his explanation, and watching Jim Cramer talk about it on MSNBC’s Hardball today, I’m now very skeptical that an attack on the speculators will actually do much about the problem.

So, back to the drawing board. One that obviously needs a combination of increased domestic production of oil, advances in synthetic oil, as well as research and production of renewable fuels. Then just the consumer decide. Like I said on another blog the other day, if drilling in ANWR or on the continental shelf really does take 10 years to yield results, consumers will probably grow sick of the wait, and then be clamoring for ethanol or something else.

Speaking of ethanol, hope we see that highly touted switchgrass on the scene soon.  I’ve got a feeling Bush is getting a kickback out of suggesting it as the source, but at this point, I really don’t care.  Better than corn, and most everything else, from what I’ve been reading.

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