TV commentator Bill O’Reilly rails against all sorts of things in an entertaining and at times even informative way. But when it comes to speculators manipluating the price of oil, he really piles on the scorn. This is all on behalf of the folks, you understand, ’cause he’s looking out for us. To help in this wothwhile task it might be good if Mr. O’Reilly put down the ratings reports and picked up an economics text. He would be better off for it, and so would his viewers.
During his Sept 17, 2008 Talking Points titled “You Have a Right To Be Angry Over the Economy,” Mr. O’Reilly asserted that capitalism is the best system on earth but it was susceptible to perversion by bad people. He claimed speculators “artificially” drove up the price of oil and that oil companies profited as a result at the expense of consumers who, presumably, had a right to be angry because they had to pay more for oil.
One thing is certain. Oil prices did go up, and then down. The price of West Texas Intermediate oil went from a low of around $90 per barrel in early 2008 to a high of $145.31 near the 4th of July, 2008. The price is now in the mid-$40 range.
Two questions emerge. The first is why did oil rise so high last year? A broader, more philosophic question is, why are supporters of the free economy (capitalism) like Bill O’Reilly so quick to blame price fluctuations on bad people?
First, the economics. Some do claim speculation accounted for 60% of the run-up in oil prices in 2008.
Others, including Nobel Prize winning Princeton economist Paul Krugman are not so sure. Krugman’s short paper here lays out two models, essentially applications of supply and demand graphs, to demonstrate how he thinks through his explanation. He concludes, “And here’s the thing: the actual data we have on crude oil don’t show the signatures of a market driven by speculative demand.”
Other economists like Gary Becker and Russell Roberts don’t think speculation is the villain here either, even though speculators may be involved. Roberts writes:
- “Three thoughts. First, blaming speculators for high prices has always seemed to me like blaming the thermometer for how hot it is. Second, airlines speculate all the time on oil prices. I assume they hedge against future price increases. Notice that in this plea, they distinguish between paper speculators and “real” speculators as if that matters. Third, is it not strange that of all the policies that the airlines could advocate to bring down gas prices (more drilling, a change in environmental regulations, etc,) they choose this one?
- The cynic in me says that the airlines must think it’s good PR to look like they’re fighting for lower prices and attacking speculators is about as riskless an approach you could choose.”
I think Mr. Roberts is on to something here. So, now for the broader question. Speculators probably are involved to some degree in oil and other commodity markets. Futures markets serve a stabilizing function for commodity markets. But placing speculative “bets” voluntarily with private money on how factors might influence prices, factors like political turmoil in the Middle East, or weather, or exploration trends, or alternative energies, or the risks involved in committing resources to oil production, is not on its face evidence of bad people. In fact, as Adam Smith pointed out, these invisible hands could be connected to smart heads that may actually do consumers of energy products some good.
For example, here’s how Robert P. Murphy describes the economic role of speculators:
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- “Here we see the true social function of speculation. By buying when prices are relatively low, and selling when prices are relatively high, the speculator makes prices less volatile than they otherwise would be. More important, the speculator snatches up oil during times of relative plenty, and delivers it to times of relative scarcity. It’s true that the speculator earns personal profit in proportion to the superiority of his forecasts, but this is no different in principle from the fact that the best brain surgeons earn a fabulous salary on the market.”
I believe critics of the free economy are too quick to read into price fluctuations evil intentions of bad people. It is curious, however, that even some advocates of free markets are tempted to see the deeds of greedy manipulators rather than the positive longer term outcomes of free market price signals. I am not denying that greed and manipulation are involved in oil markets; indeed, vice most certainly is involved to some degree. But the requirement of economics is to go beyond simplistic moralism to learn how speculators and other market participants, good, bad, and indifferent, provide things we can use.
Pope John Paul II, no softy when confronting sins like avarice and pride, put it this way: “It would appear that… the free market is the most efficient instrument for utilizing resources and effectively responding to needs.” (Centesimus Annus, 34)
In looking out for us, shouldn’t news commentators go beyond superficial moralism and share prominent economists’ views on how speculation may or may not have played a role in the oil price run-up of 2008?
Fascinating post! Far more worth while than hours of angry-man TV! Thank you for the insight…-Taiko
You are most welcome. Thank you for the comment.