Tim Harford debunks the oil speculation myth

Over at Slate, Tim Hardford, the "Undercover Economist" and a favorite economist of mine*, tells people to stop blaming speculators for high oil prices. It's an often-repeated myth that oil speculators-- investors who bet on whether the price of oil will rise or fall-- are responsible to a large extent for the increase in oil prices.

Some of the major airlines even spammed their customers last week, asking them to raise a stink to their elected representatives about these greedy, America-hating speculators.

Harford contends that some speculators-- the profitable ones-- actually help stabilize the price of oil. For this he calls them "veritable philanthropists." He writes: "When they think oil is going to become more expensive, they buy and hoard oil, or they buy oil futures, encouraging others to buy and hoard. This raises oil prices when they are relatively cheap and lowers them when they are relatively expensive."

So it's the bad speculators we need to worry about then? Not so fast. "True, when speculators make mistakes, that is destabilizing. But in the case of oil prices, it's hard to see that speculators are playing much of a role. For one thing, inventories don't seem to be rising. If the inventory data are correct, consumers were burning all that $135 oil."

So maybe it's our fault for using so much oil. But how satisfying is it to blame ourselves?

[*Yes, I have a favorite economist-- actually several. They're like my baseball players.]

Filed under: Activism, Business, Transportation