Robert Samuelson has a column in today’s WaPo that should be required reading for anyone with influence on US energy policy.  He begins:

We should exorcise the politically convenient notion that high oil prices result from the market maneuvers of greedy “speculators.” It’s convenient because it suggests that a solution to high pump prices — or a partial solution — is to banish the offending speculators from the marketplace. That’s fantasy.

Despite periodic debunking, it returns whenever oil prices surge. In mid-2008, with crude prices approaching $150 a barrel, the Commodities Futures Trading Commission (CFTC) created a task force to study whether speculation caused the run-up. The task force included experts from the Agriculture, Energy and Treasury departments, the Federal Reserve, the Federal Trade Commission and the Securities and Exchange Commission.

Samuelson quotes the conclusion from this task force:

“Current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. . . . The Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.”

Despite this clarity, politicians hate to admit they are relatively impotent over an issue like high oil (and gasoline) prices.  So, President Obama has resurrected the idea and has once again pointed an accusing finger at “speculators”:

“We still need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil. . . . We can’t afford a situation where speculators artificially manipulate markets.”

Well, the good news is we don’t have to worry about speculators artificially manipulating markets, as Samuelson reminds us with a lesson in Economics 101:

It’s true that outside investors (a.k.a. “speculators”) have dramatically shifted money into commodities — raw materials. “Commodity index funds,” which invest in a basket of commodities (oil, wheat, corn), have attracted hundreds of billions of dollars. It’s easy to imagine all this money chasing prices up in futures markets, just as speculative stock market frenzies push share prices to unrealistic levels. It’s also wrong.

The stock and futures markets operate differently. In the stock market, herd psychology can lead to speculative bubbles or panics. In a bubble, almost everyone seems to win (until the bubble bursts); in a panic, everyone seems to lose (until the panic subsides).

By contrast, futures markets are “zero-sum games.” One investor’s gain is matched by another’s equal loss. Here’s why. Under the standard futures contract, one investor agrees to buy the commodity (say, 1,000 barrels of oil) at a future date for a given price, and another investor agrees to sell for the same price. If the actual price on the settlement date has gone up, the buyer reaps the gain; if it’s gone down, the seller wins. The loser pays the winner; actual commodities are rarely transferred.

There are measures that policy-makers can adopt to help lessen the impact of high oil prices — and ultimately lower prices themselves.  Chief among those would be assisting in the deployment of vehicle electrification infrastructure and advanced biofuels.  Bashing the bogeyman of speculation doesn’t help a bit.

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