Sunday, June 29, 2008

Speculating on Speculators

There has been a lot of talk recently about 'greedy speculators' driving up oil prices. It's nonsense of course: but it's an easier 'excuse' to grasp than the real reasons I guess. I've been a longtime subscriber to Gary North's superb (and free) eletter Reality Check. He makes the point in this week's eletter that it takes two to speculate, i.e.: you need someone willing to bet that the price (say of a barrel of oil) will be higher than the contract price at a future date ('going long' in the jargon) and someone willing to bet that the price will be lower than the contract price ('going short'). As Gary puts it:
"In what way do speculators drive up the price of oil?" For each speculator who is betting on an increase in the price of oil, there is another speculator betting on a decrease in the price of oil. There is still the same quantity of oil available for consumers to buy.
He's right of course. If you disagree then tell me: what will be the price of a barrel of oil this time next year? Are you willing to bet on that? According to The Sunday Times, analysts at Société Générale are forecasting $60 by the end of next year: those at Fortis are forecasting $172. It's currently at $142 (up 42% since the start of this year). Call it right and there's a fortune to be made (of the Paddy Power variety of investment), call it wrong and you'll lose your shirt. The oil will still be there, of course.

As for how I see it: the future course of the price of oil will be a drunken stagger from the brickwall of economic depression to the lamp post of oil supply shortages. But as I've said before, when it's easier to print money than to find oil, then there's really only one way for the price to go in the long term. But would I bet on it? I don't think so - that's a game for big boys and I wouldn't want to risk the children's allowance on it.

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