Photo: tsuda

So congress held hearings for many hours on why oil prices were so high, mostly focussing on the effect of speculators in the market. I was wondering if what they were talking about had any merit - in my view, speculation can jack prices up in some markets, like housing - you can only bet it one direction, really - but it depends on how it works. In commodities markets, it's a useful tool for hedging by actual companies.

It's was nice to read this article in the NYTimes about how the congressional hearings were mostly bluster. Some good quotes:

Even if you eliminated speculation entirely, the price of oil wouldn’t fall. Thankfully, no one is proposing to go that far ... because even members of Congress understand that futures markets serve a crucial purpose. They help companies hedge their oil prices, and they help energy companies manage their risk, for starters.

The energy speculators I spoke to say that Congress has it exactly backward: the futures market is actually taking its cues from the physical market, where the buyers and sellers of oil do their business. Last week, the Saudis promised to produce an extra 200,000 barrels a day. But it is pricing that oil so high that oil companies are balking at paying for it....

Both speculators and oilmen say that supply and demand is the real culprit. ... said Gary Ross, the chief executive of the PIRA Energy Group, and a well-known energy consultant. “Look at the data.... The world economy is growing by 3.9 percent a year. World oil demand should grow by 2.3 percent just to keep pace. That’s an extra two million barrels a day. We don’t have it! It’s obvious.”

I also think there is something else at play. After years of ignoring the rather obvious fact that oil is a finite resource, the world has suddenly become acutely aware of that reality.... That is not speculation at work — it’s market psychology. There’s a big difference. If there is indeed a bubble, that’s what is causing it.