Defending Crude Oil Speculators

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"Oil prices a century ago make today's moves look like gentle waves."

The debate about the speculative impact on the recent run-up in oil prices continues.

Yesterday, I was surprised to find out that Fox Business Network's Oil Price Information Service (OPIS) Analyst Tom Kloza is blaming speculators for the run up in oil prices!

Now wait a minute. While I agree with Tom that the run up in price has a lot to do with the perception of the crisis in the Middle East and the price is rising on the threat to supply in the future, (it is a futures market you know) what the heck does that have to do with the advent of electronic trading? In fact, as long as I have been in the futures industry, and even back when the commodity markets were traded on blackboards, oil prices rallied on the perceived threat to supply. That's true for all commodities and a simple fact of life.

To blame the run-up in price on electronic trading ignores that fact that when you adjust for inflation, this run-up in price of oil is no greater than similar increases in price we have seen in the past. And this is true since the earliest days of oil prices. If you want to see real volatility, go back and check oil prices a century or so ago and that activity will make today's moves look like gentle waves.

Rising prices, when there is a threat to supply, serve a valid economic purpose. The market will move to ration supply and decrease demand to try and ensure that we will have enough oil or gas or grain or whatever is being threatened should supply be cutoff. That's what markets do. They become very defensive. If they did not anticipate, the marketplace would be chaos, leading to shortages and wild price moves.

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