The oil-speculation myth holds that dastardly Wall-Street speculators are buying up our oil cheap, driving the price up, and making tons of money. Then I suppose, they sell high priced oil to you and me. Well, I’m not buying this story. This is lot of nonsense, because, for the most part — 99% — speculators don’t buy any oil at all! They just buy oil futures.
zFact 1: Financial Speculation Is Just Gambling and Has No Impact
What are oil futures? They are bets. Speculators are gamblers. Say you think the price of oil is going to $200 per barrel, and I don’t. So we bet. Say we bet on 10 barrels. We agree to bet on a price of $170/bbl. So six months from now, if the price of oil is $200/bbl I will owe you $30 × 10 bbl = $300. And if the price is $120, then you will owe me $50 × 10 bbl = $500, and so on. That’s a futures contract. Well, not quite. It’s not a standard contract backed by a big commodity exchange, so technically it can only be called a forward contract, but it’s the same thing. That’s financial speculation.
So does our bet make the price of oil go up? No. If one-half the the US bets the other half that the Euro is going to $10 next week, will that make the Euro go up? No. Betting on the horses doesn’t make them run faster.
There is, however, another kind of speculation, but it doesn’t happen on Wall Street. And this kind of speculation can have a real effect. Here’s how it works.
zFact 2: Physical Speculation Makes a Little Difference Both Up and Down
If you believe that the price of oil is going to $200 in six months, you could buy a big tank and fill it with $100/bbl oil now. Then in six months you could sell it for $200 — if you turned out to be right. Now, your single tank would not be big enough to make a difference to the oil market, but what if lots of Big Physical Speculators did this? It would affect the price Now. Because buying all that oil Now to put in their tanks would be extra demand for oil Now and more demand always drives up the price. So physical speculation can drive up the price for a while — until the speculators’ tanks get full.
But after the physical speculators’ tanks are full, they’ve got to sell to stay in the game, and, of course, the whole point is to sell (at a profit) some time in the future. But selling depresses the price just as buying raises it. So if physical speculation works, the speculators will raise the price when they buy at low prices, and lower the price when they sell at high prices. So if they succeed, they even out the price swings. And if they don’t succeed, then they buy high and sell low and go out of business.
On top of that, physical speculators don’t own enough storage capacity to have much of an impact. The daily flow of oil on this planet, 86.4 million barrels a day (1000 barrels a second), is just too great.