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The Texas Blue
Advancing Progressive Ideas

Speculators’ Paper Barrels Inflating Physical Barrels

The House Energy & Commerce Subcommittee met recently with experts to discuss the impact of speculators on the price of oil. The witnesses concluded that oil should be trading at $65 to $70 a barrel instead of $137. They claim index speculators are responsible for this inflation.

To better understand how this occurs, one should view the trading of oil as an activity that occurs in two different realms. One realm is on paper, and the other is in the physical world. Speculators operate in the paper realm where prices are determined by speculation, while distributors and wholesalers operate in the physical realm where prices are determined by supply and demand.

The problem is that the paper realm has overtaken the physical realm causing damage to the price discovery function of the market. Oil prices are being fixed irrespective of supply demand realities. The largest oil traders are essentially setting their own prices through speculation.

All the witnesses on the House subcommittee panel agree that if legislation passed to reign in speculators, oil and prices at the pump would drop by half in less than thirty days.

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