Friday, June 19, 2009

When speculators don’t add value

Gas prices are on the rise again. The reporter for CNN money is claiming that a large part of the increase is caused by investors, who expect the dollar to be worth less because of borrowing to finance the “stimulus”.

So the answer is speculators.

Now we all know that speculators are not evil people, and in fact add a great deal of value to the economic system. When speculators buy futures, they make cash available today to people who won’t sell their products until next week, next month, or next year. Since the speculator doesn’t have the use of their money until the product sells, they should get some payment for the time their money is not available.

When you put money in the bank, the bank pays you interest for the use of your money. The longer the money is locked up the higher your return. A 6-month CD pays more than passbook savings because you can pull the passbook savings right now. The oil and gas speculators may not get their money for long periods of time, so the percentage of return is that much higher.

Is the speculator still adding value when their “fees” for the use of their money today become a significant part of the final cost tomorrow?

One problem is that a small number of players dominate the oil and gas markets and the cost of entry is huge.

This is not a monopoly in the usual sense. These people are, probably, not agreeing on a single price. It’s just a small number of people making independent decisions in a market where their self-interest leads them in the same direction.

The big problem with oil and gas is that a small number of players control a necessary resource and have an inordinate impact on prices. Oil and gas products are seasonal. We use more of certain products depending on what month it is and less of others. When the seasons change, the product mix changes as well. This also means that there may be excess of some products at some times. If a small number of speculators can control that excess they can move the price of the entire market up or down, usually up, by their actions.

At what point should they be more closely regulated and at what point does their negative impact on the consumer outweigh their value to the system as a whole?

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