Speculators May Be Cause of Inflated Oil Prices

With the way the economy is (not so great), it seems unreasonable that gas prices would remain where they are (kinda high). So, the obvious question to ask is, why exactly are prices higher than the market would normally dictate? The answer, some think, lies at the foot not of people actually consuming oil, but with speculators that have been driving up the price as they buy futures (registration required). And these unnatural price spikes could end up being somewhat harmful, reports the Washington Post:

Regulators worry that even a small bubble in oil prices could stifle economic recovery by draining money from savings or other purchases, undercutting the government stimulus program and reigniting inflation...

Speculation, many analysts note, is a loaded term. It conjures images of unprincipled middlemen who manipulate and bet on prices. In reality, "speculators" are simply investors who have no commercial use for oil and never plan to take delivery. They can include state pension funds and college endowments, as well as investment banks and hedge funds seeking to use oil futures the same way they use other financial instruments.

So what happens is a cycle of sorts–speculators think oil prices will rise, so they buy futures now to sell later. Then, banks raise the value of oil, because the demand is higher than it normally would due to speculation. Then speculators see the value on the rise, and buy more futures. And so on and so forth. Yet, as noted above, the danger here is that if an unnatural amount of funds have to be used to purchase oil due to inflated prices thanks to speculation, governments and consumers will have less money to spend elsewhere, thereby reducing the amount of dollars circulating in the economy, which will screw with recovering from this crisis.

So, unfortunately, there's not much you or I can do to lower the price of oil. But by reducing the amount of gas you use, you will help both the environment and your wallet. Win-win!

photo credit: ezioman's flickr photostream/Creative Commons