Burn the speculators.
I laughed out loud while reading Air Transport Association chief economist John Heimlich's letter regarding oil index speculation (Letters, January). His letter shows quite clearly why his industry has been sucking air lately: because it gets economic advice from clueless Keynesians like him.
Of course $60 billion of new speculation money in the futures market will run up prices. Anyone with a high school understanding of supply and demand could tell you that more dollars chasing the same goods will have that effect. At some point, though, those futures contracts come due and the owner has to sell (or, heaven forbid, pay to store the oil somewhere). If real consumer demand wasn't there to begin with, he's going to take a loss. This is exactly what happened. Billions of hedge fund dollars surged from the crumbling stock market into oil futures in the futile pursuit of an investment, any investment, that was showing a profit. Once those contracts started maturing, though, real demand was right where it always was (actually, down a few percent), and red ink flowed like oil from a gusher.
What bristles economists like Heimlich is the idea that "manipulators" can drastically affect their bottom line, such as with fuel costs. The error in Heimlich-style thinking is the idea that buyers and sellers could ever be better served by a politically appointed master manipulator. Time and again we've seen government attempts to stabilize prices, and always it's had the same destructive effect of favoring either production or consumption according to the political winds.
The real lesson of this story isn't that hedge fund managers are dumb, or that the futures market is "broken," or even that a new "regulatory framework" is needed to stabilize prices. It's that a market, when left alone, can adjust to a $60 billion malinvestment and correct itself in just nine months. Imagine if we had allowed the mortgage derivative markets to do the same thing.
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|Article Type:||Letter to the editor|
|Date:||Apr 1, 2009|
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