The benefits of oil speculation

Ryan Pollard notes (and praises) the NDP reaction to oil prices, which is to blame them on oil company collusion:

They Hate Us For Our Freedoms: Layton: Oil co.s colluding: Gas and home heating oil prices are going to be a national emergency, I bet. Our own oil people, and your neighbour who buys oil futures, are going to make, I'm going to predict, a literal killing off of the misery of poor and working class Canadians.

I've been thinking and reading up on this matter for a few weeks, and while I'm certainly not going to discount the effects of corporate practices on oil prices, I've also come to the conclusion that there are benefits to speculation in futures.  That's because commodity futures speculation has a property that other kids of speculation perhaps do not, or at least it has it in greater measure.  That property is the extent to which it is tied to future physical events: actual projections of oil supply rates, which determine, really, whether the speculator is going to win or lose money, particularly on the longer-term contracts. 

At the moment it looks like we are starting to suffer real physical supply problems as proven, easily available oil reserves (meaning the light sweet crude in the ground) appear to have reached peak production and may indeed be starting to decline.  So in this the speculators may be performing a useful role in raising the price: prices raised now means that demand drops means that depletion rates slow means that future prices don't have to rise as much as they otherwise would means slightly lesser effects from Peak Oil over the long term.

Now you may argue that this is going to hurt the most vulnerable first, and you would be right.  But arguing for price and speculation controls may not be the best way to go about this sort of thing: taxing everyone else to subsidize weaker consumers is what I think the NDP should be pushing for instead.

You may also argue, more strongly, that oil dependence should be dealt with through democratic processes (as embodied in the government) and not via futures markets.  Many Peak Oilers say that by the time the price rises enough to make it worth it to the private sector to invest in alternatives, we would have crossed the Rubicon, so to speak: prices would accelerate at that point at a rate that would quickly make the necessary investments too expensive. And, naturally, it is always prudent to wean yourself off limited resources as soon as possible in any case.

However, we (and in particular the US) lost that opportunity likely a while ago, and we have to throw ourselves on the mercy of speculators and hope that the libertarians are right.

Comments

[RP.]

Please, call me RP. Even my wife does. ;)

I think the time has come for a national price regulator, much as PEI and Newfoundland now have. It's a finger in the dyke solution, but it might be just what we need to get us through the winter (OK, I'm dreaming if I think it'll be in place for winter... next coupla years maybe).

[Mandos]

So getting us through the winter is important, for those who don't use electric heat, but in general I'm opposed to a price regulator for oil, which was the point of my post. Oil is a scarce resource, and we have to keep two goals in mind:

1. We want to provide an incentive to invest in more efficient uses of oil--for those who can afford such investments.

2. We want to make sure that those who are personally vulnerable to price changes (meaning the elderly, welfare recipients, working poor, etc) can still afford to survive.

Price controls temporarily solve #2 at the expense of #1. What we are looking for is an equitable allocation of a scarce resource, not making it generally cheaper for EVERYONE. That means not price controls, but a subsidy.

I'm not dogmatically against price controls. In the case of oil, though, I think it's a bad move.