Oily Speculations.(The Talk of the Town)(blaming the commodity speculators)

When bad things happen, it's always nice to have a scapegoat. So, with Americans furious about soaring oil prices, Congress has gone in search of someone to blame. There are a number of usual suspects to choose from, depending on your politics--OPEC, greedy oil companies, lily-livered environmentalists opposed to oil drilling--but now Congress has seized on another set of villains: commodity speculators. "Excessive market speculation," in the words of Senator Joseph Lieberman, has supposedly inflated the price of oil and other commodities beyond reason. Curb speculation, as a raft of proposed laws intend to do, and oil prices will soon return to earth.

Speculation has been a favorite target of politicians looking to mollify anxious voters since the time of ancient Greece, when the orator Lysias protested that wheat traders had reduced Athens to a "state of siege." Even in market-friendly America, there is a long tradition of denouncing speculators as dishonest, unproductive parasites; the nineteenth-century preacher Henry Ward Beecher decried their "cool, calculating, essential spirit of concentrated avaricious selfishness." And not unreasonably: the past century is full of examples of avaricious selfishness leading to the manipulation and corruption of markets. In the twenties, speculators banded together in "stock pools," trading a particular stock among themselves to create the illusion that its value was rising--in March, 1929, a stock pool succeeded in pushing up RCA's stock price by almost fifty per cent in less than two weeks--and then dumping the stock when outside investors bought in. In the late seventies, a speculators' pool led by the Hunt brothers mounted an attempt to corner the world's silver market, and at one point controlled an amount equivalent to an entire year's global production.

Given this history, and the fact that recent years have seen a huge flood of speculative money entering the commodity markets--assets in commodity indexes, by some calculations, increased twentyfold between 2003 and the spring of this year--it's not unreasonable to wonder if there might be something nefarious behind the sharp run-up in oil prices. But there's little convincing evidence that the oil market is being significantly manipulated. Whatever chicanery is occurring--and we can assume there is some--has only a marginal effect on prices at the pump.

Congress is not, though, just attacking illegal market manipulation; it's also taking aim at perfectly legal speculation, namely the buying and selling of futures contracts, which are effectively bets that oil prices will go up (or down). Futures contracts can be used by oil sellers (like OPEC ) or oil buyers (like the airlines) to hedge their risks by agreeing to sell or buy oil in the future at a set price. Speculators, by contrast, mostly use futures contracts to gamble on oil prices, and have no interest in buying or selling real barrels of oil. These gambles can be tremendously lucrative, ...