Baron Münchhausen, airline executives and oil speculators
Economic illiteracy and the human bias to look for a scapegoat conspire to single out speculators in oil futures as the reason for high oil prices. Exploiting this ignorance about economics, airline executives call on Congress to curb excessive speculation in one of the most blatant examples of corporate socialism in recent history. What is not clear, however, is how speculation in oil futures as such (instead of supply and demand) can cause sustained increases in the price of oil, and why speculation is biased towards higher prices in general. As the political philosopher Anthony de Jasay recently noted, “it was long believed that only Baron Münchhausen was capable of lifting himself up by his own bootstraps. Strident voices all around us now proclaim that the oil price does it, too.”
De Jasay discusses recent arguments that are supposed to explain why speculation in oil futures raises oil prices and argues that “in a well-functioning market, arbitrageurs, by stocking or de-stocking, see to it that spot and futures prices remain in the normal relation without the future price pulling up the spot price.”
And as William L. Anderson notes in a daily article on the Ludwig von Mises website:
Politicians insist that the causality chain runs from profits to prices when, in reality, it is the other way around. Oil companies are making large profits because they purchased the factors of production at relatively low prices and are able to sell their products for more than the company managers and the factor owners projected at the time of the agreement to sell.
De Jasay sums it up by stating that “speculators may well have swum with the tide, but they did not make the tide so they may swim with it.”
Recommended articles:
Anthony de Jasay – The Bootstrap Theory of the Oil Price
William L. Anderson – The Oil Follies
Alan Reynolds – Scapegoating the Speculators
