Oily Speculations

Here’s a letter that I sent yesterday to WTOP radio (103.5 and 107.7 on your FM dial in and near DC):

News Editor, WTOP Radio
Washington, DC

Dear Sir or Madam:

This
morning your anchors interviewed University of Maryland law professor Michael Greenberger on
President Obama’s plan to reduce speculation in oil markets. Mr.
Greenberger’s answers revealed his own confusion.

Most
obviously, Mr. Greenberger repeatedly objected to persons investing in
oil futures “passively” – as he said, “with no interest in actively
controlling these assets, just hoping to make a buck when their prices
rise.” Ummm…. Does Mr. Greenberger own stocks only in companies that
he actively manages? If not, why is it okay for him passively (and
speculatively!) to buy, say, a few dozen shares of Microsoft “hoping to
make a buck when their prices rise” but not okay for other persons to
speculate in oil for the very same reason?

Second, Mr.
Greenberger presumes that all speculators speculate long and that doing
so is a sure thing. Neither presumption is valid. It’s just as easy
to speculate short as it is to speculate long. And if speculation were
as risklessly profitable as Mr. Greenberger presumes it to be, then
high gasoline prices would pose no problem because everyone and their
grandmothers would be raking in riches by speculating in oil markets.

Sincerely,
Donald J. Boudreaux

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danielmumford

This criticism seems to take Professor's Greenberger's comments out of context and is thus sorely misguided. First, the professor's assertions about passive investing was merely intended to distinguish between those who are hedging their positions in commodity markets and have an interest in the underlying assets (such as farmers do in wheat). Second, until recently, betting that oil prices would increase was a pretty sure bet (especially if you were engaging in wash sales) just as betting in real estate was a sure bet (again, until recently). The reason why "everyone and their grandmothers" don't do this is because: 1) commodities trading is fairly esoteric and typically thought to be the exclusive domain of the "professionals;" and 2) the profitability could be assured only where speculators traded in sufficient volume to drive the market, something grandma cannot do.