Oil Speculation is not a crime.

photo from airplanemodelworks.com

photo from airplanemodelworks

<>< Josh Rule : : 2008 MCPP Intern

This morning, my inbox contained an unexpected email from NWA airlines.  It was an open letter signed by Northwest and 11 other airlines.  Read it here.  These airlines are asking for grassroots support for increased regulation on oil speculators, directing readers to stopoilspeculationnow.com.  They claim that speculators’ “excessive” trading of oil often increases the price of a barrel of oil anywhere from $30-$60, and that these prices are far above the market value.  So, these 12 airlines ask for the federal government to pass regulation severely restricting speculators’ ability to operate.  Their hope is to “cool the over-heated oil market and permit the economy to prosper.”

Yet, the result of such regulation is not quite what the airlines think it would be.  Henry Hazlitt’s Economics in One Lesson points out that speculators are a legitimate and important part of most free economies.  They absorb risks and help to preserve, not destroy, resource reserves.  Speculators may buy and sell just as any other consumer, and whether they intend to use the product or not is irrelevant.  Further, Hazlitt demonstrates through theory and practice that artificially lowering commodity prices is almost never beneficial to an economy.

For example, one could buy an umbrella, having no intention of using it but knowing that it would storm later that day.  When the rain came, one could then sell the umbrella for a profit.  Doing so is not illegal or unethical.  It is how the market works – through supply and demand.  An increased demand for the umbrella warrants a higher price, leaving the owner with a profit.  Remember the goal of trade.  It is to maximize the benefit for both parties.  If the umbrella had been sold at a lower price, that price would not have accurately reflected the demand, and some benefit would have been lost in the trade.

There is no reason to support this proposal from the airlines.  The policy they are seeking is not helpful but harmful.  The current price of oil is one that some are willing to pay, and those that are not must simply find substitutions or go without.  Perhaps finding adequate substitutions will take some time, but that does not mean it will not happen.

The price system created by the principles of supply and demand is an excellent and efficient way to manage scare resources such as oil, and attempts to tamper with it will not increase supply or prosper the economy.  It will decrease supply because of an inflated demand for the product caused by an artificially low price.  It could even create an oil shortage, wreaking havoc, not prosperity, upon the economy.


3 thoughts on “Oil Speculation is not a crime.

  1. Pingback: Onion speculation is a crime. « Trying Liberty

  2. Pingback: Crash and burn « Trying Liberty

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