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Does Oil Speculation Cause Price Spikes?

Gas station by flickr user dno1967b.

Paul Solman answers questions from NewsHour viewers and web users on business and economic news here on his Making Sen$e page. Here’s Tuesday’s query:

Name: KR

Question: Aren’t the regulations removed by the Bush administration on oil commodities the main reason for the spike in prices? Since the speculators no longer have to take delivery on the oil, that means more money is put into speculation and the higher the price. Why not report this fact?

Paul Solman: Because it’s not a fact. Speculators in the commodities markets (not just for oil) have not had to take delivery for many years. It has nothing to do with the Bush administration — either Bush administration. Moreover, spikes in price — or falls in price, for that matter — are a commonplace in markets going back as long as we have records of them. In all probability, therefore, booms and crashes have little to do with whether or not a speculator has to take delivery, though “cash settlement” does, as you suggest, make betting easier. Finally, speculators bet on downward as well as upward price movements. The more money put into speculation on the downside, the lower the price.

See ‘The Effects of Production Turmoil’ for a breakdown of what we pay for at the pump. Gas station photo by Flickr user dno1967b via a Creative Commons license.

This entry is cross-posted on the Rundown– NewsHour’s blog of news and insight. Follow Paul on Twitter.

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