×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Speculating on speculation

Speculating on speculation
Comment E-mail Print Share
First Published: Wed, Aug 13 2008. 12 23 AM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Wed, Aug 13 2008. 12 23 AM IST
The recent decline in global crude oil prices is a challenge to those who believed that the earlier spike, all the way to $147 a barrel, was the doing of speculators alone. If unbridled speculation was the cause of rising oil prices, shouldn’t it logically be the cause of lower prices as well? Or maybe there were other factors at play all along.
Illustration: Jayachandran / Mint
Union finance minister P. Chidambaram had, at a meet of energy ministers from the Organization of the Petroleum Exporting Countries in June, blamed “unregulated over-the-counter markets and futures trading” for the oil price rise. He had also called for the adoption of a “price band mechanism” in which governments of oil-producing countries would ensure a price ceiling and governments of consuming countries guarantee a price floor. Many politicians from across the world have said similar things.
Prices in a market economy convey knowledge about the intensity of wants for scarce goods with alternative uses for billions of individuals. But, price declines are not heaven-sent. Arbitrage by speculators and entrepreneurs continually bring market prices closer to true present and future demand-supply conditions. We all speculate about the future in our everyday lives: While buying a house we speculate on roads that might be built around it; while taking up a new job we speculate on its value five years from now; before marrying we speculate about the love and affection of our partner.
Speculators provide liquidity to financial markets. They help economies discover prices. But they are often easy targets for governments and regulators. A lot depends on which market is in focus. The blame for high prices of commodities such as food and oil is usually pinned on bullish speculators. Bearish speculators get targeted whenever equity prices decline. It is rarely the other way round. We are yet to see bullish speculators getting castigated for pushing up stock prices and bearish speculators held responsible for falling food prices.
The rise in the prices of oil, food and metals has several underlying reasons, and the activities of leveraged investors are undoubtedly one part of the story. But to believe that leveraged investors can drive prices irrespective of the underlying fundamentals shows a poor understanding of how markets function.
We were neither victims of oil speculators in the first half of this year, nor are we beneficiaries of their altruism right now.
Are speculators easy targets? Write to us at views@livemint.com
Comment E-mail Print Share
First Published: Wed, Aug 13 2008. 12 23 AM IST