(Some) Speculators Are People Too

Here’s an iron rule of oil politics: when gasoline prices go up, calls to crack down on speculators increase alongside them. The current situation is no exception. Some who are calling for an SPR release argue that it would succeed by punishing, and thus deterring, speculation. (In the memorable words of one man interviewed by the New York Times, an SPR release would “spank the speculators”.) Others are calling for direct restrictions on speculative activity.

Set aside whether you think that it’s healthy to have lots of money sloshing into oil funds. (Daniel Ahn does a great job of explaining the arguments for and against in a recent CFR study.) If you go after speculators with blunt tool like the SPR, you have a second problem: you will hurt bona-fide hedgers too.

What do I mean? There are lots of firms that are exposed to oil price volatility. (Think airlines and petrochemical plants.) We want them to be hedging against oil price risk in the current (highly uncertain) environment. If we “spank the speculators”, we will deter them from doing that.

That’s fine if everything turns out okay in the oil markets. But if prices blow up, those firms will be exposed. A clumsy crackdown on “speculators” will have ended up doing exacerbating damage to the real economy.

This isn’t by any means an argument against all regulation of financial players in oil markets. Financial speculators have a mix of positive and negative impacts on the markets. But in deciding what to do about them, it’s important to remember that they aren’t the entire picture. Indeed the more that we can do to help and encourage actual consumers to hedge their exposure, the better.