Speculators 101: A Lesson in Economics

Now my personal background is in the areas of engineering, science, and math. I’m not an expert in anything of any importance (unless potato gun building is important), so I would consider myself as knowledgeable as the average moron when it comes to these demons speculators everyone is talking about. So I did my due diligence and took some time to do a bit of research today to better inform myself and write this post. Here’s what I found…

So what are speculators and what do they do? As per wikipedia (not the best source, but accurate enough for my purposes here);

Financial speculation, involves the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest.

Ok, I think my pea-sized conservative brain has a handle on this. Speculators are no different than most stock traders. They purchase future inventories of a commodity in the hopes that they will increase in price and therefore be able to sell them at a later date for profit. Sounds simple enough. Later on in the same entry, there’s a quote from speculator Victor Niederhoffer, a former partner of big-time liberal donator George Soros (who by coincidence, made a significant portion of his now $8.5 billion by, you guessed it, speculating!!). Anyways, onto the quote from Niederhoffer’s article “The Speculator as Hero”, which can be found on his website.

Let’s consider some of the principles that explain the causes of shortages and surpluses and the role of speculators. When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus.

Everyone get that? Speculation helps ensure that shortages of a particular commodity do not result in a complete exhaustion. It’s very similar to why price gouging during a crisis/disaster isn’t necessarily a bad thing (I’ll cover this later, I promise).

Remember, the value of something (like oil) is only as high as someone is willing to pay for it. If McDonald’s cheeseburgers were SOOO good that a large portion of the population would buy them for 5$ a pop, you better believe McD’s would sell them for 5$ a pop, but the fact of the matter is the demand for cheeseburgers is relatively low.

Currently, speculators are banking that the demand for oil is only going to increase as time goes on (looking at China and India and other developing countries, I’d say that’s a good bet). With no new reserves being tapped and Middle Eastern output at the same level, there’s going to be a “shortage” of oil and therefore an increase in price. Now you often hear members of the left argue that drilling in ANWAR will do nothing to price of oil for 10 years. I call bullshit on that one. If the US would just declare open season on coastal drilling and ANWAR you would see oil prices drop TODAY. How do I know this? Just look at what happened today when it was reported that US oil reserves being higher than expected and demand for gas fell 2.1%. Oil dropped nearly $2.50 a barrel.

It’s not magic, it’s not rocket science, it’s simply supply and demand. More people want something that’s in a limited supply, the price will go up. If you increase the supply (drill for more oil) or decrease the demand (more nuclear power plants or purchase hybrid cars) price will also go down. It’s lovely how simple this works, isn’t it? Yay capitalism!!! (3:35 for the obscure reference, sorry, I couldn’t find anything better.)

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