Obama recently said he would investigate speculation in the oil market.. “We are going to make sure that no one is taking advantage of the American people for their own short-term gain,”
Vermont Senator Bernie Sanders thinks he already knows why gas prices rose.
"The skyrocketing price of gas and oil has nothing to do with the fundamentals of supply and demand, and has everything to do with Wall Street firms that are artificially jacking up the price of oil in the energy futures markets.”
Such shallow thinking is dangerous, as I point out in my syndicated column this week:
If Sanders and other economic illiterates get their way, we'll have new laws banning "speculation." That will raise prices further. Don't believe me? Think back to a previous time when a Senate committee said that "speculative activity causes severe and unwarranted fluctuations in the price. ..." That was in 1958, when people got upset about the price of onions. Fools in Congress addressed that problem by banning speculation on onion prices.
The result? A Financial Times analysis found that the ban made prices less stable. This year, the retail price of onions rose more than the price of gasoline — 36 versus 24 percent. Most years, the price of onions fluctuates more than other goods. No mystery there. Speculators help keep prices stable. When they foresee a future oil shortage — that is, when prices are lower than anticipated in the future — speculators buy lots of it, store it and then sell it when the shortage hits. They know they can charge more when there's relatively little oil on the market. But their selling during the shortage brings prices down from what they would have been had speculators not acted.
Speculators are like the ants in Aesop's "Ants and the Grasshopper" fable: They save resources for lean times. Everyone benefits because everyone has a chance to buy from them in those lean times.
Read the full column here.