Mankiw's Principles of Microeconomics
Chapter 4
- The news in April (when I set this question up) was all about oil speculators driving up the price of oil, and thus the price of gasoline which was averaging close to $4.00/gallon. In light of this chapter what role do speculators play in the market? Are they responsible for large price hikes?
Oil is the lifeblood of our society; as such drastic swings
in price tend to grab the attention of the powers that be in DC. Most of the
time, if Washington is involved there are probably questions of whether or not
the market for the product is fair and competitive. In a competitive market,
due to the fact there are multiple buyers and sellers, the impact that sellers
have on price is perceived to be minimal since there are several buyers and
sellers for the product. In the case of speculators in the oil market, commodities
research provided by Bloomberg supports the fact that the percentage of
commercial positions in the commodity markets have decreased since 2000, while
the percentage of index fund speculators has risen.
According to Joseph Kennedy II, an op-ed columnist for the
New York Times, “The United States placed limits on pure speculators in grain
exchange after repeated manipulations of crop prices during the Great
Depression.” If that is the case, then why would we allow this market activity
to continue when we know based on our history that speculation leads to price
manipulation? Demand is affected by several factors, one being the prices of
substitute goods. In the case of oil, without drastic lifestyle changes on the
consumer’s behalf, there are no immediate substitutes. The question of whether
or not speculators are responsible for large price hikes is a debatable topic.
In my opinion, while they are not directly affecting the immediate price since
it’s the futures contract they are purchasing, considering the amount of
hedging going on, they are skewing the perceived levels of consumer demand.
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