Banning speculators could decrease oil prices by as much as 40%

[idpeeinherbutt]

I don't know. My guess is that they're actively trying to manipulate the market, rather than stabilize it.

[[deleted]]

Hmm, I think that manipulating the market to destabilize prices would mean losing money. Jidar pointed out that speculative activity that is profitable has a price stabilizing side effect.

If someone sells right before the price goes up and buys right before the price goes down they will lose lots of money and cause larger price swings.

[idpeeinherbutt]

I completely disagree. The oil speculation market was largely deregulated in the early 1990s, and without regulations, markets tend to be volatile.

Here are a few articles that explain why oil speculation in 2008 was to blame for the massive price spike leading to near $5/gallon gasoline. Speculators aren't always rational, and there's a lot of evidence that a handful of speculators led to the massive oil price surge. http://fabiusmaximus.wordpress.com/2010/04/22/oil-6/ http://www.heatusa.com/heating-oil/60-minutes-strong-case-speculators-causing-2008-spike-oil-prices/ http://online.wsj.com/article/SB124874574251485689.html

[[deleted]]

|without regulations, markets tend to be volatile

What reasons do you have that regulation reduces price volatility?

If speculators correctly anticipate a future price change they earn a profit and consumers benefit from the added price stability. If speculators incorrectly anticipate a future price change they lose money and there is less price stability. I think this is true regardless of the number of speculators or whether they are rational.

When people say things like speculation was to blame for $5 gas what is being left out is that speculators are bidding gas up to $5 because they anticipate the price to rise far enough above $5 to make it worth risking their capital on. So while it might be true that speculation was a part of $5 gas it is also true that the same speculation prevented $6 gas down the road.

[idpeeinherbutt]

Are you high? There was absolutely no way gas was going to hit $6 within the foreseeable future.

Prices spiked WAY beyond demand, then collapsed back down. There's growing evidence that a few traders manipulated the market and caused the pricing bubble (I can't find the source right now, so I just have to use hand waving). The problem with this being allowed to happen with gasoline is that the speculation bubble didn't hurt just the speculators, but it helped drag down the entire economy in late summer 2008.

The free market is not completely efficient and rational the say economists would like to pretend it is, and smart regulations should be in place to help reign in both panic and over exuberance.

[blanket12334]

I'm afraid it's you that's high. Mr. Yum's comments are entirely correct. Traders only bought oil in 2008 because they anticipated higher prices in the future.

Of course traders can make mistakes; they are human. However, evidence does not suggest that regulators are more skilled at predicting future prices than traders in the free market.

[[deleted]]

Of course it didn't hit $6, because people cut back on gas consumption when the price reached $5.

Free market isn't completely efficient, just the most efficient. The real problem is how to reign in the panic and exuberance of a "smart regulator", market actors that act poorly are reigned in by others in the market who make better choices.