Speculators provide a useful service

By Eamonn Butler (July 24 2008)


Politicians have to blame somebody for rising oil prices, and with the Olympics coming up we can't be nasty to the Chinese, so the scapegoats of the moment are, of course, the speculators. They are the villains: when prices rise, they bet on further rises, and that simply compounds the price-rise fever.

Italy's finance minister Guilio Tremonti (who calls speculators the "plague of the 21st Century") wants their scalps, invoking Article 81 of the European Treaty, outlawing "anti-competitive agreements".

France's Nicolas Sarkozy, who holds the presidency of the EU, seems to be backing the move. The fact that Article 81 rulings can be made by majority vote is bad news for the UK, which depends on its enormous financial services sector. But the politician's frenzy is based on complete ignorance of what speculators do.

Yes, they take a bet on future prices. But to survive, they have to be highly clued up about the markets they bet on. They don't bet on rising prices unless they think demand is going to outstrip supply.

That makes their bets a really useful indicator of where prices are heading - which enables suppliers to adjust their production in line with the real needs of end users. And it allows suppliers to produce and trade with confidence at known future prices, so reducing the volatility of markets like oil.

The oil price has risen because demand from China and others has gone up but production hasn't. Outlawing speculation won't change that. Let's hope the EU doesn't kill off the UK financial services industry to find out.

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