Thoughts On Rising Gas Prices

On Speculators

As of late, many seem to be blaming speculators and oil companies for extremely high gas prices, but are these valid reasons and is nothing else effecting prices? While some are contempt with blaming greedy capitalists for our energy woes, they fail to take other aspects into consideration.

Contrary to popular belief, speculators actually have an important role in the market. The economist Ludwig von Mises would call them "the driving force of the market". Speculators buy where and when they suspect prices are too low and sell where and when they suspect prices are too high. When these speculators try to sell, the competition of the speculators brings the prices down. Fundamentally, speculators insure that whatever they are selling will be available and at a predictable price. Without them, markets would be much more chaotic.

Speculators are an important cog in the division of labor machine. For example, a cotton producer might be an expert at cultivating his product, but he might not be the best forecaster of future prices. Thus, the cotton producer might not know how many pounds of cotton to produce one year as opposed to another. On the other hand, a speculator might not have the slightest clue about how to produce cotton, but he or she might be an expert at analyzing data and sources. The speculator can buy futures contracts from the cotton producer at a guaranteed price — limiting the producer's need to guess what the price will be. A speculator can always sell his or her futures contracts if he or she believes the future price is too high, or buy more contracts if he or she believes the future is underpriced.

More on speculators in the video below:


On The Increased Monetary Base

As the graph above shows, the monetary base has increased considerably in the last few years, rising from about $800 billion to nearly $2.6 trillion. This can mostly be attributed to the Federal Reserve artificially propping up the economy with rounds of quantitative easing (QE and QE2). During quantitative easing the central bank in essence creates money out of "thin air" and buys up government bonds with it from commercial banks and other institutions. Of course, this additional fiat money will eventually get circulated, causing inflation. This ultimately leads to the dollar's weakened purchasing power and destroys savings.

Conclusion

The increased monetary base and its resulting inflation is most likely the main cause for the high oil prices. On top of that; the current unrest in the Middle East, a growing demand of oil by countries such as China and India, as well as increased consumption by the United States Military surely affects the price as well. With most of the money created by quantitative easing yet to reach circulation, the problem will only get worse before it gets better.