Why Oil Speculators Aren't Really To Blame

In Washington, rhetoric is the name of the game. If your quoted blurb is better than your opponents', you win the day – whether facts are on your side or not. In fact, the side that has to “explain” the facts is likely to lose, so you always want to be the one forcing the other guy to explain.

The more unknown, but bad-sounding the label you can stick to your opponent or their industry, the better. Ever since the Federalists won out over the Anti-Federalists thanks in no small part to the names they were able to get labeled with, politics in this country has revolved around name calling. Had the anti-federalist been called “Freedom-Lovers” or “Libertarians” then history might have been different.

So it goes today. Nothing is better for politicians than a crisis (contrived or real) that they can twist to their advantage. The price of gasoline has been a favorite subject for decades, with everyone trying to force the issue and give it the labels they want. Alluding to “Big Oil” is always a favorite tactic, as is “economic choking” and comments about “lifeblood.”

Lately, however, the new thing is to bring out a very old term with a lot of negative baggage and throw it at the public in such a way that it can be stuck onto some of the things we've been told to hate. Oil “speculators” are labeled with a spit and insinuated to be in alignment with Big Oil and all of the evils it's been saddled with. To be an “oil speculator” is, according to the rhetoric, how you get insane profits by screwing over the American people because you want oil (and thus gasoline) prices to skyrocket so you can buy low and sell high.

As with all great lies, this one is told based on a kernel of truth. Add on the bicycle pump and start filling it up with hot air, though, and it becomes something entirely different, retaining only the veneer of the original, but being pumped up to incredible proportions.

Here's the rub: chances are you yourself or someone you know, maybe even a family member or close friend or neighbor, is one of these “oil speculators.”

This new name that President Obama conjured up and that has been gaining ground in media is really just for those who participate in oil futures. Many people with a retirement fund, such as a 401k, or similar investment portfolio are probably sometime oil speculators. It's one of many commodities that portfolio managers like to buy and sell as part of their attempt to average out ahead of the game to keep their clients' investments profitable.

The way oil futures work (or any other commodities future, for that matter) is simple. Two types of people are in the game: those who only buy promises to own the commodity when it's ready and those who actually want to own the goods when they're ready for delivery. Oil is no different than corn, gold, pork, or rubber for car tires. People buy and sell it every day and, in the case of futures, they buy and sell an item that doesn't exist yet, but is promised to be delivered when it does. In other words, when you buy corn futures, you're expecting a farmer to grow it and give it to you just as when you buy oil, you're expecting the owner of the oil rig to pump and deliver that amount of oil. The producer gets the security of money up front.

The idea for the buyer is to purchase at today's prices and then either sell the rights to it before delivery (that's the “speculating” bit) or wait for delivery and hope you got a good deal. Refineries, for instance, buy oil this way all the time, purchasing it months ahead of their actual need so that it shows up when they're running out of what they've currently got.

The problem is, as with any future, you're “speculating” that it will be worth more than you paid when it is actually ready for delivery – or at some point in between your purchase and that delivery. Investors will sell when that happens, making money in the process. But there's risk, just like any investment. Oil is just another commodity, it doesn't always rise in price. Recently it took a dip, in fact, and many of these so-called “speculators” lost out and sold their futures for fear that the dip would remain until the point of delivery. That part usually gets left out of the rhetoric, of course.

Futures are like any other investment opportunity. Even oil barons like the Hunt Brothers or current media whipping posts the Koch family, have lost big-time in commodities futures. It happens to everyone. Want another secret? Even media darling Warren Buffet is an oil speculator. Shocking isn't it? He's not alone. Most of the people who've at least pretended to be against “speculation” are, in fact, speculators.

And chances are, if you have a mutual fund or a 401k, you are probably sometimes guilty of “speculating” on oil too. How does it feel to be Dr. Evil?