by Henry Oliner

Three people in the last 24 hours have forwarded me an e-mail from the leading CEO’s of the major airlines asking for public support to curb the speculation which is driving up the cost of fuel and causing such harm to their industry. I will assume these are legitimate e-mails.

My thoughts:

The price of steel is up over 50% in the last 6 months. There is no widely used speculative vehicle for most steel products, so it is hard to blame speculators for the increase. In fact I have sought such a vehicle to help stabilize my prices; that is the origin of commodity contracts.

Speculation may increase volatility for a short time and that is likely happening now, but they do not set the direction. Oil is higher because we consume more than we produce. The sources are unstable, hostile and largely government owned outside the US. The minute production surpasses demand, inventory will build up and the price will drop to eliminate it.

I am no expert on commodity exchanges but this seems to me to be econ 101.

The answer, short term is to increase production, which amazingly we are still reluctant to do. Alternatives will also develop, but much more slowly.

Speculation can also lower prices. If a fast easy alternative appeared tomorrow, these same speculators would take short positions and drive the market down.

Speculators are a scapegoat. The futures market should be regulated, but its serves often to promote stability and consistency. Also remember that while prices of oil are high, we are not waiting in lines to buy gas like we did under Carter. High prices are not nearly as dreadful as supply allocation which would have horrible economic consequences.

Prices serve to allocate resources efficiently. I am more than a little surprised that the Airline CEOs don’t push for longer term better solutions.

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