There was a moment in history when the Dutch really loved their tulips. In 1635, 40 tulip bulbs sold for the astronomical price of 100,000 florins. This was at a time when the average yearly income of a Dutchman who wasn't forced to spend all his time plugging leaky dikes was 150 florins.
Eventually, the Dutch came to their senses and collectively realized the uselessness of the tulip. You couldn't cook on it, you couldn't fuel your horse-drawn buggy with it, and you couldn't eat it (although according to legend, a sailor mistook a tulip bulb for an onion and munched away-the owner of the precious bulb saw to it that the sailor spent months in jail). So deep was the passion for the bulb, however, that a speculating class of investors managed to shove the Dutch economy into a depression.
This seminal economic event happened over three centuries ago. Ever since then, "speculation" and "speculator" have been pejorative terms, used to belittle certain classes of investors that have fallen into public disfavor. Otherwise respectable people often use the term "speculator" the way someone like Pat Buchanan might use the phrase "New York money men."
Right now, Americans' economic anxiety is reaching feverish levels. The primary culprit for the nation's heebie-jeebies is the record price of fuel. At such times, the political and chattering classes share a vital responsibility-they must identify a villain. Inevitably, they have settled on "speculators" as their bogeyman.
The terminology can be a bit confusing to those not steeped in the arts of demagoguery. For instance, in recent years, lots of people bought homes that they quite simply couldn't afford. They assumed (mistakenly or naively) that the homes they purchased would be worth more the following year. In other words, they were speculating. But the political class does not call such people "speculators." Instead, it reserves for these purported victims the more benign sobriquet of "homeowners" and debates how much taxpayer-funded largesse should be lavished on them to ease the pain of their unwise speculation.
But how about people who think oil will be worth more next year-do we call them petroleum owners? No, politicians and pundits have dubbed them "speculators." They seem to think that speculators are purchasing oil and hoarding it, readying to sell it when prices have reached truly astronomical levels. In this fanciful scenario, the speculators are decreasing the world's oil supply via their rapacious hoarding, and the diminished supply is providing a spike in prices.
This scenario calls to mind the Hunt Brothers' infamous attempt to corner the world's silver market in 1979. Over a nine-month period, the Hunts purchased and hoarded somewhere between $2 billion and $4 billion worth of silver. Whether they twirled their mustaches while doing so is unclear. Regardless, the price of silver between September 1979 and January 1980 leapt from $11 to $50 per ounce. Unfortunately for the Hunts, the crash of Silver Thursday in March 1980 brought the whole scheme tumbling down. Fortunately for the Hunts, the American government banned them from any future commodities trading so they could do themselves no further harm.
Disappointingly for villain-seeking politicians, the Hunt Brothers' scenario bears no resemblance to what's currently going on with the oil market. There are no mustache-twirling speculators hoarding the world's oil supplies and in the process artificially inflating oil prices. Instead, the world economy has been making great strides-especially in petroleum-thirsty China and India-and oil supplies haven't kept pace.
Given the media and government-directed hostility toward "speculators," many people will want proof that they are innocent. Well, for the scapegoat-seeking masses, there's the following inconvenient truth: If oil were being withheld from the market by speculators, said oil would physically have to be somewhere other than on the open market where it is being sold and bought. And yet crude inventories have remained roughly constant since 1998. If someone were hoarding oil, we would have seen a spike in crude inventories.
In fact, speculators, also known as investors and traders, play a salubrious role in the market for oil, as they do in other markets. In a paper released last week on the present crisis, the Institute for Energy Research outlined the way investors, both buyers and sellers, increase the oil markets' stability:
The benefit of [the investment] process is that it provides liquidity to the futures markets. For example, the engineers at an oil refinery may report to management that routine maintenance is taking longer than expected, and consequently capacity over the next few months will be slightly lower than originally forecasted. The refinery will then need to sell off some of the oil futures contracts it had purchased, because it doesn't want to take delivery of barrels that it will need to hold as inventory for an extra few months.
Without institutional investors to "pick up the slack," the refinery would have to find another physical consumer willing to buy the futures contracts at the exact moment when the refinery wished to sell them, or it would have to sell small quantities of contracts to various physical consumers. Rather than engaging in this costly and time-consuming search process, the refinery can sell the entire batch of contracts at a reasonable price to institutional investors who act as middlemen.
I know what you're thinking, especially if you're a United States congressman or senator: If we can't scapegoat "speculators" for $4 a gallon gas, who can we blame? For those who really need to find a villain in this affair, there is good news and bad news. The bad news is that one of the principal causes of high gas prices will be familiar to anyone who took an introductory economics class-supply is relatively low (not to mention relatively inelastic), while demand is relatively high. That means higher prices.
But blaming the whole thing on Adam Smith's invisible hand obviously serves no political purpose. That brings us to the good news for the politicians in the audience-the other principal cause of $4 a gallon gas is the weak dollar. Because how the dollar gets strong or weak is understood even more poorly than what "speculators" do, a crafty politician can blame pretty much anyone he wants. I'm fairly sure I can already hear Pat Buchanan resting the blame for the weak dollar at the feet of "New York money men."
Dean Barnett is a staff writer at THE WEEKLY STANDARD.