April 20, 2011 | In: Energy
What Regulators Should Do to Control the Price of Oil
We all have witnessed how oil prices jumped dramatically in the past few months. We also know that Libya’s instability should have had little effect on current oil prices, but we also know why oil prices spiked: Speculation.
Speculation is a very common word when you’re trading stocks: even if a company issued some terrible news, but there is speculation that the company will be bought, the stock will go up. Of course, this works the same way the other way around: if a company announced a great quarter, but investors are speculating that next quarter, the company will not be able to meet the expectations, then its stock will drop at least 5%. That’s how it goes.
Speculation in oil is a harmful game: harmful to the economy, and harmful to the real people, the people that are leading real jobs and having real families and working fair and square. Speculation in oil nearly always is bullish (everyone thinks that there is not enough oil supply to meet all the demands, which is complete false). OPEC consistently tries to reduce speculation in the market, but consistently fails to do so. In fact, when OPEC announces it’s going to increase its output, speculators think that there was not enough oil in the first place so they buy even more.
So how can the price of oil be controlled? It is very simple, suspend oil trading in stock markets. A huge chunk of the price of an oil barrel at the moment is pure speculation, and this needn’t be the case. It’s hurting everyone (well, nearly everyone), and everything (including the economical recovery). Imagine if traders are no longer allowed to trade oil ETFs. There will be no speculation in oil prices whatsoever, the price of oil will only be determined by supply and demand.
Is this feasible, I’m sure it is. Are regulators ready to do this bold step? I’m sure they’re not, and probably neither is the whole world!
That was just a thought!