Whether it's corn or oil, futures market no bed of roses
Let's look at the futures market and, for simplicity, use corn futures discussed in my May 28 column. While corn is different from oil, both obey the laws of supply and demand, just as humans are very different from bricks but both obey the laws of gravity.
Say that today's price of corn is $7 a bushel. I have a hunch that because of Midwest flooding, higher demand due to droughts and war in other parts of the world, that in May 2009, corn will sell for $12 a bushel. I stand to make a lot of money by buying corn now for $7 a bushel, holding it, and in May 2009 selling it for $12 a bushel. If many speculators share my hunch and buy more corn now, today's price, sometimes called the spot price, is going to rise, let's say to $10 a bushel.
Suppose the Midwest floods have a significant impact on corn production; there's drought and war in far off places raising the demand for corn exports. What do you predict will be the availability and prices of corn in May 2009 after Congress has outlawed, or made futures trading more difficult? If you answer less corn and much higher prices, go to the head of the class. By outlawing or impeding futures trading in corn, Congress encouraged Americans to ignore the future. Had Congress not interfered, people would use less corn now, making more available in May 2009. Thus, one of the very valuable functions performed by the speculator is the allocation of resources over time. It makes sense to take the future into account when making consumption decisions today. The futures market, by the way, is no bed of roses. My hunch about corn supply and demand conditions might be dead wrong. Its May 2009 price might be $3 a bushel, and I would have to sell at a loss. Futures trading is risky business.
Congressional attacks on speculation do not alter the oil market's fundamental demand and supply conditions. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil domestically available, not to mention the estimated trillion-plus barrels of shale oil in Wyoming, Colorado and Utah. Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil. I guarantee you we would begin to see a reduction in today's prices even if it took five to 10 years for us to get the first barrel. Put yourself in the place of an OPEC member knowing there would be a greater supply of U.S. oil in five or 10 years, hence maybe driving oil prices lower to, say, $40 a barrel. What will you want to do now while oil is $130 a barrel? You would want to sell as much oil now, and OPEC's collective efforts to do so would put downward pressures on current oil prices. Right now the U.S. Congress is OPEC's staunchest ally.
Walter E. Williams is a professor of economics at George Mason University.
Recent comments
IT never ceases to amaze me how liberals reject reality and substitute...
Anonymous | July 9, 2008 at 6:37 p.m.
To: To wrz @ 3:03 p.m. wrz | July 9, 2008 at 4:56 p.m.
Again, you're spot on.
To wrz | 11:15 a.m.: "Two possible solutions: 1 - require all...
wrz | July 9, 2008 at 4:22 p.m.
