Originally Posted by Outkast_IRE
For example oil . The AA in a recent article blamed speculators for the recent rise in the price of oil. Leading them to conclude the supply and demand matters less now than ever, they are saying speculators are responsible.
Would it be possible to avoid specualtors alltogether and go directly to an oil producing nation and offer them a set amount per barrell etc.
The same goes for something like wheat etc.
Essential recourse, like any other kind of resource, need to be allocated efficiently, and in accordance with the extent to which they're supplied and demanded. When a harvest is bad, the market for wheat pushes the price of wheat up, in recognition of the fact that if there's going to be less wheat to go around next year, then it's best to have the price of the wheat go up today. It's best to have the price go up today than next year, because the increase in price today reduces consumption today, meaning there's more wheat to go around next year. If the price didn't go up today and went up next year, then there'd be over consumption up until next year's harvest, at which point there'd be an even greater shortage of wheat and an even greater price increase.
So having a market for these commodities makes sense, because it's in general a good way to allocate them. Of course, markets aren't always used when things are very scarce (like during WWII) but in general markets allocate wheat and other commodities well.
Speculation, then, is a tricky thing to get a handle on, because it occurs for different reasons. From the above example, you could say that speculators are pushing the price up; but in that case it's a good thing (good speculation), because they're pushing up the price in response to real supply constraints, and really all they're doing is acting as a part of the market mechanism, enabling wheat to find it's proper world price. On the other hand, it's possible that speculation occurs in the absence of supply constraints, which is what the AA are getting at; this is a bad thing (bad speculation). But the thing is, how do you tell the difference between good and bad speculation? How do you know why someone is bidding up the price of a commodity, perhaps they have information about supply that others don't, which completely justifies their speculation. Or maybe they just think that others think the price will go up, and it becomes a self fulfilling prophecy. It's impossible to tell.
So speculation isn't banned, because 'good' speculation has a valid function, and it's pretty much impossible to tell the difference between 'good' and 'bad' speculation.
Also, regarding your last bit about avoiding speculators; if a speculator is willing to buy a barrel for more than you're willing to buy a barrel, the country selling the oil has no incentive to sell to you.