The Speculation Explanation: Framing the Energy Crisis

By Matthew S. Miller, AlterNet. Posted June 28, 2008.

"There is nothing in that equation that says oil should cost what it costs today. Nothing! With one exception -- speculation." -- Mike Norman, Fox News Central

"A major contributor (to high oil prices) is the rise in speculation." -- Sen. Carl Levin, D-Mich., to CNNMoney

"Perhaps 60 percent of today's oil price is pure speculation." -- F. William Engdahl, Global Research

The $11 spike in the price of crude oil on Friday, June 6, pasted a great big exclamation point on the sentence, "Something is wrong with oil prices" banging around in the worried minds of America's happy motoring hoi polloi. With the national average for a gallon of liquid mobility hovering around four bucks, fear, now the only motive for action among the populace of fortress America, inevitably initiated some reflection among them. Such instinctive fear-inspired attention developing around the plug-in of the matrix must be deflected, and so it was: Enter the speculation explanation.

The speculation explanation blurs the issues involved in our present energy crisis by suggesting the wrong semantic frame to truthfully explain high oil prices and the likely consequences of depletion. Oil futures speculation is only tangentially relevant to an honest discussion of the price of oil. In fact, it is harmful because it undermines and replaces a reality-based appraisal of the problem. This meme arose simultaneously from a variety of sources by institutional necessity from within the propaganda apparatus to serve the interests of the military-industrial-congressional-cultural complex. Those interests are "business as usual" at all costs. The story will sound familiar.

The speculation explanation filtered through the media system like a virus; the cable TV culture conduit showed footage of it being uttered by corporate shills, politicians, kings and think tank pundiots until it became common knowledge. It was repeated like the pledge of allegiance, everyone marching in lockstep, in exactly the fashion predicted in the propaganda model of media. It was the version of events created for public consumption.

Pairing the words oil and speculation ubiquitously and uncritically, the usual cable news talking heads faithfully disseminated the meme to the masses. The cacophony reached new heights in congressional hearings last week. Politicians from the auto state opined repeatedly about speculation for an obvious reason -- the inverse relation between high gas prices and Michigan's economic survival. The notion of speculation as the principle cause of recent price spikes also found a defender from among those who also believe that oil comes from a magic oil fairy that lives at the center of the Earth and abiotically refills oil reservoirs as they deplete (making the 60 percent speculation quotient easier to estimate presumably?). So what is the average American to make of this?

Economists employ the term speculation to refer to a specific kind of market activity. Markets generate wealth in four ways: profit from direct financing of business activity or investment; profit through risk minimization or hedging; profit from price differences between two distinct markets, or arbitrage; and profit through price differences in a single market, known as agiotage, or speculation. The speculator tries to buy low and sell high, thereby profiting from the market uncertainty about the future supply. Speculation and market manipulation are two different things. The speculator is simply betting the price will go up.

Oil is a fungible commodity in a global market. Used to be that speculation was never a problem for the oil market, since world supply steadily grew year on year, and if the price ever got too high "somebody" would just turn on the pump and flood the market with cheap crude. Call it supply-side price controls. In the early days of the 20th century, that somebody was Uncle Sam and his nephew Standard Oil.

Since the '70s, the world's swing producer has been the kingdom of Saudi Arabia. This macro-manipulation of the price of oil, neo-liberal reservations aside, never garnered a congressional or popular objection, as long as it was the United States or our ally in the desert doing the manipulation in order to keep things humming right along for the disaster capitalists.

While the Saudis announced plans last week to increase their production by a quarter of a million barrels, they -- or even a unified OPEC -- cannot lower price by increasing supply. The proposed increase represents a mere quarter of a percent of daily world production, and it has no chance of making even a minor dent in price. Considerable doubt remains about whether such an increase can be sustained for long. The Saudis cannot increase supply to match demand in any event, so that's it for supply-side price controls. It should come as no surprise that even Abdullah joined the speculation sing-along lest he witness his vast dollar-denominated assets devalue further.

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