Friday, June 13, 2008

O'Reilly and Hannity and Colmes Drop the Ball on Oil Speculation

Dick Morris was on Hannity and Colmes tonight to discuss oil speculators' influence on oil prices. Last night, O'Reilly claimed that high oil prices are due to "greedy speculators" This is spin. If speculators are causing high oil prices, then the mechanism needs to be clarified.

For a subject this important, Hannity and Colmes and O'Reilly should have economists from the CATO institute and perhaps the Brookings Institution debate regulation of commodities speculation. Part of the discussion would explain what makes this situation different from the rest of the 300-year history of commodity speculation. Who are these shadowy speculators? What is the mechanism by which they supposedly drive up prices? Why doesn't real demand by consumers drive down the speculators' inflation of oil prices? Unlike the coverage on Fox heretofore, the debate would need to be specific, clear and avoid double talk.

Dick Morris is a nice fellow but he lacks understanding of economics or of futures markets. I don't doubt that markets can become inflated as we saw with the tech bubble and housing, but such asset holders risk a crash. There is every reason to think that this would happen and, if so, there would be no need for regulation.

Regulation is the wrong idea, but there is nothing wrong with debating it. In particular, such a debate would clarify why speculation has or has not caused the price increase in oil and why the market will not correct on its own. Morris did not explain this. He could barely say the word "futures contract" and I doubt if he could define the term. There has been futures trading since tulip bulbs went through a price bubble in 17th century Holland and then crashed.

Futures holders must sell their oil when the future contract expires. If consumer demand has been reduced because of high prices, when the contracts expire the oil price will decline.

If this basic pattern is to be violated, O'Reilly, Hannity and Colmes owe it to their viewers to explain the reason clearly instead of putting spin on it like saying "greedy speculators" or having an economic illiterate like Morris say that "paper trading" is causing price increases.

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