Market Analysis

Demand or Speculate

Oil endured its second biggest drop on record Tuesday…and "blame” was finally attributed to supply and demand, not speculators.

Story Highlights:

  • Speculators have been getting the lion's share of blame recently—from Congress to the airlines—for rising oil prices.
  • However, in a twist, when oil fell by its second biggest margin ever on Tuesday, it was over economic concerns raised by Ben Bernanke tied to lower demand.
  • This is a classic attempt to have it both ways—but markets don't work like that. Since supply has remained relatively constrained; it's demand, not speculators, pushing prices both up and down.


Speculators have been on the ropes over high oil prices for a while, leading to calls for greater regulation of speculators. One airline went so far as to ask their customers, in an open letter, to write their senators:

Oil Speculation
By Russell Roberts, Café Hayek

The letter outlines their case: "Ultra-expensive fuel" causes unemployment and slower growth in the airline industry and more pain overall. A quote from "some market experts" estimates "current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs." Their proposed solution is to toughen regulation and reforms to "help cool the over-heated oil market and permit the economy to prosper."

Setting aside questions about who their unnamed market experts are and how they arrived at their $30 to $60 figure unveils another problem. Oil prices are high today because the global economy has expanded for several years running. As explained in our 6/17/08 cover story, "Speculation Accusation," speculators don't organize and conspire to drive oil prices higher—theirs is a key role in normal market activity that can actually reduce risk. Further, note speculators, unlike growing emerging markets, don't consume commodities. Virtually none take physical delivery of the commodities in which they invest, so they don't contribute to actual demand. And, though this can be hard to accept as filling the gas tank gets pricier, high oil prices aren't inherently bad. Fact is, today's high oil prices prove continued demand from a growing global economy.

This concept may finally be catching on, as Tuesday's big oil price drop was attributed to Ben Bernanke's comments about economic concerns tied to slowing US demand for oil.

Biggest Oil Price Drop in 17 Years
By Kenneth Musante and David Goldman,

The headlines about dropping demand leading to lower oil prices have, for today, largely replaced those blaming speculation for higher prices. But this is strange. We can't have it both ways—prices aren't driven by speculation on the way up and demand on the way down. As Bernanke explained in his comments on Tuesday, "if financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But in fact, available data on oil inventories show notable declines over the past year."*

If you want a culprit for oil prices today—no matter which way they head—blame demand. But that doesn't mean Tuesday's big oil drop is the first hint of a coming downward trend. Rather, oil prices, though volatile in the near term, will likely remain firm. A big downward trend would require not just slowing growth, but outright global recession—at this point unlikely. Does that mean speculators will get a break from headlines and government scrutiny and we'll only see prices discussed in terms of supply and demand from here on out? Probably not. But we can always speculate.

*You can read Bernanke's full comments here:

Semiannual Monetary Policy Report to the Congress

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.