Oil Speculators take us for a ride

With Oil soon to hit $120 a barrel, public interest is building on the role speculators play in pushing prices higher. India’s Solution for Oil Prices: Ban Speculation by Banning Trading quotes:

Buying stakes in overseas oil properties is proving much cheaper for India than purchasing crude on the open market. In some areas where India has purchased stakes in oil fields, it is pulling light crude oil — the kind that sets the benchmark oil price — out of the ground for less than $40 a barrel, Mr. Srinivasan said.

We aren’t supporters of regulation. Using economic analysis we can see that any price above the $40 India can pull light crude out of the ground is economic rent. Thus in many situations, speculators are accounting for two thirds of the price of oil. We propose that the government can eradicate speculation by adopting a more effective revenue raising system. If a resource rental was charged per barrel of oil then resource hoarding would no longer be financial. The resource rental acts as a holding charge, set at approximately 5% of the value of the resource. This rate would soak up the economic rent and deter the buying and selling of oil.

With property and share markets proving unstable, the trade in light crude is increasingly attractive for investment firms and superannuation heavyweights. Light crude is already the world’s most traded commodity and with peak oil pundits pushing their barrow, the expectations for $1.50 per barrel of oil are tightening. Even Fox News is concerned about this trend!

The threat this places to the world economy is paramount. The 1970’s oil crisis was blamed on the Middle East. How ironic that today’s looming global economic crisis can be blamed on monopoly capitalism. Speculation in land (ie US sub-prime), oil, coal, wheat, corn and water is due to the failure of the government’s taxation system to capture economic rent. Such a powerful medium can replace all other taxes on incomes and rid us of indirect taxes like the GST.

Only then will economic freedom be possible. Natural resources are a gift to all living beings and should not be speculated upon for short term profits. No productive value is provided by such activity. Government is sending the wrong signals to the market place by actively allowing this growing speculative trend. If economic rent was captured at source this trend would be averted without the need for regulation and in place of damaging deadweight taxes.

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https://prosper.org.au/2008/04/21/oil-speculators-take-us-for-a-ride/