More on “Speculation”

Note: There’s been a bit of a layoff in posts of late due to the authors’ schedules. I want to apologize to all of our readers. Post volume should mostly bounce back in the near future, rest assured though, the site is alive and well.

Apparently, the case (see examples already posted on this blog) against the rising oil prices being due to a short-term bubble from speculators still has not convinced some market analysts and journalists.

Congress even saw fit to question hedge fund manager Michael Masters about speculation’s role. Masters aggressively condemned speculators for taking food out of the developing world’s mouths. In reality, prices are apparently rising because of energy costs, demand, and biofuels, and speculation plays no real role but Masters is unwilling to admit it.

This is just a matter of opinion, but I would suggest that Masters might not be the greatest investor in the world. Apparently, a sizable amount (30%) of his fund’s portfolio is long on GM and airlines. This is relevant for two reasons: first, he’s clearly not very smart considering how those are performing; second, he has a stake in trying to minimize the public’s fuel price expectations in order to enhance his own position. He is basically “shorting oil” and if the public knows the truth, that there is real supply and demand basis for high oil prices, his fund stands to lose money. One paragraph of a BusinessWeek story summarizes the conflict of interest rather well:

“Financial blogger Greg Newton wrote on June 26 that while Masters presented himself as a disinterested party in oil futures, “his hedge fund portfolio is at least knee-deep levered long in U.S. airline stocks and General Motors,” citing Masters Capital filings with the Securities & Exchange Commission. ‘Mr. Masters, protestations of independence and good faith notwithstanding, most definitely has a dog in the energy price witch hunt.'”

The article itself is not terrible, although it gives Mr. Masters’ argument a bit more credit than it really deserves. Masters himself though is either terribly misguided and somewhat deceptive or just terribly misguided (the latter is a bit more likely). The problem, in a nutshell is given by a Paul Krugman quote towards the end of the article:

“Economist and columnist Paul Krugman wrote in The New York Times on June 27 that Masters is ‘making the bizarre claim that betting on a higher price of oil-for that is what it means to buy a futures contract-is equivalent to actually burning the stuff.'”

Krugman may be a controversial figure, but here he is exactly right. The question now is how long it will take Mr Masters and others like him to figure it out.


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