I’ve never really understood the idea that oil prices are being driven higher by speculators (James Hamilton, who’s forgotten more about the subject than I’ll ever know, discusses in detail here). Seems to me quite simple: if there’s a speculative premium (or a terror premium, as people used to say back in 2005 when terrorist activity in Saudi Arabia was in plain view) then that means people are paying for oil that they’re not burning. (If they’re burning all the oil they buy, in what sense is there any kind of premium?)

That’s possible – but if so, where are the rising inventories? News of low stocks in the US was what drove prices to $135 yesterday..

By the way, if the speculators are any good, they’ll stabilise the oil prices. Profitable speculators buy low (driving up the lows a little) and sell high (moderating the highs). It’s exactly what a benevolent deity would do. If the speculators are incompetent, then they can exacerbate oil prices spikes – but we can take the modest consolation that they’ll wipe themselves out while doing it.

Lots more here.

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