Speculating on Speculators

Everyday it seems a new scapegoat for rising gas prices gets bandied about the blogosphere. The latest being oil futures speculators, who are charged with creating artificial demand due to hedging themselves against inflation.

I have hear a number of arguments and there seems to be no clear solution. Speculators are an integral part of the trading community and do provide some necessary functions. Indeed, anyone who makes an investment is speculating whether the price of said investment will rise or fall.

However, it doesn't make sense that supply and demand alone can account for a 400% increase in gas prices since 2000-2001. While China and India's economies are booming it seems highly unlikely that prices would spike to such a degree so rapidly. One would assume that prices would certainly be on the rise, but the pace would not be so rapid as we have recently witnessed. Increases of 50-80 cents in a matter of months do not seem like they could realistically be tied to increased demand.

Ethanol has taken a lot of the blame for rising food costs, but many farmers receive subsidies to not grow. Increased demand for corn should mean that more farmers would enter the corn market to take advantage of the higher price they can get for corn thereby increasing supply and lowering the cost.

Many have argued that we should ramp up domestic production to increase supply. Not only is this a short-sighted supply side approach, but why would domestic corps. sell their oil cheaper than what they could receive on the open world market.

Its interesting that this issue has reached such a point that the Saudis are concerned enough about this situation to increase production.