Publilius Syrus was right

On Tuesday, the President of the United States said something that implies one of two things: he doesn't know what a speculator is or he thinks we don't know what a speculator is.  Frankly, I don't care which it is, because neither is a good quality in a president.  Remember when Bush couldn't say nuclear?  How much comfort did that instill?

"We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit."  -President Barack Obama

 Speculators are people who think that something is priced too low.  If you find a $10 lamp at a yard sale that you turn around and sell for $25 at an antique store, you're a speculator.  If you bought into a hot stock tip, you're a speculator.  If you bought a lottery ticket, you're actually a gambler, and a poor one at that. 

All of those things, though, are voluntary, and require two parties.  The guy who sold you that $10 leg lamp would have preferred to sell it for $25, I'm sure, but either getting rid of it quickly was worth something to him or he didn't know its actual value.  But, after this transaction, both the seller of the lamp and the buyer of the lamp are happier than they were before, otherwise the lamp would not have been sold.  So, in every case of speculation (even on oil), in order for a speculation "bet" to be made, somebody else must take that bet.  Somebody on the other end of the speculation thinks that the price they are being offered is, at the very least, fair, if not good.  Unless you make all your own stuff, everything you've ever bought you  because you thought it was worth the money on the price tag (or somebody else did).

Speculators have been demonized as predatory or parasitic, because they don't make things.  However, price correcting does have value and is not without risk.  Other people selling lamps are happy to know what they are worth (have you ever looked at what similar items are selling for when you post on Craigs List?).  Sometimes the price is not predictable and goes down instead of up or vice-versa, making those various bets go bad.  Like Beanie Babies. 


The price of oil might be undervalued, too.  People are complaining about the price at the pump, but the concept of price is really just a means to distribute resources.  Money is valuable because it serves as a store of value and is easy to carry.  Food is valuable to me, as are books and candy.  How valuable?  We measure that in its monetary value.  If you remember your supply and demand curves from economics, as the price of transportation goes up, people will still pay (inelastic good), but some will find other alternatives  (Biking, carpooling, public transportation, moving closer to work, getting a smaller car, etc.) or suppliers will increase production to take advantage of the higher prices.  If that's the case, then it stinks, but your lifestyle will have to change.  During the Carter Administration, gas was rationed and price was not the means that the resources were distributed, and instead it was (among other things) wait time.  Would waiting in line be less aggravating?

It may not seem fair to the poorer if this happens, but it's not any less fair that the poor don't have Gulfstreams, that the busy may not have time to wait in line for gas, or that interesting people get attractive spouses, either.  That's how resources work, really.  In fact, there are a lot of people who think extra taxes on gasoline would be a good thing in the long run, implying that there is definitely room in the market for speculation.

There is also the awkwardness of the word "artificially."  What does he mean by that?  Is he saying that some participants in the market are illegitimate?  How is that determined?  If I buy a used car for $1500 with the intent on keeping it, but later see on Craigslist someone willing to pay $2000 for it, would that be an artificial transaction?  How long would I have to keep it before it's not speculation anymore?  Or what if I hire a travel agent?  Or buy stock from a stock broker instead of an IPO?  Or buy tickets to a Clemson game on Stub Hub?  Or just a guy selling tickets outside the stadium?  Are they equally artificial?  What is a natural price increase?  What about the extra costs incurred by taxes?  The president could push to lower gas prices by introducing a bill to Congress to suspend gasoline taxes, since they are price effects that are not even made by market participants; at least the speculators have skin in the game.

Now, does that mean Obama doesn't understand high school economics?  Possible, but personally, I think it's more that he doesn't like the answer.  Like people who complain about their lottery tickets not winning.