For the better part of 2007 and 2008, there was a lot of debate in the press and even in Congressional hearings over whether “speculators” were behind the extreme rise in oil prices, and to a lesser extent (from a focus perspective) other commodities such as metals.

"Energy speculation has become a fine growth industry and it is time for the government to intervene," said House Energy and Commerce Committee Chairman John Dingell in June.

Nonetheless, in July a federal task force said that it had found no evidence that speculators were systematically pushing up the cost of energy.

To be clear, what this refers to is the “futures” markets, in which financial players and real companies buy the rights to purchase oil and other commodities at some later time. The financial types, or speculators, have no interest in the commodity per se, other than as financial transaction. They will certainly not take possession of the actual commodity.

So, many felt the oil and metals contracts were rising not based on true supply and demand but by futures traders who kept driving the price they would bid higher based on a belief that the price would keep going up, “fueling” a very un-virtuous cycle. The soaring futures prices also drove up costs for those actually buying and using the oil too, of course.

Contrast that with non-futures driven markets, where the price is more impacted by true supply and demand. If there is more demand than supply, suppliers feel confident about raising prices, and will lower prices if they aren’t selling all they have or could make.

It’s hard to know what the real situation was, but it sure seems to me that the dramatic drop in oil and commodity prices in so short a time provides fodder for the “speculators played a key role” crowd. I find it hard to believe the supply demand situation changed so much in just a few months that it could possibly have caused the price of oil, copper, etc., to fall by 50-70%

So, it looks to me the speculators played a role in driving these prices far higher than they would have gone had there been no futures markets. So the prices we are at now (which are too low to sustain for long, I believe) in the face of modestly shrinking demand are down so much because they came from levels that were at least in part unhinged from true supply and demand.

I do agree absolutely that ultimately the futures markets too must adhere to the laws of supply and demand. But I also believe that they can distort, maybe even greatly, those laws for awhile. I am not an economist, but it looks to me like that’s what happened in 2007 through half of 2008.

I’d love your thoughts on this.