[PA32R]

If there are people who need or want to hedge (protect themselves from falling or rising prices) there must be those who want to speculate. They cannot exist without one another. You might as well blame people boarding up their windows for causing hurricanes.

Speculators are the grease that lubricates the system whereby owners and prospective purchasers of commodities protect themselves from adverse price moves. If I want to, I can take a speculative position on either side - I can sell futures as well as buy them. Or, even more highly leveraged, I can buy a call option on a future, or buy a put option on a future. All of these are speculating. I can hedge my "long" position in oil (owning futures, expecting a price rise) by selling call options on my futures (selling someone the right to buy the future at a particular price - if the actual price goes down, he won't buy the future for which he has the option since he can get it cheaper on the spot market and I keep the option price; if the price goes up, I sell him the future, so my upside is limited by my hedging my future).

All of this, in theory, exists for the purpose of enabling producers and users of commodities to stabilize predictable prices for what they will need to sell/buy. The speculators make the market liquid.

There is a vast literature on the web, in your local Borders, and at the University Library in scholarly journals on why oil prices are so high. There's probably a little truth in all of the explanations. But one way to look at it is:

In the 1930's we had the Great Depression. This was a time when no one had money (dollars) and dollars were pegged to a commodity (gold). So as liquidity decreased, dollars became worth more (deflation). This can't happen now because no country's currency is linked to a commodity, rather the opposite. So, flip that. Say your "currency" is oil. Well, we are very likely in a huge economic contraction, so with oil as your currency, it becomes more and more valuable.

This is exacerbated to a certain extent by the fact that oil is priced in dollars, and the dollar is staggering against most currencies for a variety of reasons. Mostly that we are, both publicly and privately, basically insolvent. We exported our ability to produce anything real and we've used up our ability to extricate ourselves by using our natural resources. We're consuming those faster than we produce them. So, our ability to shore up our economy is minimal. Not to mention our trade deficit (hugely impacted by our need to import oil) and the spectacular level of foreign debt.

So, speculators are rightfully confident that purchasing oil on paper using leverage will pay off big time. But they aren't the cause of it. (By the way, I like to use parentheses).