Bets on Higher Oil Prices Rational, but Irresponsible

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Colin Barr at Fortune argues that the rise in oil prices is a ‘rational response’ by speculators, even though “It’s tempting to view that bet as irresponsibly driving up gas prices and endangering a tepid economic recovery.”

Barr is a seasoned industry expert and begs an interesting question here: are the speculators who are driving up oil prices acting rationally?

Our answer is that of course they are acting rationally, but they are also acting irresponsibly.

Here’s Barr:

“The Saudis have been saying they can pump up the volume if there is further disruption to other exporting countries. But talk of oil going to $140 or $150 a barrel starts to look distinctly reasonable if you consider what might happen if it turns out Saudi output isn’t what we think – let alone where prices might go if things get ugly politically.”

In a market economy, rational actors seek profit. Within the rule of law, those actors will do anything to make money. So of course speculators are acting rationally by driving up the price of oil and pegging their “concerns” on “uncertainty,” because doing so makes them all rich.

The scenario listed above by Barr is unlikely, so we do not foresee oil prices going that high. Barr is right on this point, though:

If something does come unglued, there is not a lot the United States can do about it. Though the gadflies may buzz about cracking down on futures trading or releasing fuel from the Strategic Petroleum Reserves, our failure to take things like conservation seriously mean that as usual we are struggling to fix a long-term problem with a short-term mindset.”