Barack Obama's Advice to Investors: Buy High, Sell Low!

Well, that is not exactly what the President said, but it is its logical equivalent:

Obama blames speculators for high gasoline prices

ANNANDALE, Virginia — US President Barack Obama blamed oil "speculators" on Tuesday for soaring gasoline prices that risk weighing down the US recovery and could dampen his 2012 election hopes. "It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. There's enough oil out there for world demand," Obama said at a campaign-style event not far from Washington.

Commodity speculation is the purchase (or sale) of a commodity, not because you plan to use it (or you produced it and need to dispose of it), but because you expect that you'll be able to sell (or re-purchase) it at a later time for a higher (or lower) price. And—contrary to the instinctive reaction of a vast majority of the population of the United States and even an alleged sophisticate like the President—it is a social good.

A good speculator must accurately predict price movements (or, to be more precise, their probability distribution). To make a profit, they must buy when prices are low and sell when prices are high. But adding speculative demand when prices are low will tend to increase prices and adding speculative supply when prices are high will tend to decrease prices. In other words, successful speculation tends to even out price spikes and troughs, not cause them.

Successful speculation also helps market prices reflect longer-term trends and risks and indirectly causes physical storage (if possible) and investment decisions to be made which reflect and compensate for these factors rather than merely immediate demand.

Indeed, at some level, the Pres. Obama appears to understand this:

"The problem is, is that oil is sold on these world markets, and speculators and people make various bets, and they say, 'you know what, we think that maybe there's a 20 percent chance that something might happen in the Middle East that might disrupt oil supply,'" he said.

"'So we're going to bet that oil is going to go up real high.' And that spikes up prices significantly," said the president, who recently launched his reelection campaign.

That could conceivably be true. But it can only be a sensible investment strategy if these hypothetical speculators sincerely believe (and back with their own money) that in the 80 percent chance that nothing bad happens in the Middle East—these are the President's odds, but they seem a tad optimistic—the price of oil will fall by less than one quarter than the amount from the allegedly speculation-induced price that it will rise above that price if something bad does happen.

But in that case speculators have bought positive expected value insurance for oil prices and helped smooth them out (on average), rather than caused an irrational price spike for their selfish, greedy gain. The President (and the general population) should be thanking, not condemning, them.

The alternative hypothesis is that these alleged speculators are just not very smart and are messing with the market by making incorrect predictions about the risks of future price movements. But such bad speculators are also a social good. While they may cause market volatility, they effectively give away their money to other market participants by selling low and buying high. And eventually they go out of business as they run out of capital.

When Pres. Obama accuses the speculation of malefactors of great wealth of responsibility for high oil prices, he must assume that they are all bad ones. That leaves the question of why he does not believe that the "problem" will solve itself.

Not that the opposition is much better:

Obama's Republicans foes have pounded him over the rise in fuel prices, accusing him of putting on hold new oil drilling that could eventually lead to lower prices.

Increasing U.S. oil production may or may not be a good idea. To blame the unavailability of the relatively small amounts still to tapped domestically for day-to-day or even year-to-year movements in the global oil markets is inane.