It’s been a while since I really angered a good chunk of my readers, so I guess it’s time.

In this spirit today I am rising up in defense of commodities speculators; more specifically, speculators in the price of oil and agricultural products.

There is no group more vilified today than the speculators, and few who are as unjustly attacked. Speculators have been taking a lot of heat from politicians and various other demagogues as the cause of the rapid rise in food and energy prices.

The latest group to get into the act of blaming speculators for rising prices is a coalition of a few big businesses (mainly airlines) that use a lot of fuel. They have banded together to create “Stop Oil Speculation Now,” a group dedicated to getting the government to seize more control over the futures trading market. One thing these businesses fail to tell you is that they were doing badly long before oil prices went up, mainly due to poor management.

If the idea of big businesses calling for more big government doesn’t frighten you, you must be a socialist already. These companies aren’t pushing this agenda for the common good of all of us—they want the government to bail them out by imposing price controls on oil through the back door of impeding the trading of futures in oil.

It’s hard to find an idea as dumb as this getting such serious attention.

Attacking speculators is akin to shooting fish in a barrel. Price speculation is as naked a profit-seeking activity as can be found in a free-market economy, and when consumers get angry about price increases or shortages there is not easier target than the “blood sucking” and “profit before people” speculators.

Of course, nobody mentions that without a futures exchange the modern market in commodities would come to a screeching halt. In fact, the history of futures exchanges—where so-called “speculators” do all their trading—goes as far back as 1710 in Japan and 1800 in America, and some argue that even the ancient Greeks had futures markets.

What good is a futures market in commodities such as oil and food (and gold and silver and…)? Why do we need speculators to make a modern economy work?

Growing food and mining gold and pumping oil are risky businesses. Prices fluctuate a lot, and the supply of those goods varies quite a bit over months and years. A particularly good or bad harvest, the discovery of new oil fields or the flare up of a war in the Middle East, and even the decision to print fewer or more dollars by the Treasury or Federal Reserve can all have tremendous impact on the value of commodities. Supply and demand constantly fluctuate in these markets, and prices along with them.

That makes it difficult for producers of commodities to make long-term investments. They have no idea how an investment today might pay off tomorrow. Will large investments today yield significant profits tomorrow? In just a few hours of one day—July 15th, 2008—the price of a barrel of crude dropped $10. From the point of view of somebody deciding whether to invest billions of dollars in a new oil drilling venture, the prospect of significant declines in the price of oil looks both real and frightening. Same goes for farmers buying new farm equipment, or mining companies investing in a new mining venture. Continued...