Rich Lowry

The global market for oil has, in the imagination of Washington, a mysterious quality that should occupy academic economists for a long time. The market only works when the price moves in one direction -- down.

If the price goes up, some nefarious manipulator is responsible, whether it's oil-company executives, gas-station gougers or -- now -- speculators.

It used to be that price increases were summarily blamed on oil executives. This theory always raised the question: If their greed explained high prices, what accounted for low prices? Their generosity?

If they are guilty of theft at $140-a-barrel, were they being charitable at $20-a-barrel in 2002? And why do their bouts of greed and charity seem, with a suggestive exactitude, to coincide with times of tight or abundant supply?

Thankfully, these imponderables can be put aside now that oil executives are as powerless as anyone else in the hands of ... speculators.

These speculators -- on whom Democrats in the Senate are proposing a legislative crackdown -- are said to be responsible for bidding the price of oil upward beyond any considerations of supply or demand.

Institutional investors and others buy contracts for oil on the futures market, basically making bets on the future price of oil. They can guess that it will go up or go down, and if they're wrong, they lose money.

So they have an incentive to act in accord with their appraisal of market fundamentals. Just because a lot of people bet one way on the future price won't necessarily make it so. And it doesn't necessarily affect the price right now.

In theory, it could if the future price were so high that people were hoarding oil, pinching the supply now to sell it later. There's little evidence of that. Or if producers were leaving oil in the ground to sell it later. Production has declined slightly in recent years, but from factors like the dysfunction of Mexico's state-owned oil company and the dwindling oil in the U.S. in those areas that Congress deems acceptable for drilling.

Global supply is simply very tight. The world only has roughly 1.5 million barrels in spare capacity a day, a razor-thin margin. Any significant supply disruption and people who need oil won't get it.

That risk -- and expectation that supply will remain tight in the future -- gets built into the current price.

Rich Lowry

Rich Lowry is author of Legacy: Paying the Price for the Clinton Years .
TOWNHALL DAILY: Be the first to read Rich Lowry's column. Sign up today and receive daily lineup delivered each morning to your inbox.