Bastiat’s Bastions

Steve W. sent me this link to a story in Scotsman.com by Gerri Peev. In it, the writer points out that since the kidnapping of the 15 British Sailors from international waters, Iran has made loads of money. With Iran rattling sabers, committing an act of war, daring Britain and the US to get involved in a war with Iran, that Iran has made about £5 million per day. This is because wars in the Middle East boost oil prices, as speculators bid up the price of oil. In other words, Iran makes money from daring the West, just as Sadaam Hussein probably made a lot of money by ratcheting up the rhetoric about weapons and weapons of mass destruction and what the weapons inspectors could and could not do.

Often, people worry about speculators manipulating commodity prices. In the 1970s or 1980s, the Hunt brothers drove silver prices way up by trying to corner the silver market. As they bought more and more silver, prices rose. When they tried to make money off of the higher prices of silver, the prices came down, driving prices down at the same time, and they lost their shirts because prices came down below the prices at which they bought. They violated a very simple principle of profiting in commodity trading—buy low, sell high—by doing just the opposite.

While it is doubtful someone could make money from manipulating the market by buying and selling in the market, as the Hunts found out, there are other ways to manipulate markets. An individual who could mastermind events in the Persian Gulf that would make speculators worried about future oil prices and then relieve their fears could make lots of money on their own. By buying up oil futures and then pulling off some act of war, such as kidnapping sailors in international waters, one could drive up spot oil prices, sell the futures contracts they bought before their terrorist stunt once spot prices were high. Then, if they could do something that would relieve speculative fears, they could trade oil short, betting that oil prices would fall then make their bet come true. Short trading is done by selling contracts to deliver some good (or a stock or bond) at some determined future date, and then when that future date arrives, buying up the good or investment instrument in the current or spot market at current prices. You make money if the price of the good or investment instrument falls, because then, you would have bought low at the later date, while you had already sold it high. Someone who manipulates events rather than markets, such as an Iranian president, or a Mullah who pulls that president’s strings, can build up large sums.

Perhaps our Department of Homeland Security should keep an eye on the oil market, and oil market futures. I am certain they do. (BTW Last year, I posted this on predicting terrorist acts and election results with markets.)

MC

This entry was posted on Thursday, April 5th, 2007 at 1:01 pm and is filed under General, Political Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.