What is a Speculator?

In terms of financial markets, a speculator is a person, or more likely an institution, that purchases or sells commodities, stocks and/or bonds based on factors other than simply analysis. Investors, on the other hand, focus, by and large, on detailed analysis.

An oil speculator, for instance, will buy shares of “paper” or “future” barrels of oil from an oil producer and sell or broker this future oil to a user for an inflated price based on speculation that prices will rise even further. This is where the term “oil futures” originates. This future oil is either untapped (reserves) or is sitting un-contracted in a supplier’s tanks waiting to be sold. Therefore, the supplier or oil company actually owns the oil and the investor or speculator buys shares of this oil on the expectation that the value of the share will rise.

Oil users, in order to make a profit, have to be financially prudent. One method whereby the petroleum users can increase effective operation is to “hedge” on oil supply purchases. This means that they will purchase a long-term contract for oil at a price determined, in part, by the speculator. The user, thereby, expects that this contracted price will remain lower than prices over the long run, while the speculator expects a more lucrative return on his next contract since he is driving prices higher with an inflated price for his last contract.

Oil speculators have been blamed — some say unfairly — by politicians and consumers for driving oil prices unnaturally high through hoarding, price gouging and collusion with suppliers. Other analysts maintain that supply and demand is the true culprit, primarily because of the underestimation of the impact that the exploding Asian oil markets have had on the available oil reserves. Still others blame OPEC (Organization of Petroleum Exporting Countries). OPEC, at one time the single most influential force in the oil market, is now only one third of the driving force behind oil price increases. Supply and demand, rampant speculation and profit taking on the part of the petroleum industry are, arguably, the major factors contributing to what many call the artificially inflated price of oil.

The oil speculater, meantime, expects that the intricacies involved in the production and distribution of this important source of energy are so internationally diverse and resistant to regulation and so deeply in flux as to be virtually impossible to decipher or control.