I have always believed that speculation is the reason the concept of modern markets is in existence. Speculation is a zero sum game. Someone pays the price for it and someone else pockets the profit. Crude is a classic example of how speculation can drive a commodity to more than 4.5 times its utility value. The following graph shows the Price of Speculation for Crude from May 2008 to November 2008.
In august this year, the Price of Speculation for Crude was 3 times the utility price of Crude as on 8th December, 2008 ($ 39.74) and with time, this has come down to as low as $10.10, i.e. 1/3rd of the utility price.
In fact the Average Price of Speculation for Crude has been $60.92 for the period which means that we have been paying twice as much for Crude, just based on speculation. Interesting.....
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