Today's topic is the recent spate of proposed legislation targeting that anathema, high oil/gasoline prices. I don't have any fancy links to articles in the MSM about this stuff, but suffice it to say that the House Energy and Commerce subcommittee on Oversight and Investigations is meeting perhaps as you read this, with some legislators intending to place an outright ban on speculation in energy markets. Other legislators would simply place limits on the size of the bets made in energy speculation. With differing degrees, these proposals boil down to the same thing, so I'll pretty much lump them in together.
The first and most obvious reason (probably the least persuasive to all you forcetarians out there) is that speculation/trading/investment are freely voluntary contractual arrangements that should not be put asunder for perceived "greater good(s)." Simple as that.
Fortunately for those of you who can't think of yourselves in other people's shoes unless those other people are some sort of canonical minority, there are practical reasons why speculation in general is very good for the economy. Walter Block does a very good job of making this argument in his book Defending the Undefendable.
Speculation is essentially a mechanism of price discovery, and prices are the essential mechanism of indicating the relative importance of a good or service. A high price a signal that says "Hey! I'm important, conserve me!" In the context of oil, a high price triggers all kinds of responses in consumers that alter the way they consume. If you're an environmentalist (I'm not), you probably ought to cheer the higher price of oil, considering how it has fundamentally changed the American motor car scene. In a car culture formerly dominated by the theme "Idiots like Hummers", we're starting to see a lot more in the way of themes like "Poor college-bound kids like to walk and ride bikes" and "Idiots like Hybrids." But seriously, freakin' GM is probably going to go out of business (or get bailed out) because the Hummer is not a status symbol anymore.
Back on topic: the essence of the legislation against speculation is that the price increase in oil isn't real, it's somehow fake, a result only of the speculation itself. But that really fails to ask the question of why the speculators think the price of oil should go higher. (At this point, I should also mention that not all speculation increases the price of a good, since you could speculate in lower futures, etc.) There are a couple of 800 pound gorillas in this room, maybe even some larger, that we're missing when we pretend like the speculation has no connection to reality. Here's a brief list of the reasons oil at $200/barrel might not be so unreasonable.
- Peak Oil - I don't really believe in it, but others whom I respect do. If true, prices are going to have to gradually rise as the supply falls, lest we suddenly wake up one morning and realize that we don't have any oil left for important stuff like barbie dolls and shampoo bottles. (Yes, that shampoo I sold you was just crude oil in a mason jar.)
- Inflation - Commodity "price inflation" could well be the theme for the decade, and with the government printing enough new money and credit do devalue the dollar by something like 95% since the 1970s, it doesn't seem terribly unreasonable.
- Middle East Conflict--Namely War With Iran--Namely Carrying Out The Orders Of Our Jewish Masters--No Wait Scratch That Last One - I don't have any statistics, but I'd love to know what portion of higher gas prices come from the U.S. Armed Forces in the form of raw demand (those tanks have horrible gas mileage) and supply disruptions, including those disruptions caused by "The Insurgency" whose presence as an armed disruptive force is generally the fault of the U.S. occupation in any case.
Finally, in a political context, the proposed legislation is really nothing more than an attention-seeking power-grab by those who are responsible for two of the three crises I've mentioned as causes for potentially higher prices (with the exception of Peak Oil). If someone such as Sen. Lieberman truly cared about oil prices (or U.S. consumers, or mere humanity, or in general if he weren't some sort of politician), he would say something to the effect of, "In order to curb rising oil prices, and out of deference for the peaceful needs of the American people, and acknowledging the rather large stockpile of nukes with which Israel can deter its antagonists, and since its not technically our business anyway, and in general to not be a world-class hater, let's just scrap this whole idea of policing the Middle East and in particular let's promise unilateral friendship towards Iran." These politicians generally just want more power, and the more they break something, well, that's all the more justification for new and greater powers over it.
So, there. Without the grace of an editor, there are three good reasons not to ban or limit speculation in oil markets.
