Oil Speculators Are the New Boogeymen

by Brian McGraw on April 19, 2012

in Blog, Features

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President Obama and his obedient lap dogs are out in full force this week attempting to convince voters that those evil guys on Wall Street have moved on from destroying the value of their homes to artificially raising the price of gasoline. Soon they are coming for your first born. From one of Obama’s speeches this week:

So today, we’re announcing new steps to strengthen oversight of energy markets.  Things that we can do administratively, we are doing.  And I call on Congress to pass a package of measures to crack down on illegal activity and hold accountable those who manipulate the market for private gain at the expense of millions of working families.  And be specific.

First, Congress should provide immediate funding to put more cops on the beat to monitor activity in energy markets.  This funding would also upgrade technology so that our surveillance and enforcement officers aren’t hamstrung by older and less sophisticated tools than the ones that traders are using.  We should strengthen protections for American consumers, not gut them.  And these markets have expanded significantly.

Now the ability to place blame for rising gasoline prices on Wall Street (or Republicans) is good politics, but its not true. The Center for American Progress report linked to above, chillingly titled “Is Big Oil Rigging Gasoline Prices?” begins by alerting the reader to the fact that the American people, having been polled, believe that Wall Street must be behind the recent rise in gasoline prices. Apparently the average American’s opinion on financial speculation, oligopoly pricing, and their link to gasoline prices is sufficiently meaningful to include in an article not accusing Big Oil of manipulating oil prices, but just putting the question out there. I hastily blogged about that report here, as did the editors of RealClearEnergy.

Obama pulled the exact same stunt last year. He set up some sort of task force/executive agency/working group/etc. to make sure that there isn’t any illegal price manipulation going on. The agency never found anything, and its unclear if they even really did any investigating:

Pressed by McClatchy for details on how an active working group would be reconstituted, Carney said simply that rising prices are a worry now.

“What we are seeing now in the last several weeks and months is a new surge in the price of oil for a variety of reasons that have to do with the global oil market,” he said. “We are seeing then the concurrent spike in the price of gasoline that Americans pay at the pump, and the president believes that it’s important to be sure that there’s no fraudulent speculation involved in that — in those spikes in the price.”

As to why restart a working group if it didn’t find anything last year and went dormant, Carney offered that, “you don’t know until you investigate what you might find. And whatever they found or didn’t find a year ago is not dispositive towards what they might find or might not find as they investigate going forward.”

Just days earlier, McClatchy asked in a March 1 report what the task force had done over the past 10 months; the answer was, very little. Administration sources who spoke on condition of anonymity because they weren’t authorized to say such embarrasing truths acknowledged that the working group had met only five times last year, three of those soon after the April 21 formation of the inter-agency task force. The working group now has met seven times in all, the Justice Department said Thursday.

It’s less embarrassing when you realize this is nothing more than a political stunt designed to convince voters that Obama is doing something about high gasoline prices. From here we take it away to an excellent post by an economics professor/blogger on a similarly ridiculous op-ed in the NYT:

Let me close by pointing those interested in this issue to a recent survey of academic studies of the role of speculation by Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva. The authors conclude:

We identify six strands in the literature corresponding to different empirical methodologies and discuss to what extent each approach sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets.

And another post, by Craig Pirrong, an expert in energy markets who pulls no punches:

In sum, the parts of Obama’s markets aimed at speculator-manipulators are intellectually confused, empirically baseless, and deeply irresponsible because they encourage a witch hunt atmosphere by slandering (by slimy insinuations) legitimate market actors as criminal manipulators.

Well played.  Because of all the practice, no doubt.

A few other things stand out.  First, he repeats the “we use more than 20 percent of the world’s oil and we only have 2 percent of the world’s proven oil reserves” mantra.  Hell, even he admits he says this repeatedly: “But as I’ve said repeatedly.”  Repetition of a dubious factoid does not make the conclusion it is intended to support true. Indeed, that’s a staple of the Big Lie.

Second, he continues to take credit for increased US oil output when in fact he and his administration don’t have a damn thing to do with it, except that it could have been higher yet without some of their counterproductive policies.

Third, take a look at this remark: “We’ve added enough new oil and gas pipeline to circle the Earth and then some.”  To which my first response is:  What do you mean “we” kimosabe? Again, a guy who has never done anything that would risk getting a callous taking credit for the actions of those that actually put hands to shovel and made some truly shovel ready projects realities.  Moreover, it raises the question: if building so much pipeline capacity is such a great thing, why is he doing everything in his power to stall or stop Keystone?  Is that uniquely damaging? (To the environment, I mean, not to the fortunes of Buffett’s BNSF.)

A rule of thumb to keep in mind.  Whenever Obama talks about energy generally, and speculation specifically, it is safe to conclude you are being manipulated: that’s not at all speculative.

Read the rest here. It’s definitely disconcerting that the President is denigrating a completely legitimate, and valuable, aspect of our market economy.

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