Some pre-emptive scapegoating over rising oil prices

The Politics of ‘Speculation’. WSJ Editorial
Some pre-emptive scapegoating over rising oil prices.
WSJ, Jul 29, 2009

The oil speculators are back—that is, back in the cross-hairs of the political class. On Tuesday, Commodity Futures Trading Commission Chairman Gary Gensler uttered the Pentagon-like phrase that “every option must be on the table” to curb “excessive speculation.” If you’re wondering what makes speculation “excessive,” in Washington the answer is this: Speculation becomes excessive when prices move in a politically inconvenient direction. Which brings us to the real meaning of the three days of theater, er, hearings that Mr. Gensler is conducting this week.

Last summer, as oil prices were peaking, the CFTC launched an investigation into whether $100-plus oil was the result of market manipulation by those “speculators.” That interim report, issued in July 2008, concluded that price movements were largely driven by—wait for it— supply and demand.

The report noted, among other findings, that so-called speculators were net short during some of the biggest run-ups in oil prices over the past several years. In other words, they were, if anything, putting downward pressure on prices during some big spikes. The CFTC also found that markets in which futures trading is outlawed altogether—such as onions (yes, onions)—price volatility tended to be even greater than in commodities like oil with deep and efficient futures markets.

Oil prices began their six-month, 80% slide about the time that report was issued. But since last December oil prices have climbed back up again, and consumer gasoline prices have climbed along with them. This is not popular with voters. Three weeks ago, British Prime Minister Gordon Brown and French President Nicolas Sarkozy warned on these pages about the dangers of “damaging speculation.” Now the U.S. is getting into the act in the form of Obama appointee Mr. Gensler—and Congress can’t be far behind.

So the Gensler CFTC is now poised to issue a follow-up repudiating the commission’s earlier findings. This week’s hearings are being held without the benefit of the CFTC’s actual findings, which are due out in August—but no matter. The CFTC’s about-face is all about the politics, not the economics, of price discovery. And the real goal is not to blame the evil speculators for last year’s price spike or this year’s oil rally, but to lay the groundwork for explaining away the commodity-price bull run that we’re likely to see as a result of the Federal Reserve’s easy money and the Obama Administration’s spending and debt party.

As the CFTC’s 2008 report noted, price signals drive discovery and exploration, albeit with a lag. Low prices today beget shortages tomorrow, while high prices today encourage the discovery and development of future supply. Those prices, in turn, are not the product of any economic model or forecast, but are the sum total of the bids and offers available on the spot and futures markets.

In all of this, what nobody has managed to explain is what, exactly, happened to the omnipotent speculators between July and December 2008. Did they all go on vacation? Perhaps they paused for a six-month drinking binge with their winnings before returning to manipulate us anew in 2009.

No, what we really have here is the age-old scapegoating that our superstitious ancestors would have recognized. The only twist in Mr. Gensler’s case is that he’s trying to scape the goats pre-emptively. On our current fiscal and monetary policy course, the dollar is not done falling and interest rates have barely begun to rise. Both of these market moves will be felt in the commodities markets, as they were after Alan Greenspan cut short-term rates to 1% in 2003-2004. So better to send the posse after the speculators now than to confront the consequences of Washington’s policy errors.

There is an alternative to the market price—it’s called price controls. And the danger is that this is where we’re headed politically. If curbing speculation by limiting trader positions or restricting the ability of “non-commercial” buyers to trade is a politically acceptable way to dampen volatility (remember the onions), the logical next step is a political diktat that oil will not be bought or sold above a certain price.

Truth is, we need more speculators, not less. They’re the people who can help prices find the right level, because there is no “right” level other than the one the market gives us. And that’s why, in turn, excessive speculation is nothing more—or less—than a convenient fiction for when prices don’t move the way politicians would like.