Daily Archives: April 22, 2011

Oil speculator witch hunt, 2011 edition

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Lynne Kiesling

Following up on Mike’s post yesterday about pandering politicians and their 2011 edition of the recurring petroleum price witch hunt … Others have weighed in on the idiocy of this “Oil and Gas Price Fraud Working Group”. Let’s start with KP’s go-to energy finance economist, Craig Pirrong:

… it’s an opportunistic effort to scapegoat others on the basis of zero evidence in order to distract attention from the real issues–but that’s cool!

Here’s a non-enabling professor’s take:

“Craig Pirrong, a finance professor at the University of Houston who specializes in commodity prices, says the task force is hardly needed, since the agencies already have the tools to monitor for fraud and take action. [Yeah.  It's like their day job.]

“This is a transparently political fishing expedition that insinuates that fraud or manipulation is distorting oil prices without providing even the flimsiest factual basis for such a suspicion,” Pirrong said. “This is part of a broad effort by the administration to deflect criticism with regard to gasoline prices.””

Actually, the “fishing expedition” characterization is probably optimistic.  Especially given Obama’s assertion of ownership of the issue, and his personal identification with the claim that speculators are distorting prices, there is a high likelihood that fishing expedition will give way to witch hunt.  Remember when Obama told bankers “[m]y administration is the only thing standing between you and the pitchforks”?   It is becoming increasingly clear that Obama won’t be standing between oil “speculators” and the pitchforks this time.  Indeed, he’s taking leadership of the mob.

And this from KP’s go-to journalist (and, I’m convinced, sometimes more-eloquent inhabitor of my brain), Reason’s Matt Welch:

Here’s your federal energy policy: Do nothing significant to increase domestic supply, create mandates to have XX% of future supply come from magical green leprechauns, then when prices (surprise!) go up, you know what to do: Blame the “speculators”.

Finally, Cato’s Jerry Taylor and Peter VanDoren in Forbes give a thorough, straightforward lesson on how futures market works to indicate how ludicrous the “speculators are raising petroleum prices” argument truly is:

If this is going on we would expect to see some sort of inventory buildup. While crude inventories in the U.S. are increasing, they always increase at this time of year, and this year’s increase is well within the normal range. More important, gasoline inventories are decreasing and decreasing much more rapidly than normal. Hence, there’s no evidence that speculators are reducing the supply of crude or gasoline through increased storage.

Producers, however, could react in the same way to higher futures prices by decreasing current production to allow more future production at higher prices. Alas, we see no evidence of suspicious reductions in producer output that might give this story credence.

They then go on to give a good, concise summary of recent research showing that both prices and quantities in petroleum futures markets are reacting to global factors, such as political unrest in Libya (shifting the oil supply curve to the left) and increases in economic activity (shifting oil and gasoline demand curves to the right). Even a basic understanding of introductory economics would enable the interested observer to conclude that, while the ultimate quantity of oil and gasoline transacted is ambiguous, the combination of a decreased supply and an increased demand will unambiguously increase prices.

Perhaps someone should inform the DOJ and the Obama Administration, assuming that they actually care about the underlying economic fundamentals …

“What we call ‘smart metering’ today will business as usual tomorrow.”

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Michael Giberson

The title is a quote from a Q&A conducted by the Financial Times Energy Source blog with a couple of top executives from smart meter maker Landis+Gyr. Part 1. Part 2.

Questions were culled from suggestions from readers. First up in Part 1 are two questions from Tyler Slocum of Public Citizen:

Does the industry acknowledge that households must have consent on installation of these smart meters? And isn’t it true that unless the smart meter is integrated with “smart appliances“, then the smart meter’s ability to save consumers’ money is severely limited?

Go to the Energy Source blog to see the Landis+Gyr answer. Here is my response:

First: I’m all for consumer consent in retail electric power markets, but why pick on installation of smart meters? The local wires company likely owns the preexisting dumb meter, it presumably has every right to update the old meter when a new meter comes available. What right of the household is potentially infringed by a meter owner who changes the metering device without consumer consent?

I get that a smart meter has the potential to change the relationship between customer and power company, and, to rephrase myself, I’m all in favor of active customer involvement in this relationship. But we are approximately 100 years into a regulated environment (at least in the United States) where nearly every aspect of this relationship has been worked out between regulators and the regulated companies and barely the slightest nod over this 100 years in the direction of consumer consent.

Certainly, households should have the power to consent, or not consent, on all parts of this relationship. But the metering device is an odd place to start the conversation on consent. How about consent in the choice of retailer including the opportunity to choose someone other than the local monopoly? That would be consent worth talking about.

Second: No it isn’t true that a consumer needs the meter to be integrated with smart appliances in order to get more than “severely limited” savings. For example, in the Texas competitive retail power market, all of the retailer contract offers that currently require a smart meter are for prepaid consumer accounts. At least some of these offerings are for accounts that don’t require deposits, don’t impose disconnection fees, and can’t lead to the possibility of late charges or other penalties. For some consumers, these aspects of the accounts reduce the financial burden of paying for power service.

(Some environmentally-minded consumers like pre-paid accounts because it helps them cultivate a stronger awareness of their energy use, presumably also leading to some savings.)

Prepaid accounts don’t inherently require a smart meter. Some companies in Texas offered prepaid services that involved estimated billing, but these kinds of prepaid contracts did result in a lot of excess consumer fees due to the inherent difficulty of estimating bills without a smart meter. Estimated-bill prepaid accounts in Texas led to a lot of consumer complaints to the utility commission. Smart meters help eliminate one big source of disputes and are saving low income consumers money.

Why do credit rating agencies still have any credibility?

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Lynne Kiesling

On Wednesday morning Planet Money’s Jacob Goldstein was on NPR’s Morning Edition discussing the role of credit rating agencies in the economy, in the wake of the signal earlier this week from Standard & Poor’s regarding their assessment of the quality of U.S. Treasury debt. The statement itself had only a fleeting negative effect on U.S. equity markets, and has not translated into changes in bond yields, despite the widespread acknowledgment that their perception of U.S. government debt is consistent with the beliefs and expectations of other observers and analysts.

But what I really appreciated in the story was an exchange between Goldstein and host Mary Louise Kelly that reflects the first question that popped into my mind on hearing of the S&P statement: why does anyone even place any weight on their pronouncements?

KELLY: And why should we pay attention, generally speaking, to pronouncements from S&P or the other rating agencies – the other big two being Moody’s and Fitch. I mean, they turned out to be incredibly inaccurate in the financial crisis, lots of mortgage-related bonds that they rated very highly turned into junk. Why trust them?

GOLDSTEIN: That’s a great question. They certainly got a black eye in the financial crisis. But despite whatever their performance may have been, the big ratings agencies, they’re still written into the laws and the regulations that govern our financial system. So, for example, if rating agencies lower their rating, that can force banks and insurance companies and other big financial firms to sell off that country’s bond. So the rating agencies still do matter.

KELLY: You say that their influence is written into the law, but these are not government agencies. How is it, exactly, that they work?

GOLDSTEIN: They’re private companies. And when they rate corporate bonds and mortgage bonds, it’s actually the companies that they’re rating that’s paying them. So it is this very strange hybrid, right? On the one hand, they’re private. They make a profit. But on the other hand, the law gives them this special position in the financial system.

Where I’m from we call that “special position” a conflict of interest that creates perverse incentives.

After all of the putative attention to increased financial regulation, the purported increase in consumer protection in retail financial transactions, I am still flabbergasted that the “special position” of the credit rating agencies has not been modified. They have managed to dodge what I think is some very well-deserved criticism for their role in perpetuating the unrealistically optimistic expectations about returns on mortgage instruments and their derivatives. Some of the best critical analyses I’ve read come from Gillian Tett at the Financial Times (the article is an excerpt from her book Fool’s Gold).

In a similar vein as the TSA’s “security theater”, all of the sound and fury of the financial regulation of the past two years is “regulatory theater” as long as these deep, perverse incentives are not addressed. Regulatory theater may make some financial consumers and their elected representatives feel more secure, but it’s window dressing compared to core perverse incentives such as those under which the rating agencies operate, and it’s therefore a waste of our money and resources.