Oil Speculator Witch Hunt, 2011 Edition

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 …

3 thoughts on “Oil Speculator Witch Hunt, 2011 Edition

  1. [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:]

    They don’t know what the hell they’re talking about. Anybody can trade futures now, since the industry was deregulated back in 2000. They don’t control inventory.

    Let’s see… Just who are these conservative “experts?”

    Jerry Taylor (born 1963 or 1964) is a senior fellow at the Cato Institute where he researches environmental policy. He holds a Bachelor of Arts degree in political science from the University of Iowa. He is also a board game designer who has released three wargames, Hammer of the Scots, Crusader Rex, and Richard III.

    Yeah, there’s a reliable source.

  2. Lynne,

    One point that Matt Welch makes in your quote that lacks reason is the implication that policy on domestic oil supply is going to do much of anything to impact either oil prices or our their impact on our economy. There are lots of good reasons to help get that fuel out of the ground in a responsible way – good jobs, profits for US firms, and GDP growth – but the implication that this is in any way related to solving US energy policy challenges for the broader economy is just wrong. This should be the last, rather than the first thing that a conservative take on energy security/policy should bring up.

    I would argue that the biggest part of Obama’s efforts on US energy supply and security for mobile sources is really the new CAFE standards/GHG tailpipe standards. These are likely to be a poor second-best to a gas tax but that’s a different argument. These will over time reduce US consumers sensitivity to gas price shocks and that will be real progress for desensitizing the US economy to oil price shocks since consumer demand is the thing we really care about in this conversation.

    -Mike Wara

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