Obama and the Oil Speculators

Karin McQuillan
President Obama's re-election prospects rise and fall with the price of oil.  Yet he clings to policies that have caused prices at the gas pump to skyrocket.  Our President's response to this crisis which reaches into every American home is his typical one to any adversity: find someone to blame.  This time, the villains are "big oil" and "speculators."

Obama does not know his onions, according to Bruce Bartlett (staff director of the Joint Economic Committee of Congress  and deputy assistant secretary for economic policy at the Treasury Department under Bush).  In 1958, Michigan farmers successfully lobbied Congress to ban future trading in onions.  Onions, it turns out were driving farmers crazy by doubling in price one day and then dropping below the cost of growing them.  Onions are the only commodity for which trading is banned.

So what happened to the price of onions?  Without speculators, their price swung even more wildly.  This makes complete sense according to how markets work, as Bartlett explains:

This stands to reason. Speculators make their money by anticipating price changes. If they anticipate future shortages, they will buy now and bid up prices. If they anticipate a future surplus, they will sell now and put downward pressure on prices. Thus the whole purpose of commodity speculation is to moderate volatility -- raising prices when they would otherwise be lower and reducing them when they would naturally be higher.

As the famous economist Milton Friedman once explained, the only way speculators could possibly increase commodity price volatility is if they are systematically wrong -- buying high and selling low, which is the opposite of how they try to behave and make a profit. If they were wrong too often they would lose money and go out of business.

Said Friedman, "Speculation is stabilizing rather than the reverse.... People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money."

Economists who compare the price of oil against the price of gold offer another angle on what has driven up oil prices, according to Paul Streitz on the pages of American Thinker.  When this administration prints money to cover Obama's out of control spending, the value of our dollar falls.  Prices of food are rising too, but filling your car is the most visible - one might say visceral - experience of a falling dollar.

The Erste report analyses the gold-oil ratio -- how many barrels of oil one ounce of gold buys -- since 1971. They blame the current spike in prices on the Fed policy of 'quantitative easing,' which makes our dollar cheap. 

The oil price has been stable in terms of gold, but the dollar has lost more than 98 per cent of its purchasing power vis-a-vis oil.  ...more so since quantitative easing began in 2008.

A cheap dollar is translated swiftly and directly into higher oil prices for a very obvious reason: oil sheiks get paid in U.S. dollars, so if the dollar goes down in value, they require more dollars to receive the same value.  

Then there is supply and demand.  Global oil demand grew from some 77 million barrels of crude a day in 2000 to 87 million barrels in 2010  --  a 13% increase.  Our president is pandering to his radical green base by banning or slow moving oil extraction in federal lands.  Some experts say Obama is keeping "more than a trillion barrels of recoverable oil offshore and in federal lands under lock and key."  If that oil was on the market, it would make up the increased 10 million barrels a day demand for a million days - almost a thousand years. 

Even an announcement that the White House would allow more offshore drilling would have a short term but immediate impact.  In 2008, when President Bush announced he was ending the moratorium on offshore drilling, speculators drove oil prices down by $9 a barrel as he spoke.

Clamp down on speculation, and prices would almost surely rise. Why? Because not all speculators are buyers. Some are sellers. Some do both in a single day, perhaps thousands of times.

Like it or not, this activity is crucial to an efficient market. Without it, the oil market would consist of a few huge sellers -- Anadarko, Shell, and Saudi Arabia for instance -- and a few buyers, mostly refiners.

Now there's a recipe for market manipulation. Just imagine OPEC's market power with fewer players and no speculators to keep them honest.

Obama's blame game is based on political calculations, not a sincere effort to lower gas prices.  He has no pity for the ordinary American who is suffering from Democrat decisions to suffocate our economy through restricting fossil fuels.

There is really only one way out of this mess: the ballot box in November. 

See also: Three Cheers for Oil Speculators!

President Obama's re-election prospects rise and fall with the price of oil.  Yet he clings to policies that have caused prices at the gas pump to skyrocket.  Our President's response to this crisis which reaches into every American home is his typical one to any adversity: find someone to blame.  This time, the villains are "big oil" and "speculators."

Obama does not know his onions, according to Bruce Bartlett (staff director of the Joint Economic Committee of Congress  and deputy assistant secretary for economic policy at the Treasury Department under Bush).  In 1958, Michigan farmers successfully lobbied Congress to ban future trading in onions.  Onions, it turns out were driving farmers crazy by doubling in price one day and then dropping below the cost of growing them.  Onions are the only commodity for which trading is banned.

So what happened to the price of onions?  Without speculators, their price swung even more wildly.  This makes complete sense according to how markets work, as Bartlett explains:

This stands to reason. Speculators make their money by anticipating price changes. If they anticipate future shortages, they will buy now and bid up prices. If they anticipate a future surplus, they will sell now and put downward pressure on prices. Thus the whole purpose of commodity speculation is to moderate volatility -- raising prices when they would otherwise be lower and reducing them when they would naturally be higher.

As the famous economist Milton Friedman once explained, the only way speculators could possibly increase commodity price volatility is if they are systematically wrong -- buying high and selling low, which is the opposite of how they try to behave and make a profit. If they were wrong too often they would lose money and go out of business.

Said Friedman, "Speculation is stabilizing rather than the reverse.... People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money."

Economists who compare the price of oil against the price of gold offer another angle on what has driven up oil prices, according to Paul Streitz on the pages of American Thinker.  When this administration prints money to cover Obama's out of control spending, the value of our dollar falls.  Prices of food are rising too, but filling your car is the most visible - one might say visceral - experience of a falling dollar.

The Erste report analyses the gold-oil ratio -- how many barrels of oil one ounce of gold buys -- since 1971. They blame the current spike in prices on the Fed policy of 'quantitative easing,' which makes our dollar cheap. 

The oil price has been stable in terms of gold, but the dollar has lost more than 98 per cent of its purchasing power vis-a-vis oil.  ...more so since quantitative easing began in 2008.

A cheap dollar is translated swiftly and directly into higher oil prices for a very obvious reason: oil sheiks get paid in U.S. dollars, so if the dollar goes down in value, they require more dollars to receive the same value.  

Then there is supply and demand.  Global oil demand grew from some 77 million barrels of crude a day in 2000 to 87 million barrels in 2010  --  a 13% increase.  Our president is pandering to his radical green base by banning or slow moving oil extraction in federal lands.  Some experts say Obama is keeping "more than a trillion barrels of recoverable oil offshore and in federal lands under lock and key."  If that oil was on the market, it would make up the increased 10 million barrels a day demand for a million days - almost a thousand years. 

Even an announcement that the White House would allow more offshore drilling would have a short term but immediate impact.  In 2008, when President Bush announced he was ending the moratorium on offshore drilling, speculators drove oil prices down by $9 a barrel as he spoke.

Clamp down on speculation, and prices would almost surely rise. Why? Because not all speculators are buyers. Some are sellers. Some do both in a single day, perhaps thousands of times.

Like it or not, this activity is crucial to an efficient market. Without it, the oil market would consist of a few huge sellers -- Anadarko, Shell, and Saudi Arabia for instance -- and a few buyers, mostly refiners.

Now there's a recipe for market manipulation. Just imagine OPEC's market power with fewer players and no speculators to keep them honest.

Obama's blame game is based on political calculations, not a sincere effort to lower gas prices.  He has no pity for the ordinary American who is suffering from Democrat decisions to suffocate our economy through restricting fossil fuels.

There is really only one way out of this mess: the ballot box in November. 

See also: Three Cheers for Oil Speculators!