Monday, June 30, 2008

Oil Crisis III

Having previously placed the blame for rising energy costs on Big Oil, OPEC, greedy refiners and various other vilified price gougers and corporate misfits, Congress is now focused on a new culprit: speculators. Specifically, the hedge funds, pension funds and other large institutions that buy and sell oil futures contracts with no intention of actually taking delivery. They do so purely as an investment.

This is just the latest effort to do anything that seems quick and easy, because creating a truly effective energy policy is so hard. To blame speculators for high oil costs is, at best, to treat symptoms rather than causes. Speculators can drive up prices only when supplies are tight to begin with. They are a kind of canary in the coal mine.

Whatever role the speculators play, you can be sure of this: Neither they nor any of the usual suspects are the sole cause of today's problems, nor is there any single solution. The real culprit is surging demand both at home and abroad. Until the nation begins weaning itself from oil dependency, it will only waste time and money in an unproductive blame game.
USA Today

In short, speculators use money they don't have to buy oil they'll never get. The market is treated like a 24-hour casino while the regulators are asleep.
Some say oil speculation isn't a problem, that it doesn't affect gas prices. But plenty of experts disagree. An international investment firm recently said, "We are seeing the classic ingredients of an asset bubble
." They called it "oil dot-com." I agree.
I believe in markets, but the energy market is broken. It's our job to fix it so legitimate trading is protected.
I've introduced legislation to wring the excess speculation out of the marketplace, and to restore the market's original purpose of allowing producers and consumers of energy to hedge their risks.
My legislation, called the "End Oil Speculation Act
," would shut down casino-like betting. It does not affect legitimate hedging, but it would require energy speculators to put 25% down on their trades, instead of just 5%, and would convene an international group to ensure speculators can't go offshore to hide their trading.
We have a choice. Do we sit back and watch this energy bubble grow as it hurts our economy, or do we take steps to stop the speculation that is driving up energy prices?
This is one bubble that I can't wait to burst.

Sen. Byron Dorgan

The uncertain connection between speculation and price trends is clear in recent history. The Commodity Futures Trading Commission reports how much paper oil is bought and sold by commercial users -- oil companies, refiners -- and how much is bought and sold by speculators. During the first seven months of 2007, speculators as a group tripled the amount of paper oil they owned, buying it from commercial players. But since last August, speculators as a group have not added to their positions -- yet this was when oil prices went skyward.

It would be too much to claim that futures prices don't influence players in the physical market. But to the limited extent that speculators' influence is real, this is probably a good thing. If speculators see that oil suppliers are headed for trouble and that oil demand is trending up, they express their expectation of a higher price via the futures market. This can deliver a valuable message: Governments and consumers had better adjust before shortages get even nastier.

Just as in Nixon's day, government's response to runaway prices would have unintended consequences. The most popular proposals would limit how many contracts a speculator can buy or sell on a futures exchange, and prevent trading with mostly borrowed money. But the more you restrict trading on U.S. exchanges, the more you drive trading into the shadowy world of the unregulated swaps market or onto offshore rivals. In the 1980s, Japan tried to prevent futures traders in Osaka from speculating on the Nikkei stock index. Nikkei futures trading thrived -- in Singapore.

Most fundamentally, Nixon's heirs forget that the "speculators" they attack are often trying to reduce risk, not embrace it. Pension funds have piled into oil because they are trying to protect themselves from inflation. Small investors who load up on retail oil funds are mostly doing the same. I know my family will consume several thousand dollars' worth of oil this year, so I logged on to Fidelity's Web site and locked in my price. Does Congress think I'm irresponsible?
By Sabastian Mallaby
On the surface the idea of regulating the commodities market sounds good and is well intentioned, but there are always two sides to every issue and a lot of unintended consequences from any legislation. I would agree that making people invest more of their own money in the market sounds like a good idea, but what will it really do. The answer is not the legislation that passed the house 402-19. The end result will of this legislation is headlines and little else.

The American public isn't going to let Congress do nothing for long, so instead of wasting peoples time with this zero gain plan. How about Congress coming up with a real incentive package for alternative energy. How about removing the incentive plans from the oil companies, which are doing exactly what? Oil companies are not allowed to drill for the oil they are being paid to find. Wake up Congress and pass real laws that plan for our future. Stop playing to the media and feel good legislation to get re-elected. This does nothing to help.

Right now supply is able to keep up with demand, but what happens down the road when that is not the case. Speculators are not the bad guys in this, but just the current fall guys. What bill are you going to write to increase supply?

If you don't agree let me hear it.

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