April 25, 2012 -- On April 17, President Barrack Obama addressed Americans about rising prices of gasoline, now above $5.00 a gallon in parts of the country. In any market economy, the cause of rising prices is that demand for a product has increased relative to the supply of it. Prices come down when demand is reduced or supply increased. That these obvious principles must be repeated is part of the problem we face.
President Obama, standing beside his attorney general (suggesting the tenor of his “solution”) gave a brief nod to “supply and demand”--and then got to this proposal for pretending they are irrelevant. His proposal is to spend $52 million to regulate, suppress, and punish “speculators” who allegedly are causing higher prices at the pump by “manipulating” the oil price.
He proposed a ten-fold increase in civil and criminal penalties for “illegal manipulation” of oil prices, but did not define such manipulation. Indeed, the proposal appears to call for spending money to ascertain what “manipulation” is. My best guess is that what is being targeted is investment money from large institutions that are buying oil in anticipation of a rise in prices.
The speech was cast in Mr. Obama’s rhetoric of pitting the American middle class against the wealthy: “We can’t afford a situation where some speculators can reap millions while millions of American families get the short end of the stick.” Marxist class-warfare rhetoric has evolved, in recent years, from references to “the poor” and “disadvantaged” to the middle class because that is where the votes are. Also, the policies of ever-greater regulation, taxation, and inflation threaten the prosperity of the middle class, making their fears ripe for political exploitation.
What Speculators Do
It is embarrassing to hear the President of what is, for all its burden of government controls, still one of the most capitalist countries in the world, blaming speculators for economic consequences caused by supply and demand, and, to a considerable extent, by government. The speculators to whom Mr. Obama refers are traders in the futures markets, who
buy or sell contracts for future delivery of a host of commodities—including crude oil. Their sole objective is to discern the direction of prices and place their trades to take advantage it. For every “long” contract that a trader buys, anticipating higher oil prices, there must be a seller, anticipating lower prices. For some years, the price at which crude oil contracts change hands has tended to rise—albeit with some wide swings—and buyers often make money. They make money because the supply and demand situation has favored higher prices.
Polls indicate that when gas prices rise Mr. Obama's support declines. Thus the need to scapegoat.
The reasons for higher oil prices (and a wide general rise in commodities prices—oil, coal, copper, iron ore, gold, and many agricultural commodities—have been discussed at length. Chief among those causes are the surging economies of China and India, as their governments permit at least relatively freer markets, somewhat more secure property rights, and greater opportunity for private profit. Billions of individuals in these countries are more productive and able to demand (pay for) a higher standard of living. This explosive growth has made China, in just a couple decades, one of the world’s largest consumers of oil, steel, coal, iron, copper, and a host of other commodities.
Pressures on the Oil Supply
Oil supply also has been affected, and uniquely, by geopolitics of the Middle East, Africa, and South America. Some of the world’s largest oil producers are countries that have reversed
the market process underway in China and India, damaging their economies and oil production. In one of the largest oil sellers to the United States, Venezuela, a socialist dictator has nationalized, looted, and crippled a once vibrant oil industry. The U.S. Energy Information Administration reported that “Venezuela’s petroleum exports have dropped by almost 50 percent, since peaking at 3.06 million [barrels a day] in 1997.” Socialist dictator Hugo Chavez was elected early in 1999.
President Obama shares a considerable amount of fair blame for the doubling
of oil prices since he took office.
Iran, one of the largest oil exporters in the world, is a theocratic dictatorship, but, also, is hampered by worldwide economic sanctions. The International Energy Agency, the West's energy watchdog body in Paris, reported Iranian oil production fell to a 10-year low of 3.38 million barrels per day in February of this year. Recent oil industry reports suggest Iranian exports have fallen badly since then: from around 2.2 million bpd in February to 1.9 million bpd in March. The IEA emphasized that output could tumble to levels last seen during the 1980-88 Iran-Iraq war, when both sides' oil industries were strategic targets.
In the case of Iran, we also must wonder, from month to month, when and if Israel, with or without the active involvement of the United States, will launch a war that would devastate Iran’s oil producing capacity and perhaps drive Iran to close off the flow of oil through the Persian Gulf.
Africa’s major oil producer, Nigeria, is under attack from rebel forces that operate in its oil-producing region and regularly kidnap foreign oil workers.
I am not arguing here about policy toward Iran or about rebels in Nigeria. I am pointing out that there are valid and powerful causes for the rise in oil prices, and, in most cases, these problems are getting worse. For example, with daily talk and negotiations aimed at heading off war with Iran isn’t there reason for the price of oil to remain high?
Enter the Scapegoats
Mr. Obama and his advisors are aware of all this. Indeed, it would not be implausible for Mr. Obama to point to these causes to explain why oil prices have more than doubled
since he became president. Ah, but polls indicate that when gas prices rise Mr. Obama’s support declines, and that prices at the pump threaten his re-election. Thus the need to scapegoat. Almost since organized economies have existed, the scapegoats for the consequences of government actions have been speculators, hoarders, and (in the Soviet Union and China) “capitalist wreckers”—and often the penalty has been death. Economists and historians have pointed out, routinely, that this is scapegoating—but apparently the temptation for politicians is overwhelming.
The political motivation behind Mr. Obama’s attack on speculators was so obvious that the press felt free, even in news stories, to state it. Yahoo! News reported the story under the headline: “President Obama Targets Oil Speculators—Another Election Ploy?” USA Today wrote: “The plan is more likely to draw sharp election-year distinctions with Republicans than it is to have an immediate effect on prices at the pump.” Stories almost uniformly commented that it wasn’t at all clear that the measures would have any effect on gas prices.
But gas-pump pain is hurting Mr. Obama in the polls, threatening his re-election chances and Democrats in Congress urge him to attack because their re-election chances, too, are affected. That trumps all considerations of integrity in policy and truth in explanation.
Can Speculators Profit?
If economic reasoning were even a consideration in the President’s proposals, he would have to deal with the demonstration by economists, that speculators cannot profit from price increases that they themselves cause. If prices rise only because of buying by speculators, then, when speculators sell their positions, the sales will drive prices right down to where they were when the speculators began to buy. The first to sell might profit, but, as a group, the buyers will get the same average price at which they bought. They also will be out the costs of storing the commodity or keeping their investment funds tied up in the oil. Professor George Reisman, in Capitalism, demonstrates this by diagramming the inevitable price movements and explaining the principles at work (pages 223-225).
A point made in news reports on Mr. Obama’s speech is that studies show that activities of speculators do not increase the price of oil but can affect the shorter-term volatility—the ups and downs—of prices. Yet, according to Mr. Obama, “investigations” have suggested, and at least one oil company executive has stated, that without speculation oil prices might be lower. This is completely consistent with the crucial role that speculators play in the market. Speculators profit (if they do) by correctly anticipating future shortages of a product such as oil; their response is to bid up the price, which has the effect of limiting present demand (because higher prices reduce such demand). This, in turn, has the effect of reducing future shortages by limiting present consumption of oil. You may be interested in Prof. Reisman’s brilliant exposition of this principle. Yes, speculators today, with good reason, foresee very real risks that oil supplies will plunge in the event of a war with Iran, for example; and so they bid up the present price of oil. This reduces demand now and so conserves oil for a time when it may be desperately needed.
But more is involved than the President, faced with blame for higher prices caused by worldwide supply and demand, trying to find scapegoats. And, of course, speculators—and Wall Street, in general—are excellent scapegoats at this time, since many millions of words have been written to try to blame them for the 2008 financial panic, stock market crash, and ensuing “Great Recession”—and to deflect blame from the government policies that made those catastrophes possible. Polls suggest that to blame Wall Street, investors, and the wealthy is good politics at this time of economic fear and hardship.
The Anti-Oil President
The “more” involved, however, is that President Obama shares a considerable amount of fair blame
for the doubling of oil prices since he took office. His rhetoric, decisions, policies have discouraged, hampered, or choked off a greater supply of oil—and so lower prices. From the outset of his election campaign, four years ago, he has urged every possible alternative to oil—including solar energy, wind, and geothermal sources. He has campaigned for what he sometimes
calls “independence from foreign oil”—but which is, in fact, independence from oil itself
. (And he has slipped and said that several times.)
Just as consistently, his decisions have slowed or halted production of new oil. He cites statistics to counter the perception that he has been against oil production—claiming, for example, that there are more drill rigs today than when he came to office. But the issue is not whether there are more rigs but how many more there could have been and should have been in light of the unprecedented worldwide surge in demand for oil and potentially devastating threats such as loss of Venezuelan oil or a war with Iran that would close off shipping through the Persian Gulf. Mr. Obama also says that oil production in 2011 reached an eight-year annualhigh. Other sources confirm this, but add that such production was less in 2011than in any years between 1950-1980. And Mr. Obama had nothing to do with the recent increase: Virtually all new drilling has taken place on private lands or state lands, where federal permission is not required to drill. In other words, companies gave up trying to get permission from the Obama administration to drill on federal land.
Mr. Obama has made so many decisions against oil production, and they are so complex (or deliberately obscured), that discussing them must await another article. Here are a few decisions that such an article would have to discuss.
During the administration of George W. Bush, when oil prices began to rise, President Bush reversed a policy instituted by his father, George W. H. Bush, and opened wide ranges of the Atlantic, Pacific and Gulf coasts to off-shore oil drilling. When Mr. Obama came to office, he reversed that decision. Since then, his policy on off-shore drilling has been obscured by agreeing to such drilling and then qualifying it and endlessly delaying actual permissions—in one major case for a five-year environmental impact study.
The oil sands in Alberta Province, Canada, may contain as much oil as did the largest oil field ever known, in Saudi Arabia. To bring this oil to U.S. refineries, the Canadian government, against the usual environmentalist opposition, approved construction of a pipeline from the Canadian oil fields to the American Midwest and this was built. But the real need was to carry a much larger volume through a pipe that would run all the way to the great Texas oil refineries and ports. Again, in the face environmentalist and union protests, the Canadian government approved the “Keystone XL pipeline,” which, so far, has been built to the Canadian border. The XL pipeline was proposed in 2005. The usual almost endless environmental studies were completed and the company made more than 50 changes to the planned pipeline to reduce the chance of spills. Since then, the pipeline has awaited U.S. Presidential approval to cross the United States-Canadian border. Usually, this is a routine decision by U.S. agencies, but, faced with protests from environmental organizations, such as the National Resources Defense Council, President Obama stepped in and rejected the permit entirely.
The House of Representatives voted to speed up approval of Keystone XL. But polls showing that Americans, especially in the states affected by the pipeline, overwhelmingly support the project, has stiffened President Obama’s spine to oppose the environmentalists in an election year. Thus, in March of this year, only three months after he withdrew the permission to build the pipeline, he gave a major speech in Cushing, Oklahoma—a huge oil hub—to announce he had “fast-tracked” the permission process. But that was for only part of the pipeline, and not the section from Canada. The rest of the project is on indefinite hold for additional environmental studies (and till after the election). To summarize Mr. Obama’s on-again/off-again opposition, then support, for projects like this would require another article.
Mr. Obama, in the language of middle class versus rich, has proposed to raise more revenue by withdrawing “special privileges” and “subsidies” from oil companies. In principle, the government of a free market economy would not favor any industry by means of taxation or controls. But, within our complex, interventionist tax system, it is arbitrary to threaten withdrawal of tax benefits from oil companies—at a time we desperately need more investment in oil exploration.
What are these “special privileges” and “subsidies” that Mr. Obama would withdraw? He wants to reinstate royalty payments to the federal government from companies drilling in the Gulf of Mexico and end certain tax deductions for their development costs. In other words, government today is just not demanding extra payments for drilling the ocean bottom and is allowing companies to deduct certain business and development costs.
Speculating on the Obama Effect
One of Mr. Obama’s claims is true. He imposed regulations on automobile companies to require them to build more energy efficient cars and trucks; another round of even tougher regulations is expected. This is one kind of “fix” the administration can manage: force businesses to spend more and, of course, consumers to pay much more, for cars that meet still higher fuel-efficiency requirements. There is no way to tell if the costs added to cars will ever be recouped by consumers through lower oil prices, especially since yet another round of regulations will dictate the size and weight of vehicles that companies can build. If only government could pass a law to make more oil appear in storage tanks! But dictates work only on people, not the laws of nature.
Those are several of a myriad of decisions, policies, and rhetorical attacks by which Mr. Obama has halted, slowed, discouraged (or played with substitutes for) production of more oil. His proposal to criminalize speculators, with no economic justification, cynically shifts the blame for political reasons. It will not bring down the prices at the pump. In fact, a speculator, whose role in the market, and personal goal, is to profit by smoothing out supply and demand between the present and the future, might well take Mr. Obama’s proposals as an indication that oil prices will go higher.
After all, if re-elected, Mr. Obama may come out the closet as a full-blown radical environmentalist, opposed in principle to the exploitation of natural resources for human wealth. In any case, he would have four more years to subvert oil production in the name of “alternatives.”
If passed by Congress, or implemented administratively, his crusade to criminalize speculation will undercut the crucial economic role of speculators: to minimize the impact of projected future shortages. If left alone, speculators would do this by bidding up the present price of oil, reducing demand now and conserving supply, thus lessening the impact of anticipated future shortages. Prices now would be higher, but prices later would be lower than they otherwise would be.
Mr. Obama is a bright man, surrounded by others of great ability and intelligence. The only plausible explanation for his proposals on speculation is dishonesty in pursuit of power.
Walter Donway has been a trustee of the Atlas Society since its inception. Until 2002, he was editor of Cerebrum: The Dana Forum on Brain Science for the Dana Foundation, where he was director of the Dana Press. He has published dozens of articles on the economics of health-care regulation in Private Practice, Medical World News, and Human Events. His lead op-ed article in the the Wall Street Journal, “In Defense of Decades of Greed,” exposed myths about the history of monopolies. Donway has also published articles in Newsday, Cosmopolitan, Commonweal, and Occasional Review, among other venues. He is the author of a book of poetry, Touched By Its Rays.