Liberals in Congress continue to blame anybody but themselves for the high price of energy today. Commenting on the passage of s bill directing the Commodity Futures Trading Commission to use their “emergency powers” to end “excessive speculation” in oil future’s markets, Speaker Nancy Pelosi said, “The American people should not be punished at the pump for the actions of oil speculators.”
Too bad nobody with an ounce of economic training is buying the liberal scapegoating. Last week liberal columnist Paul Krugman chided those eager to blame speculators for the price of oil. Today the Washington Post’s Sebastian Mallaby does the same:
Would-be Nixons argue that hedge funds and their ilk are piling into oil futures, driving prices above “reasonable” levels. They note that in 2000, speculators owned just over a third of the “paper oil” traded on the New York Mercantile Exchange but now own more than two-thirds. This buying pressure on paper oil is said to be pushing physical oil up. Stop the speculation, they say, and prices would revert to normal.
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.
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?