Tuesday, April 17, 2012

Obama on Oil Speculators

Obama has announced plans for stronger oversight of oil futures markets and is proposing an increase in funding for regulators.

So that has been the problem this whole time.  There hasn't been enough government oversight of the financial markets.  Of course that must be the reason for high oil prices (please not sarcasm).

Obama has decided to continue being a demagogue.  If he isn't a demagogue, then he is just plain stupid.  Perhaps he is both.

Obama said, "We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit."  He also said, "We can't afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick."

What is his bigger bureaucracy of regulators going to do?  Are they going to prevent the futures market from working?

It is time for a good economic lesson here, something that Obama and his henchmen wouldn't understand.  Speculators play a vital role in the marketplace.  They provide more accurate pricing and they actually smooth out bumps in pricing.

Let's say that speculators think that there will be an increase in demand for oil in the near future.  Or perhaps they think there will be a war in Iran or some other event that will cause a shortage of oil.  Either way, let's say that speculators think the price of oil will be going up in the near future.  In this case, the oil speculators will buy futures contracts that drive up the price of oil.

But the increase in the price of oil is a signal to the market.  It tells consumers to cut back on their usage. It also sends signals to suppliers.  If the suppliers think that prices will be much higher in the near future, then they may hold back on selling right now.  Or they may decide to extract oil from more expensive places.  With the higher price of oil, it may be worth it to extract more oil using more expensive procedures.

By raising the price of oil now, the speculators are doing others a favor.  They are signaling consumers to cut back now and they are signaling suppliers to increase their supplies for later.  If the speculators hadn't been there to bid the prices up, then the oil prices would have been that much higher in the near future.  Instead, the speculators actually prevented a big spike in prices.  The process was more gradual and less severe because of the speculators.

If the speculators didn't exist, then everyone would be guessing, almost constantly.  You could end up with a situation where the price all of a sudden doubles or triples in the matter of days.  The speculators make this less likely to happen.

Of course, some speculators could be wrong about their guess for the future.  But they will lose money if they bet the wrong way.  Those who guess correctly are the ones who are rewarded.  And they should be rewarded, because they are the ones sending correct signals to the market.  They are preventing less shortages in the future.  They are helping to properly allocate resources.

Obama does not understand free market economics.  If he does, he is a total liar.  Either way, he is demagoguing the situation.  Oil is going up for other reasons that he is partially responsible for.  Oil prices are higher than they would otherwise be because of threats to Iran, government regulation, and monetary inflation (which is encouraged by government debt).  If Obama wants to help lower oil prices, he should resign.  He should ask Bernanke to do the same.

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