What Is Obama’s Problem With Oil Speculation?

Barack Obama speech 9 SC 300x205 What Is Obamas Problem With Oil Speculation?

A recurring theme that Barack Obama has touted is that oil speculators are largely responsible for the current high gas prices. He sounded a note of it during his campaign for President back in 2008. He has returned to the issue during his time in office, speaking over the years about the problems wrought by oil speculators. Back then, his solution was to appoint a commission on oil speculation, a commission which has only met a few times since its inception. Recently, Obama has come back to this topic yet again, calling on lawmakers to increase civil and criminal penalties for manipulative trading. He has also called for more money to be directed toward the agency charged with policing the market and to have regulators set trading margins. However, Obama is wrong about oil speculation and wrong in the ways he proposes to address it.

First off, Obama’s commissions accomplish nothing beyond sounding good. House Speaker John Boehner has asked “Where is his Federal Trade Commission? Where is the SEC?” Boehner has further said that “he’s got agencies there, so instead of another political gimmick why doesn’t he put his administration to work to get to the bottom of it.” Senate Republican leader Mitch McConnell has been critical as well, noting that “it probably polls pretty well, but I guarantee it won’t do a thing to lower prices at the pump.”

Mitch McConnell is right. It polls well. Obama milks oil speculation like he has milked so many different issues. He is a demagogue who manipulates the public. Obama knows that the average American hears the words “oil speculator,” and he automatically feels repulsed. Obama demonizes certain groups such as the rich, companies, and oil speculators and engages in emotional appeals to satisfy his own ends. He harps away against the oil companies, saying “ I know that if you’ve got a limited budget and you just watch that hard-earned money going away to oil companies that will probably make record profits this quarter, it’s pretty frustrating.” With charged phrases like “hard-earned money” and “record profits,” Obama makes sure that many of his listeners come away emotionally changed.

Besides being a demagogue, Obama is also fundamentally misunderstanding how speculation works. In an old article in The Freeman, Walter Block clears away this kind of misunderstanding by pointing out the benefits of speculation. Block first notes that speculators seek to buy when prices are low and sell when they are high. By buying in the low price periods and selling in the high price periods, speculators increase prices in low price periods and decrease them in the high price periods. In other words, speculation tends to dampen the price oscillations which occur in the market, not make them worse, as Obama would argue.

Interestingly, Obama’s plan to have regulators set trading margins would quite possibly have the effect of increasing price oscillations. The Commodity Futures Trading Commission would have the power to determine how much speculators would need to pay to trade U.S. crude oil futures with the ability to increase it when prices move too far. However, this power would push out smaller investors, leaving only Wall Street banks and hedge funds able to put up enough money to trade. Broker Jay Levine stated that that “reduced liquidity often means increased volatility,” meaning Obama’s plan could increase rather than decrease volatility in the crude oil futures market.

The price is mainly due to other factors besides oil speculation, including Mideast tensions and the fundamentals of supply and demand. Republicans have argued rightly that supply obviously has an impact on price and that an expansion of supply would definitely bring prices down. John Boehner has sought votes on domestic oil and natural gas exploration, a freeze on refinery regulations, and approval of the Keystone Pipeline XL which would have run from Canada to Texas. Of course, these solutions are those which Obama and the Democrats are loathe to do. They just cannot face that the solution involves reducing government regulation instead of increasing it.

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