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Editorial:Most of us may be guilty of oil speculation
By Merrill Matthews
In the midst of outrages like an $800,000-plus party scandal at the General Services Administration, the Secret Service prostitute scandal, and a recent Medicare fraud bust that netted 107 people scamming Medicare out of $450 million, what does President Obama want to do? Why, spend $52 million in taxpayer dollars cracking down on ... oil speculators.
Depending on how the administration defines “speculation,” the target could be half of the U.S. population -- including me, and probably you.
So let me ’fess up right here. I have a little money in a 401(k), and I have been known to put some of that into mutual funds that invest in the energy sector.
But I swear I’m not trying to bring the country down or drive up what you pay at the pump. Given that the Federal Reserve Bank has kept interest rates at near zero for years, and that none of the president’s or the Fed’s multiple economic stimulus efforts have worked, I was just looking for an investment that would be worth more when I sold it -- in other words, speculation.
And I’m not alone. About 70 percent of U.S. oil and gas company stock are held by pension funds, asset management companies (including mutual funds), and IRA and 401(k) plans. If I’m an oil speculator, I’m in good middle-class company.
Of course, Obama might claim he’s not talking about us, but those who are actually buying oil futures. Notice I didn’t include natural gas.
No one seems to care about natural gas speculators because the price of gas has tanked -- largely because of the huge supply, the result of new extracting techniques.
Conversely, long-running federal restrictions against new drilling on federal lands and offshore have limited the country’s ability to increase oil supplies. But when markets get spooked by potential shortages due to turmoil in, say, Libya or Iran, the administration doesn’t come to a corollary conclusion -- that a lack of supply is causing the price increases. It blames speculators.
Who are these speculators? Southwest Airlines might be one. Southwest has a fuel-hedging strategy, contracting for future fuel at a set price now in the hope of avoiding a higher future price. And that strategy has worked.
When the price of oil was going up in 2008, Southwest still managed to do well, in large part because it was getting its fuel for a previously contracted lower price. And now the Dallas Morning News reports, “Southwest said its first-quarter results were boosted by $170 million in ‘other gains,’ primarily linked to gains from its fuel hedging portfolio.”
Most people looking at Southwest’s strategy would think “shrewd business move”: Obama looks at it and sees one of those scurrilous speculators.
Or is it manipulators he’s after? While the president has been chastising speculators -- “We can’t afford a situation where some speculators can reap millions while millions of American families get the short end of the stick” -- his $52 million proposed crackdown appears to be targeted at market manipulation. They’re not the same thing. Southwest may be speculating; it is not manipulating.
Market manipulation is already illegal. For example, the Wall Street Journal points out: “In the past 35 years, the Commodity Futures Trading Commission has brought dozens of cases alleging manipulation in energy markets. It was successful in proving only one in court.”
Yes, some people around the globe will try to find ways to manipulate a fast buck. But the oil and gas industry is a huge global market, including about 7.7 percent of the U.S. economy (in 2009), according to a PricewaterhouseCoopers study. Manipulating global prices in a sector as large as energy is nearly impossible.
President Obama’s newfound interest in reining in oil speculators is nothing but a political move: He needs to claim he’s doing something to bring down the price of oil, especially since his restrictionist drilling policies -- the Congressional Research Service said in March that domestic oil production on federal lands has fallen by 275,000 barrels a day since 2010 -- have had exactly the opposite effect.
If oil prices begin to settle down and maybe even decline in the next few months, which seems likely, we won’t hear much more about oil speculators. And then maybe you and I and our 401(k)s will be safe, at least for a while, from a president running for re-election and desperately trying to find someone to blame for his lousy economy.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas.
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Publius Valerius Publicola
June 6, 2012 2:45pm
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