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Speculation

It is getting hard to keep track of all of the disgraceful things Barack Obama is doing, but we shouldn’t overlook his effort to blame high energy prices on “speculators.” In fact, the high price of petroleum, which in turn raises the cost of everything else, is due to a combination of market forces and the Obama administration’s terrible energy policies. When you have an administration that openly wishes for higher energy costs, it shouldn’t be a surprise when prices go up.
But Obama doesn’t want to take the blame for the consequences of his policies, so he follows his usual Alinskyite policy–fabricate a villain and demonize him. Here, the villain is a group of nameless “speculators” who supposedly are driving up the price of oil. Obama has now gotten the Department of Justice and other agencies into the act. The Streetwise Professor explains:

It is becoming clear that Obama’s criticism of speculators was not a one-off. Instead, it is part of a broader campaign to demonize them. Today’s installment of the Two Minutes’ Hate came courtesy of the Justice Department (so tempted to use quotes around that). Eric Holder announced the formation of an Oil and Gas Price Fraud Working Group consisting of Department of Justice, the National Association of Attorneys General, the Commodity Futures Trading Commission, the Federal Trade Commission, the Department of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission, as well as the Departments of Agriculture and Energy. The Group’s charge is:

The Oil and Gas Price Fraud Working Group will explore whether there is any evidence of manipulation of oil and gas prices, collusion, fraud, or misrepresentations at the retail or wholesale levels that violates state or federal laws and harms consumers or the federal government as a purchaser of oil and gas. The Working Group will also evaluate developments in commodities markets and examine investor practices, supply and demand factors and the role of speculators and index traders in oil futures markets.

This is a bad joke. The Professor’s prediction appears likely to come true:

[G]iven Obama’s assertion of ownership of the issue, and his personal identification with the claim that speculators are distorting prices, there is a high likelihood that fishing expedition will give way to witch hunt. Remember when Obama told bankers “[m]y administration is the only thing standing between you and the pitchforks”? It is becoming increasingly clear that Obama won’t be standing between oil “speculators” and the pitchforks this time. Indeed, he’s taking leadership of the mob. …
It’s already ugly out there. But it just got a whole lot uglier.

An interesting question: given Obama’s ignorance of the economy, is he really dumb enough to believe that “speculators” are to blame for high gas prices? Presumably his advisers would clue him in, if he didn’t know any better. But then, why is he complaining about rising gas prices, when both he and his Secretary of Energy have made it clear that they wanted energy costs to increase to European levels?
At Forbes, Warren Meyer explains concisely why the President’s blame game is a populist fraud:

[I]t is almost impossible to find examples of private action sustaining an artificially high price floor. Only with the cooperation of an interventionist government are such sustained price floors possible….
There are two checks on current commodity values that make sustained speculative bubbles much less likely. First, physical commodities are really expensive to inventory. I can hold futures contracts on a million barrels of oil in my desk drawer; a million barrels of physical oil requires a container the size of 63 Olympic swimming pools. Second, the demand curve for oil futures is based on expectations and predictions and hope and fear. The demand curve for physical oil is grounded in the real economics of electricity generation and powering factories and driving trucks.
So lets consider speculation in this context. We start from a market in oil for current delivery that is in balance, where the price is such that supply and demand are roughly equal. Now, enter speculators. They supposedly drive the price up above this “natural” price. As the price rises, we know producers will seek ways to bring more oil to market, and consumers will reduce their consumption. The result is a glut – an excess of supply over demand. Here is the real question to ask if one suspects that speculators are driving the price of oil for current delivery above and beyond the market clearing price: Where is all the extra oil going? …
[H]ow do oil traders’ supposedly pull off this feat of keeping oil prices elevated above the market clearing price? Well, there is only one way: Excess supply created by the artificially high price has to be stored, either in tanks or in the ground.
In fact, the Koch Brothers (who else?) have recently been accused of buying several tankers just to store oil for speculative gain. Forgetting for a moment whether this makes any economic sense for them, even four full million-barrel tankers would only only increase world crude inventories just over 1%, and would effectively store just over an hour of world oil demand. To keep prices elevated, someone would have to be buying this amount of oil every day, and keep on buying and storing this amount indefinitely.
Certainly this would bankrupt anyone in the attempt — it would cost something like $80 billion (just for the oil) to maintain this game for six months and require storage larger than the entire US strategic petroleum reserve. So it should not be surprising that we see no such trends in inventories. Crude oil and gasoline inventories are among the most carefully watched economic statistics there are. Crude oil inventories always rise this time of year (in anticipation of summer gasoline demand) and the rise in inventory this year has been well within historic norms. Gasoline inventories have actually been falling, indicating that the price of gas is perhaps a bit too low.
The only real option for raising prices is to store the oil in the ground — in other words, don’t allow it to get produced in the first place.
How do speculators pull this off? I have no idea. Despite people’s image, the oil producer’s market is incredibly fragmented. The biggest companies in the world have less than 5% share of world production, and it rapidly steps down from there. It is actually even more fragmented than that, because most oil production is co-owned by royalty holders who get a percentage of the production. Producers and royalty holders are a very fragmented and independent group, and have every incentive to produce fast and hard when prices are high.
Is there a crime in the current oil prices? Yes, but it’s not one of speculation. Prices are a form of communication. Higher prices tell consumers to use less oil, and producers to go find more. The real crime today is that while the signal is flashing today to oil companies to go find more crude, the Obama administration has bent over backwards to make such efforts all but impossible. In fact, the Obama Administration desperately tried and failed to increase oil and gas prices via cap and trade last year. President Obama is not really against higher oil prices, he just wants them driven higher by the state, not by the markets.

The Obama administration is a failure, and in its waning days the administration’s efforts are largely focused on trying to blame its failures on others.

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