It seems like summer time is hunting season for speculators. Every year around this time lawmakers and regulators begin taking aim at “excessive speculation” in the energy markets.
This time around the lord of the hunt is Commodity Futures Trading Commission Chairman Gary Gensler, who announced Tuesday that “every option must be on the table” to reign in the speculators. That’s the kind of talk we remember Al Haig using to defend “first strike” nuclear capabilities at the height of the Cold War. Basically, the regulators are preparing to go nuclear against speculators.
But here’s the thing: last summer the CFTC launched an investigation into the oil market and concluded that “speculators” were actually net short. That is, they were putting downward price pressure on the market that had driven oil above $100 a barrell. What’s more, they found that the pricing impact of speculation was minimal.
So what drove up prices?
Get this wild idea. Prices were driven by supply and demand.
As the Wall Street Journal’s editorial explains, we’re almost certain to see a commodity-price bull run thanks to all the money pumped out by the Federal Reserve. It will be mightily convenient to blame spiking prices not on monetary or fiscal policy, but on speculators.
In all of this, what nobody has managed to explain is what, exactly, happened to the omnipotent speculators between July and December 2008. Did they all go on vacation? Perhaps they paused for a six-month drinking binge with their winnings before returning to manipulate us anew in 2009.
No, what we really have here is the age-old scapegoating that our superstitious ancestors would have recognised. The only twist in Mr. Gensler’s case is that he’s trying to scape the goats pre-emptively. On our current fiscal and monetary policy course, the dollar is not done falling and interest rates have barely begun to rise. Both of these market moves will be felt in the commodities markets, as they were after Alan Greenspan cut short-term rates to 1% in 2003-2004. So better to send the posse after the speculators now than to confront the consequences of Washington’s policy errors.
There is an alternative to the market price—it’s called price controls. And the danger is that this is where we’re headed politically. If curbing speculation by limiting trader positions or restricting the ability of “non-commercial” buyers to trade is a politically acceptable way to dampen volatility (remember the onions), the logical next step is a political diktat that oil will not be bought or sold above a certain price.
Truth is, we need more speculators, not less. They’re the people who can help prices find the right level, because there is no “right” level other than the one the market gives us. And that’s why, in turn, excessive speculation is nothing more—or less—than a convenient fiction for when prices don’t move the way politicians would like.
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