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Congress has always had a soft spot for “experts”
who tell members what they want to hear, whether
it’s supply-side economists declaring that tax cuts
increase revenue or climate-change skeptics
insisting that global warming is a myth.
Right now, the welcome mat is out for analysts who
claim that out-of-control speculators are
responsible for four-dollars-a-gallon gas.
Back in May, Michael Masters, a hedge fund manager,
made a big splash when he told a Senate committee
that speculation is the main cause of rising prices
for oil and other raw materials. He presented charts
showing the growth of the oil futures market, in
which investors buy and sell promises to deliver oil
at a later date, and claimed that “the increase in
demand from index speculators” -his term for
institutional investors who buy commodity futures
-“is almost equal to the increase in demand from
China.”
Many economists scoffed: Mr. Masters was making the
bizarre claim that betting on a higher price of oil
- for that is what it means to buy a futures
contract - is equivalent to actually burning the
stuff.
But members of Congress liked what they heard, and
since that testimony, much of Capitol Hill has
jumped on the blame-the-speculators bandwagon.
Somewhat surprisingly, Republicans have been at
least as willing as Democrats to denounce evil
speculators. But it turns out that conservative
faith in free markets somehow evaporates when it
comes to oil. For example, National Review has been
publishing articles blaming speculators for high oil
prices for years, ever since the price passed 50
dollars a barrel.
And it was John McCain, not Barack Obama, who
recently said this: “While a few reckless
speculators are counting their paper profits, most
Americans are coming up on the short end -using more
and more of their hard-earned paychecks to buy gas.”
Why are politicians so eager to pin the blame for
oil prices on speculators? Because it lets them
believe that we don’t have to adapt to a world of
expensive gas.
Indeed, this past Monday Mr. Masters assured a House
subcommittee that a return to the days of cheap oil
is more or less there for the asking. If Congress
passed legislation restricting speculation, he said,
gasoline prices would fall almost 50 percent in a
matter of weeks.
O.K., let’s talk about the reality.
Is speculation playing a role in high oil prices? It
is not out of the question. Economists were right to
scoff at Mr. Masters - buying a futures contract
doesn’t directly reduce the supply of oil to
consumers -but under some circumstances, speculation
in the oil futures market can indirectly raise
prices, encouraging producers and other players to
hoard oil rather than making it available for use.
Whether that’s happening now is a subject of highly
technical dispute. Suffice it to say that some
economists, myself included, make much of the fact
that the usual telltale signs of a speculative price
boom are missing. But other economists argue, in
effect, that absence of evidence is not solid
evidence of absence.
What about those who argue that speculative excess
is the only way to explain the speed with which oil
prices have risen? Well, I have two words for them:
iron ore.
You see, iron ore is not traded on a global
exchange; its price is set in direct deals between
producers and consumers. So there’s no easy way to
speculate on ore prices. Yet the price of iron ore,
like that of oil, has surged over the past year. In
particular, the price Chinese steel makers pay to
Australian mines has just jumped 96 percent. This
suggests that growing demand from emerging
economies, not speculation, is the real story behind
rising prices of raw materials, oil included.
In any case, one thing is clear: the
hyperventilation over oil-market speculation is
distracting us from the real issues.
Regulating futures markets more tightly is not a bad
idea, but it would not bring back the days of cheap
oil. Nothing will. Oil prices will fluctuate in the
coming years -I would not be surprised if they slip
for a while as consumers drive less, switch to more
fuel-efficient cars, and so on -but the long-term
trend is surely up.
Most of the adjustment to higher oil prices will
take place through private initiative, but the
government can help the private sector in a variety
of ways, such as helping develop alternative-energy
technologies and new methods of conservation and
expanding the availability of public transit.
But we will not have even the beginnings of a
rational energy policy if we listen to people who
assure us that we can just wish high oil prices
away.
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