Every once in a while I leave the area of faith, family, and politics to talk about work, something I hope I know a little about. This week President Obama announced that in order to get gas prices down he and the rest of our government needed to crack down on oil speculators. His premise is that these individuals are solely responsible for the recent climb in gas prices that you pay at the pump. I’ll be the first to tell you I know very little about all the economic theories that drive prices regardless if they are agriculture or energy.
I’ll also be the first to admit that Obama is likely correct in attacking energy prices, cheap energy relative to the value of the products and services we can provide has partly been responsible for getting this country where it is today. High energy costs do hurt our economy. I went to the grocery store the other day to buy a few things, spent about $100 there then went to the gas station before returning home and had to spend another $100. The combined cost of that 45 minute shopping trip did startle me. There are individuals in our society that are hit particularly hard with rising gas prices. Obama is right oil prices and particularly gas prices are hurting our economy.
BUT, (you knew that was coming didn’t you?)
attacking big oil speculators is not the answer, the CFTC publishes weekly data that tells the world how much oil big speculators own in the US futures market. This most recent report says that the combined positions of the large noncommercial firms net to less than 8% of the total open interest in crude. This week in soybeans just for comparison the large spec trader held a net of about 19% of the open interest but I don’t hear a cry from Obama that my edamame is costing too much
.
Yes, heavy speculation brings booms then busts so there is some danger if the spec position is a large percentage of any market. However that is not the whole story. Obama has a few tools that also effect what you pay at the pump. We have done away with ethanol subsidies. Since Jan 1 the price you pay for blended fuel is no longer subsidized by credits given to the blenders. I don’t disagree that the credits should have gone away but everyone lost a subsidy, including me when I painfully filled my pickup.
Secondly the value of the US dollar as measured by the dollar index has fallen 10.5% from Obama’s first quarter in office till today, from his high point to low it had fallen as much as 18 ½%. This devaluation has hurt two ways, first making the oil we import higher priced and making the gasoline we manufacture look cheaper to the world. Gasoline and diesel exports FROM the US have more than doubled since June 2010. The world is willing to buy the fuel that would have normally gone to a gas station near you, in part because our dollar is cheaper. Our government has also artificially limited supply, Keystone Pipeline, limiting Gulf exploration, limiting Alaska drilling, partly causing prices to escalate.
I would speculate (pun intended) that the price you pay for fuel has more to do with the value of the US Dollar and artificially limiting supply than those that trade oil. The problem for our government is they think they need to clean up the mess, they want to fix gas prices, they just don’t understand that they are at least partly responsible. You want to see the speculators sell their oil? Strengthen the dollar, allow for exploration, and allow for the transportation of oil. My mother taught me, that I should be careful accusing others, bet yours did to “Be careful” she would say “when you are pointing at others you have 3 fingers pointing at yourself!”
Yeah I don’t know allot about the world energy prices but I do know a few things, for one we live in a global economy where resources are allocated by price and ability to pay not by need, resources go to the highest bidder, otherwise I’d have a little less food in my freezer and some individuals in Africa would have a little more. I know that speculators try to make money no matter the financial instrument: oil, beans, gold, housing, dot com stock, small businesses, collector plates, or baseball cards. If you own a business you are a speculator, if you have a non-governmental job you work for a speculator. If any of your retirement is invested in the stock market you are a speculator..Yes, sometimes speculators pay more than an item is worth and lose money, when I am the seller I like that fact, it helps my economy.
I also know from personal experience that not all speculators make a fortune, if they did I’d be typing this blog from on the beach somewhere eating a bowl of salted edamame.
David
