Resuming the Black on Black Thought series, Garlin Gilchrist II from the SuperSpade blog writes that we must Stop Speculation Now.
“Guess what? Gas is expensive. Expensive gas impacts almost everything in Americans’ day-to-day lives by making almost everything we do or consume more costly. One of the large contributors to the high cost of fuel is speculation, which in simple terms means to buy something you have no purpose for other than to make money off of its unstable price.”
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Where I come from, “buy it for a nickel and sell it for a dime” isn’t a bad thing — it’s good business. One man’s manipulation is another man’s capitalism. Tomato tomato — but that doesn’t work so well written out.
Gilchrist links to a CBS News piece on “the dark market” for oil. Michael Greenburger, former director of the Commodities Futures Trading Commission, claims that “at least 70% of the U.S. crude oil market is driven by speculators.” But when asked, point blank, by CBS Reporter Armen Keteyian, how much, as a percentage per barrel, that speculators drive up prices, Greenberger says that “various estimates” put the number between 25 and 50%. But 25 to 50, even if it’s 50, is a lot less than 70. Is Greenberger saying that the price is only affected on 70% of the barrels? If so, 70% of the barrels, at a rate of 25 to 50% per barrel, is still a lot less than 70.
Gilrchrist argues that the price of oil has been “amorally” driven up. But now we’re talking apples and oranges. You can’t couch market decision in terms of “the good of the nation.” Nor is it fair to assume that a “good for the nation” approach would lower prices at the pump.
In our search for someone to blame for energy costs, let’s not forget that every seller was first a buyer. The reason some airlines are cutting services and raising prices is their failure to properly speculate and “lock in” the price of fuel when it was cheap. They, too, have joined the call for Congress to curb speculation: “Normal market forces are being dangerously amplified by poorly regulated market speculation,” the letter said. “The nation needs to pull together to reform the oil markets and solve this growing problem.”
This is interesting. Seven years ago, we were supposed to believe that airlines needed bailouts because of 9/11. Now, we’re supposed to believe that airlines are hurting because of high fuel prices. But the more likely cause for airline problems is incompetence. While American Airlines responds to rising gas prices by making matters even worse — fewer services at a higher price, plus nickel-and-diming whenever possible, is the brilliant recovery plan at American — Southwest “shrugs” at high gas prices.
From reporter Jeff Bailey at The New York Times: “Southwest Airlines, in danger for much of this year of losing its quirky dominance in the domestic airline industry, could soon be standing, once again, head and shoulders above the competition…The reason for Southwest’s rapidly increasing advantage over other big airlines is much simpler: it loaded up years ago on hedges against higher fuel prices. And with oil trading above $90 a barrel, most of the rest of the airline industry is facing a huge run-up in costs, and Southwest is not. Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years.”
This was from 2007. Southwest really knows how to hedge its bets; despite its fuel buy, Southwest, too, was a signatory to the call for Congress to curb excessive speculation. Of course, there is a difference between Southwest’s speculation and that of investors; Southwest will use every drop of fuel it purchased; it’s not just re-selling it for a profit.
But the American system benefits people who take risks. Perhaps it’s a kink in the old Horatio Alger narrative that it takes money to make money in America, but that’s where we are. That’s how it is everywhere. And the sooner that is accepted the better.
Even Gilchrist allows that Speculation isn’t all bad. “Speculation, when regulated, is not necessarily evil. However, like most things, when something grows beyond a natural, logical, or sensible balance, it becomes cancerous.
“In simple terms, what’s happening is two basic yet sinister phenomena: 1. Oil companies are artificially driving up the price of their own product by betting on high prices in the futures market. 2. As a result of #1, we’re getting gouged at the pump [and everywhere else].”
It would be shortsighted and distracting to take our angst for high gas prices out on speculators rather than address the factors that allow for such manipulation. America’s dependence on foreign oil is the problem. It can’t be adequately addressed by an eat the rich, class warfare mentality that feels great but doesn’t address the reason oil speculation works — American business has done woefully little to develop alternative energy technology, and American lawmakers won’t let us touch our own oil supply. We’ve tied our own hands and now we’re funding both sides of the war, participating in what billionaire oilman and soon wind-man T. Boone Pickens has referred to as “the biggest transfer of wealth in human history.”
If there were renewable energy sources from which to operate vehicles, we would be laughing at speculators the same way we do housing market speculators. This is a risk/reward game on both ends; speculators lose too, sometimes, and the market need not force losses on them. The market need not pick winners and losers, but it should offer so many renewable energy options that futures trading commodities like oil becomes a fruitless venture. I don’t know if it’s the conservative or the libertarian in me that takes issue with the idea that a lack of governmental oversight is a problem, but either way I don’t see as how increased government regulation results in a better outcome for consumers.
Regulations cost businesses money. Those costs are passed onto consumers. Gas prices stay high, and now there’s no speculator class to blame. Potato potato — but, then, that doesn’t work so well…
(Photo credit: Garlin Gilchrist II)
— James David Dickson
