Blame It on Traders and Speculators

Springtime brings rising gasoline prices almost as surely as it brings flowers and songbirds. Rising gas prices, in turn, bring government investigations.

Last week, with prices averaging around $3.84 per gallon, President Obama announced that a new Oil and Gas Working Group will look into possible cases of fraud, collusion and price manipulation in the oil and gas industry. The president said at a town hall meeting in Nevada, “We are going to make sure that no one is taking advantage of the American people for their own short-term gain.”

If you feel a strange sense of déjà vu reading Obama’s remarks, it may be because former President George W. Bush said almost exactly the same thing in April 2006 when he announced his own investigation into possible price manipulation after fuel prices rose to around $3 a gallon. Or perhaps you’re thinking of 2005, when a group of governors suggested investigating possible industry misconduct in response to the high prices that followed Hurricane Katrina. You might also be remembering May 2001, when newly empowered Senate Democrats were the ones pushing for investigation, or April 1999, when California’s state attorney general took the lead.

As the rest of the country searches for Easter eggs and matzo, government officials search for scapegoats. Whenever voters get antsy about prices at the pump and politicians get antsy about their prospects at the polls, a work group appears.

These studies almost uniformly discover that – amazingly – the cause of price increases is an increase in demand that exceeds increases in supply. Various underlying causes, from economic growth in Asia to local refinery capacity shortages, have been triggers, but price manipulation is rarely a major factor. As Bill Day, a spokesman for Valero Energy, a major refiner, told The New York Times, “Politicians and bureaucrats launch these investigations with great fanfare and hoopla every time prices rise, but they don’t hold similar press conferences or issue press releases when their investigations inevitably find no wrongdoing.”

The current round of investigation is likely to end as predictably as it began. “I think the run-up at the pump pretty clearly and closely tracks the run-up we’ve seen in crude oil prices worldwide,” David Pumphrey of the Center for Strategic and International Studies in Washington told The Los Angeles Times. There are plenty of explanations for the rise in oil prices other than foul play. Commodity prices of all sorts are rising as the global economy strengthens. Inflation also contributes to increasing prices, as the flood of easy money released by the U.S. government pushes down the value of the American dollar. Meanwhile, the political turmoil that has seized Libya and other exporters affects oil on the supply end.

Obama has, not surprisingly, thrown blame onto his favorite targets: “traders and speculators.” He said his investigative team would “root out any cases of fraud or manipulation in the oil markets that might affect gas prices – and that includes the role of traders and speculators.” But investors buying commodities when their prices increase is not an occasion for blame; it is part of the normal functioning of any marketplace. When something becomes more valuable, naturally more people will want to own it, and that will push prices higher. Investors are currently buying all sorts of commodities, from corn to cotton to gold. Largely because of “traders and speculators,” gold prices have hit unprecedented levels, trading at more than $1,500 an ounce this month. Yet there have been no calls for investigations in the gold trade.

Of course, there is some manipulation of oil prices; it’s what the Organization of Petroleum Exporting Countries (OPEC) was formed to do. The organization’s stated mission is to “coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets….” There may also be some less transparent manipulation. Saudi Arabia’s recent decision to cut production by 800,000 barrels a day, after previously promising to meet the supply gap left by the civil war in Libya, caused some to wonder if the Saudis were deliberately attempting to induce a shortage to drive up prices. Our president, already crossways with the Saudis over his administration’s abandonment of former Egyptian President Hosni Mubarak, is not calling for an investigation of the House of Saud.

If key suppliers truly had the capacity to manipulate prices, the best time for investigations would be following price crashes, not during peaks, since crashes give the industry the most motivation to restore former profits. Curiously, elected officials never seem to be concerned about speculation, price manipulation or other nefarious activities when gas prices drop. In 1986, when a global petroleum glut sent the price of oil crashing to $10 a barrel and decimated the economies of Texas and other nearby petroleum-producing states, the rest of the country did nothing but rejoice all the way to the drive-thru.

These commissions have little to do with gas prices and a lot to do with approval ratings. No president, governor or member of Congress wants to be seen sitting by while voters suffer at the pump. Forming a committee “kind of turns the high gas prices into something that [the president is] combating and he’s against, rather than either a problem that can’t be dealt with or something that’s due to domestic policy decisions,” Laurel M. Harbridge, a Northwestern University political science professor told The L.A. Times.

The latest panel is consistent with Obama’s overarching energy policy, which is to do whatever is politically popular right now, regardless of long-term consequences. The president is sometimes in favor of off-shore drilling, as he was immediately before the BP oil spill, and sometimes opposed to it, as he has been since the spill. But he is always in favor of doing what it takes to win votes.

As summer approaches, the rest of us can go on with our own annual rituals of putting away winter coats, taking out bathing suits, and watching the dollars fly by as we fill our gas tanks.

About Larry M. Elkin 534 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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