Limiting “Speculation” in Oil; Revisiting The ’70s

I’ve come to the conclusion that American politicians followed closely by American journalists have absolutely no facility for comprehending historical lessons. Today’s case in point is the move towards limiting “speculation” in oil.

Now the potential for repeating history might be somewhat muted if this movement were limited to the oil futures market but as so often happens this thing is starting to take on a life of its own. For example, ponder this from the Economist Free Exchange:

The other question is whether limiting speculation is the best way to reduce volatility. Another way of looking at this issue is, why do we care about big swings in oil prices? We care, of course, because oil is a key economic input, and volatility is extremely damaging (and self-perpetuating, as volatility makes long-term investment unattractive). In a post on this subject, Justin Fox quotes Milton Friedman saying that the only stable exchange rate regimes are free floating and fixed. If free floating oil prices are undermining economic activity, then perhaps a price intervention is warranted. In particular, a floor would protect a minimum level of investment in exploration and production.

A number of commentators have recommended a petrol price floor as a means to reduce price volatility (and raise revenue, if the floor was achieved with a variable tax). If the goal is to reduce volatility, it makes much more sense to attack that directly, rather than play around with trading or regulatory intervention in the hopes that the desired result will obtain.

I’m going to be charitable and assume that the author was either not alive in the ’70s or is too young to have remembered those days. We’ve been down this road before. The Nixon White House tried to manipulate the price of oil and what we all received for their efforts were shortages and interminable lines to refuel one’s automobile.

Frankly, I’m not sure exactly what he proposes as he speaks of creating a floor for gasoline which he would create by levying a tax. He suggests that this floor which would presumably be above the market clearing price would be set high enough to encourage exploration. But if the floor is accomplished via taxation how do the excess profits make their way back to the producer for exploration. Are we to believe that government will collect these taxes and then forward them onto the producers so they can go find more oil. Governments mind you that are hostile towards the industry. Strains credulity doesn’t it.

Once upon a time we learned that the oil markets are much bigger than the government of the U.S. That market shrugged at our attempts to manipulate it and simply took its bat and ball and went away and played elsewhere. It was a lesson learned the hard way and one would hope that it would have lingered in our subconscious. Apparently it hasn’t, so now a new generation will get its ears pinned back. I would only ask that those of us who do remember and went through this once automatically get a place at the front of the gas line.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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