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.