News :: Opinion
Getting To The Murky Bottom Of Rapid Run-Up In Oil Prices
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Published: June 2, 2008
The sudden, shocking increase in the price of oil is a market failure that resembles the damaging excesses of the dot-com bubble, Enron scandal and housing meltdown.
Speculators, loosely regulated, have bid up crude-oil prices to illogical highs. There is no oil shortage. You don't have to wait in lines at the pump. The cost of bringing oil to market has not changed.
The world is using slightly more oil than last year, but not enough to justify a 12-month doubling in price.
The Commodity Futures Trading Commission is justified in its investigation of possible manipulation of oil prices. If evidence is found, violators should be punished as harshly as the law allows.
The best description of the surge of money into the oil futures market comes from a Democratic senator from North Dakota, Byron Dorgan, who calls it an "orgy of speculation."
Finally a few lights are being shined on the participants. One of the few consumer-friendly features of the recently passed, pork-laden farm bill is a requirement for greater oversight of oil-futures trading.
The process today is too secretive. Adding to the opportunity for abuse, rules require traders to put up only 6 percent of the total purchase price. The requirement for borrowing money to buy stocks is a more sensible 50 percent, which discourages runaway speculation.
If you're buying oil, for the price of one barrel you can take control of 16. One of the lessons from the housing crisis is that rampant leveraging leads to unsustainable inflation that hurts everyone.
Folks feeling the pinch of high fuel prices are eager to find someone to blame and look first at those they already mistrust.
Liberals wrongly blame conservatives for stubbornly refusing to conserve. The nation's energy policy under President Bush has been unhelpful, but it doesn't explain why gasoline has hit $4 a gallon.
Conservatives unfairly blame the spike in prices on environmentalists' successful opposition to drilling off the Florida shore and in portions of Alaska. That oil would be of some use, of course, but it would quickly be swallowed up in the global market. In any case, oil supply doesn't appear to be the source of the problem. Canada is producing oil from extensive reserves of oily sands at a cost of $15 to $20 a barrel.
Advocates of more regulation naively urge price controls that would lead to gas lines or rationing and less oil production.
And those who have blind faith in the market wrongly expect the forces of supply and demand to set a fair price for oil. We wonder if they also think the investors who went broke in the dot.com explosion and again in the housing meltdown knew the right price for houses and stocks.
But market forces are at work. U.S. gasoline consumption is down 5.5 percent in recent weeks. For the first time since driving has been measured, Americans are driving less. Driving in March was down 4.3 percent. If you normally drive 1,000 miles a month, in March you drove 957.
That isn't much, but does send a message to speculators that oil prices are near their upper limits.
Part of the problem is that the Federal Reserve has kept money flowing, empowering consumers to bid up the price of food and oil. The easy-money policy helped the economy, but at the price of a weaker dollar, which adds to the rising price of oil and invites a surge of money into inflation-resistant commodities, such as grain, gold and oil.
Reining in speculators is key to returning the price of fuel to a fair level. Frenzied buying with borrowed money by people who never take possession of the oil does no good for either producers or consumers.
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