Speculators and the Price of Gasoline - Discussion

This is an issue that I had not originally intended to discuss. But since it is one of the favorite hobbyhorses of the Left and since Eric Offner of Manhasset Hills, NY has been raising this issue forcefully, I discussed it in my post of March 29, under the heading "Control of the Weather (Discussion)." Offner has now chosen to pursue this, which prompted me to do a fairly long dissertation on the subject. I now want to share my analysis with my readers.

Offner wrote:

First see the article in Business Week entitled "Why Obama's Crackdown on Oil Speculators Won't Work." 

Then answer these questions:

1.) If a crackdown on oil speculators won’t work, does it not imply that there are oil speculators?

2.) Is it possible that Wall Street oil speculators affect the price of oil?

3.) The bigger question is whether speculation on food, water and other necessities exists and whether such action is ethical?

4.) Is failure to restrict unethical behavior unethical?

My response to his questions is set forth under corresponding numbers:

1.) Yes of course there are. The question should not be whether there are speculators but whether it is ever possible to eliminate them and whether they are bad. The answer is that it is not possible to eliminate them and in many cases not even possible to regulate them. Sometimes they are bad, sometimes good, most often neither.

2.) It is not only possible, it is probable. But that is not necessarily bad. Look at the article you sent me. He argues convincingly that speculators even-out the speed at which prices change. Without them, as happened some years ago the price can quadruple almost over-night and a more gradual rise is better for the economy and consumers.

3.) Yes and Yes. Let me take this down to basics. There is a rumor that sugar, or for that matter water, will be in short supply. Most people, i.e. consumers upon hearing this will head for the markets and hoard it. The result is the price goes up and soon the shelves are empty. A self-fulfilling prophecy. Now let us suppose a larger speculator wants to take advantage of the situation and so he goes out and buys many tons of sugar, puts them in a ware house (or he buys futures) and then taking advantage of the rising prices resells it at a hefty profit. As he and others begin to sell the price goes down. Is he/she now a good speculator? How do you stop this? Do you make it illegal for anyone to buy more than a certain amount? How do you determine the amount? How would this effect a legitimate store or a legitimate wholesaler, who by the nature of their trade must buy large amounts?

The way to stop this is price controls and rationing which brings about a black market, where the price is even higher and even less sugar in the stores. We are now seeing this in Venezuela.

Are there times when rationing and price controls are appropriate? Yes!!! But only in extreme cases, such as war-time, when the evils of the black market are preferred to letting hoarding control, but it is always a close question. Where the hoarding is by a limited group, intent on creating shortages and raising prices, it falls afoul of the anti-trust laws and definitely should be prosecuted.

Is Obama's approach sound? I don't know, but it is good politics. He is doing something!!!

Raising the margin price on commodities speculation seems like a sensible thing to do, but it takes someone more knowledgeable than I to analyze the consequences. The article you sent me seems knowledgeable and objective.

I will say this. When Allan Greenspan talked about the stock market suffering from irrational exuberance, the obvious thing to do, as far as I could see and still believe, was to raise the margin requirement, which was within the power of the Fed, but because of Greenspan's hostility to all regulations this was not done - ditto for so many other things that could have headed off the crash.

But I don't know the commodities market - We apparently have regulations but we need money to enforce them. Everything else is shooting in the dark. Simplistic answers whether from Left or Right rarely have any merit.

The article in Business Week appears to be an intelligent one. It recognizes that regulations are important and need enforcing by the CFTC. Thus it is apparent that we have regulations in place that are not being enforced, or at least not being enforced adequately. But the Republican Congress will never appropriate the money needed. Instead, they will make sure that what can be done is not done, and then blame the President, who can only do so much without Congress' help.

There are many problems with the world's food supply that are exacerbated by US policy.

The use of US ethanol as an additive to gasoline has created a shortage of corn and driven the price higher, but the corn lobby will prevent Congress from changing this.

Our foreign aid program with food is counter-productive. The law requires that we not give money to aid organizations for food aid, but rather buy the food from American farmers at much higher prices than we could buy it on the world market and it must be shipped in US vessels. If the law would allow our aid to be by buying the food from African farmers, we would save money both in the price of the food and in the shipping costs and we would aid the African economy. Now it enriches the American corporate farmers and hurts the African economy because it competes with the African grown food and drives that price down.

4.) No and the question is irrelevant since I have said such action is not unethical. But even where it is unethical there is always a weighing of unintended consequences. Simplistic questions and simplistic answers to complex problems are, well, simplistic.

I then added:

The oil market is a world market. How do you regulate trades made outside the US? If you rationed gasoline in the US, it would have no effect on the price of oil on world markets. If you had price controls on gasoline that were below the world price of oil, no one could afford to sell gasoline, since they would lose money on every gallon. World markets and globalization make a new ball game. But we can no more change it than we could stop the industrial revolution and now the technological revolution that brought about globalization.

Furthermore a high price of gas is not bad. It makes clean energy and conservation much more competitive

Even boycotts have limitations. We put a boycott on Iranian oil. But if China does not join the boycott, can it be effective? The boycott might force the price of Iranian oil to go down, in which case China gets a windfall. How do you stop this? Only with a full fledged blockade of Iran, an act of war, which would put us in conflict with China and get Iran to try to close the Straight of Hormuz. Can you imagine what the price of oil would go up to? Speculators will make a lot of money, but they are not causing the price rise - they are taking advantage of it. Is there anything we can do - yes, but I am not smart enough to know what. Ask Barney Frank - he understands these things better than I do, and while I am talking about Barney Frank I commend to you an interview of him, which appeared in New York Magazine.

Also we do have laws on the books and the Commodities and Exchange Commission, which needs more funding as recommended in the article you sent me to enforce the laws and regulations. But the Republicans will never authorize this. What can we do? Get rid of them to whatever extent we can.

But I get tired of the Left and their "it’s the speculators.”

Finally allow me to add that while normally a two party system benefits the country, now a defeat of the Republican Party to the point where we have only one party has the best hope of reforming the system. Now it is broken and can't be fixed. In our system a one party system would not last long. The Democratic Party would split in two.

Talk of a third party in our system is very counter-productive. It would make sense if we had run-offs as e.g. the French and most of the world do.

Comments, questions, or corrections, are welcome and will be responded to and distributed with attribution, unless the writer requests that he/she not be identified.

Control of the Weather (Discussion II)

In my last post entitled "Control of the Weather (Discussion)" that was posted and distributed on March 29, I set forth some comments made by Eric Offner Esq. of New Hyde Park, New York. To access those comments double-click on the title of the post above.

At the end of that post I promised that: “Next time I want to tackle a very important and complicated subject, i.e. the role that race plays in American life and politics. It will be entitled: “It’s All About Race.” But since the discussion emanating from the comments contained in that post continued, I want to share them with you.

In response to the comments I made as set forth in that last post, Eric Offner wrote:

Thank you. Please discuss the present Supreme Court hearings. It seems that we will get a 5 to 4 decision, as was the case in the decision that made Bush President. We can throw out the commerce clause, and cite pre new deal case law. By the way I did not realize that the price of gas issue is a left/right issue, but I do not intend to pursue this. Your scholarly articles are very much appreciated.

To which I replied:

I am sorry to say that the Supreme Court hearings on the Health Insurance Reform Act is not a subject I plan to address in forthcoming commentary. There are only so many subjects I can deal with, and as I have indicated, I am anxious to deal with the issue of race in our society and politics.  

I will say, however, that 5/4 against is not a foregone conclusion. Kennedy has been and continues to be the linchpin, so that we do not have a court of 9, but essentially a court of one. Kennedy decides. However, that does not mean a 5/4 if it is upheld. Some commentators have speculated that if Kennedy goes with the liberal 4, Roberts will join the majority for upholding the law, in order to appoint himself as the one who writes the majority opinion. That would make it 6/3 but assure a narrow holding, with concurring opinions.        

As for the Commerce clause - yes it has been under attack for some time. They are pushing for a pre-New Deal interpretation. Only Kennedy can stop it and if Obama loses, the Right wing Court majority will go to 7/3, when Ginsburg retires or dies, and Kennedy will no longer be the swing vote. It will lead to total Right Wing domination.    

As for the price of gas being a Left/Right issue, it is not. Rather it is a partisan issue. There is a difference. When Bush was President and the price of gas reached levels comparable to the price now, Democrats, including Obama, attacked Bush. I don't remember the details but my guess is that Bush was no more responsible than Obama is now.

But then, after listening to the NewsHour on PBS on Friday March 30, I felt further comments were called for. I wrote:

Since saying "that the Supreme Court hearings on the Health Insurance Reform Act is not a subject I plan to address" I have seen additional facts, particularly on the NewsHour on PBS on Friday that made me feel I had to comment. So here goes:              

In listening to the NewsHour on PBS yesterday I saw a clip of Romney on the campaign trail (See here at two minutes into the video) where he says: Obama Care “will directly control almost half the US economy.” There is a tendency to exaggerate on the campaign trail, but this is beyond all reason. The absurdity is evident when we consider the government will not control anything. It will regulate the health insurance industry. Regulate not control (Medicare or a single payer might be considered as controlling but this does not control, it regulates) and the whole Health Care Industry of which insurance is a small part, is 16% of our economy. See here.              

He then goes on to say, “if I am President I will repeal it.” Doesn’t he ever read the Constitution? The President can’t repeal an act passed by Congress. Only Congress can. 

At 55 minutes 22 seconds into the video we get a discussion between Brooks (representing the Right viewpoint and Shields representing the Left, actually they are both rather moderate) and they both are embarrassed to note that some of the justices during the hearing are actually expressing Tea Party talking points.  

It is difficult for me to understand why there is even a question as to the Constitutionality of the Law. It is no different from any other tax levied, i.e. you pay taxes on your income unless you choose to give money to charity, in which case you don’t have to pay a tax on that portion. Social Security taxes don’t benefit you directly and not immediately. They benefit another generation, i.e. those over 67.              

Talking about forcing people to buy broccoli is and was intended to be facetious. But of course Congress can tax people who don’t eat broccoli, if it is shown that there is a reasonable connection between that requirement and the regulation of Commerce, but that can only be decided when that issues is before the court. Even if such a regulation were ridiculous it would not therefore make it unconstitutional. Some of the justices are behaving like clowns.              

If the court, after the Gore case and the United Case goes down the same partisan ideological route it will discredit its legitimacy. Years ago, (at the moment I can’t pinpoint when it changed) one could not tell how a justice would vote by whether a Republican or a Democrat appointed the Justice. Now that is controlling.              

In Roe v. Wade a decision that was 7 to 2 (not 5 to 4) the majority consisted of Harry Blackmun, William J. Brennan, Chief Justice Warren Burger, William O. Douglas, Thurgood Marshall, Lewis Powell and Potter Stewart. (It was not the Warren Court, and by the way Earl Warren was appointed by Eisenhower, a Republican.)

Blackmun was appointed by Nixon (Republican); Brennan by Eisenhower (Republican); Burger by Nixon (Republican); Douglas by Roosevelt (Democrat); Marshall by Johnson (Democrat); Powell by Nixon (Republican); Stewart by Eisenhower (Republican). Of the 7 justices in the majority, 5 were appointed by Republican Presidents. Yet this has now become a partisan issue.              

When we know how a justice will rule by which party appointed him/her, then it is an extension of the party, and no longer a judicial forum.                       

I don't know what the answer is, but we cannot indefinitely allow a partisan body to have the power to overrule an elected legislature. Only a judicial non-partisan body can be allowed to do that.

And Irving Lesnick Esq. of Boca Ratan, Florida picked up on the issue of eliminating speculation in oil and other commodities, writing:

Your comments are interesting, as always. While I generally agree with them, I will mention a disagreement, or at least a query, since you prefer disagreement, with your statement that outlawing speculation would require banning all commodities trading. It seems to me that the situation here is somewhat like that which prevailed in the life insurance business in the 1700s or so in England. There people were buying what we now call term life insurance on the lives of public figures.  Reportedly, it became a bit of a bubble, and both because it was viewed as morally objectionable as gambling but probably more importantly because some of the public figures began worrying that allowing the wrong people to get into a position to profit from their speedy death, their death might become more speedy than it would otherwise be. The response was the imposition, I think by legislation, of a requirement of insurable interest in the purchase of insurance, which limits insurance purchases to situations where the purchaser would suffer a loss from the occurrence of the insured against event. There are non-speculative reasons for buying and selling commodity futures - a manufacturer who wants to be protected against a rise in the cost of raw materials, an airline who wants to be protected against too much of an increase in fuel prices or and farmer who wants to be protected against a fall in the price of his or her future crop. Requiring participants in futures markets to have these kinds of interest would bar speculation, without banning commodity trading. How to structure such a requirement is, of course, another question.

To which I responded:

Your analysis is worthy of one who was an editor of the Yale Law Journal.                 

You are absolutely correct that there is a way to outlaw speculation without banning all commodity trading, and the insurance industry, (your area of expertise) is clearly a perfect example. But that then brings us to the question of whether it is desirable to stop speculation. I would argue that it is not desirable. If you placed the kind of restrictions on the commodities markets as you suggest, the market would shrink to a degree where "legitimate traders" would have a hard time finding buyers when they were ready to liquidate their positions. Furthermore not all commodity traders can be defined in the futures market as your focus suggests. What about commodities like gold and silver? Traders in gold buy the metal to hedge against inflation. How do you limit this? Or do you limit the market to jewelers.

The problem becomes similar to the stock market, where one could argue that only legitimate investments in a start up business should be allowed, but without a secondary market, the primary market collapses. That is also true in commodities. When you get rid of the "speculators" you are getting rid of the secondary market.                 

Please advise if I am missing something.

And then added:

This reminds me of Revolutionary times. Since the Continental Congress had no taxing power and the states were very poor providers of money to fight the war, the Congress issued promissory notes that went unpaid and because it appeared they would never be paid, they became worthless. A secondary market of speculators arose ready to buy the notes at huge discounts, thus giving them some limited value to the relief of the primary holders. Jefferson argued that the notes should not be paid because that would unjustly enrich the speculators. Hamilton in turn argued that what was at stake was the full faith and credit of the US. Washington sided with Hamilton, the speculators were paid, and the Full Faith and Credit of the US was never in doubt thereafter. [Until the Tea Party (to all intents and purposes, the Republican Party) decided to threaten to prevent the US from paying its debts. For the first time since then, the US full faith and Credit has now been put in doubt.]  The bracketed portion is a bit of a digression, but the point is a secondary market, which usually consists of speculators, is vital to a functioning market.

Comments, questions, or corrections, are welcome and will be responded to and distributed with attribution, unless the writer requests that he/she not be identified.

Control of the Weather (Discussion)

My last post "Control of the Weather" was distributed on March 23. I was greatly gratified when Eric Offner, impresario of Jazz concerts, author and lecturer on the law, humanist and mental health advocate (See here for a description of Offner in Who's Who in America) seconded the compliments from Pearl Duncan writing:

I agree with Miss Duncan. I learn a lot from your articles.

And then added:

Today I disagree with you. The price of gas is set by speculators. I would outlaw speculation on most commodities.

To which I responded:

I am glad to receive your disagreement. I receive disagreements so rarely, and yet differences of opinion are useful in arriving at intelligent conclusions.  

Your view on speculators is not unique and you may have noted that in the discussion on the PBS NewsHour referred to in my post and accessible here, Daniel Weiss, of the Center for American Progress (a left wing think tank) mentions Wall Street speculators as one of the causes for the high prices, and speculators are a favorite target of the Left for everything that may go wrong in our economy. But who are speculators? They are the people who buy and sell stocks and commodities. They are people like me, who invest in the stock market in the hope of making a gain, but sometimes sustain a loss. They are the union and other pension funds who invest in the market. They are as much to blame, or rather deserve credit when prices go down. Without them there would be no market in anything, because all traders, and that in effect means all merchants are speculators. You say you "would outlaw speculation in most commodities,” but you can't do that without outlawing all trading in commodities. 

They are a convenient scapegoat whenever anything undesirable happens in the market, but they reflect market conditions, they don't create them. 

What I have not mentioned, heretofore, and which needs mention, is that another factor that drives up world oil prices is the saber rattling about Iran. Netanyahu with his threats drives up the price of oil, and so do the Republicans with their demands that we use military force, again. They play a clever political game, because the are complicit in driving up the price of oil, and then seek to profit politically from the higher prices, which they helped to generate, and finally Obama himself, when he says we will use military force if that is necessary to stop Iran from getting the bomb, a position he was forced into, as the only way to keep Netanyahu from his own military action. And of course Iran, every time they talk of closing the Strait of Hormuz. 

Surprisingly, OPEC, which used to be the culprit in past oil rises, is not complicit this time.  

Next time I want to tackle a very important and complicated subject, i.e. the role that race plays in American life and politics. It will be entitled: “It’s All About Race”, but I am postponing that discussion because it will, of necessity, be long, and multi-parted, and so, rather that append it to this concluding discussion on the price of oil, I will let it go till next time.

Comments, questions, or corrections, are welcome and will be responded to and distributed with attribution, unless the writer requests that he/she not be identified.