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Posted on Jul 23, 2008 in Across the US, Congress, DC Life, Economy, Party Politics

Congress is tackling something they don’t understand, again.

Today the Senate voted to take the next steps in passing a bill that would essentially try and remove speculation from the oil markets. However, does the Senate have any idea what they are even talking about?

In watching some of this unfold today, it’s quite clear that this bill is going to serve as the base for a variety of additions and negotiations, which means it’s probably something that the Republicans might actually compromise on, if they get their carrots.

The biggest impetus for this bill was the skyrocketing costs of oil over the past few months. According to CNN.com, Senator Byron Dorgan (D-ND) is convinced that speculation is responsible for 71% of the increase in the price of oil.

Who actually believes that 71% of our increasing oil prices are based on the actions of investor? Anyone?

I think John Birger explains this well in an article at money.cnn.com,  Don’t blame the oil ‘speculators’, where he examines the ludicrous accusations that speculators are playing a “huge” role in the increase of the price of oil.

One segment from the article:

Bad public policy

If our representatives did understand the oil markets, they’d know that the true telltale sign of a speculative bubble is not rising trading volumes but rising oil inventories. Speculators would be hoarding oil – building up inventories either in anticipation of higher prices or as part of a scheme to drive prices there. Yet according to the Department of Energy, U.S. oil inventories are now at below-average levels. U.S. oil stocks stand at 309 million barrels, versus 330 million in June 2005.

So far, lawmakers have introduced nine different bills targeting oil speculators, though for the most part their prescriptions have been milder than their over-the-top rhetoric .

Bashing futures traders may well be good politics, but it’s stupid public policy. By providing a mechanism for locking in prices, the futures market makes it easier for oil companies to make costly investments in new production – which is the key to lowering prices at the pump.

Futures trading also discourages hoarding in an otherwise tight market. Without speculators willing to take the other side of so many futures contracts, oil refiners and other end-users might be inclined to ramp up their spot-market purchases and store more oil as a hedge against further price increases.

And, of course, any increased draw on current supplies would lead to even higher oil and gasoline prices. Indeed, without a futures market, I believe we’d be decrying oil at $200 a barrel oil instead of oil at $135.

I encourage everyone to read Birgers complete article, because I think it sums up the real issues so well.

Honestly, I’m quite shocked to see Senator Dorgan be so aggressive in pushing this legislation. After all, he is one of the few members of the Senate who I would have guessed would be most qualified to oppose the very claims he is making. Senator Dorgan has an MBA from U of Denver, was the tax commissioner for North Dakota, is the chairman of the Subcommittee on Energy and is also the chairman of the Subcommittee on Interstate Commerce, Trade and Tourism. You would hope that any one of these positions would have given him more understanding on this issue.

But, I guess sometimes politics surpasses knowledge.

For more details on this bill, please checkout TheOilDrum.com, where they have been covering this extensively, and are providing excellent analysis of the more complex issues regarding speculation.