Oil price speculation

I’m not ready to talk about global warming yet, but in my research I came across a recent session of the House Committee on Energy and Commerce regarding oil prices. As a public service I watched all six and a half hours of this (not always riveting) meeting, and now am here to share with you the results, which as a fairly free-market-oriented fella I for one found rather shocking.

We’ve heard over and over that oil speculators do not have a significant effect on the price of oil — this has been repeated over and over in a “no reasonable person disagrees with this” tone by all the various political and economic talking heads I’ve seen over the past few months.

The premise of these hearings is presented rather early in the video. Roughly stated, it says that speculators, freed by loosening of restrictions on them passed in 2002, have caused the price of oil to rise to almost double of what it would be in a standard supply/demand market. Further, it says that with fairly straightforward regulations, these speculators would be dis-incentivized out of the market, and the price of oil would return to something on the order of $60 per barrel (as I type, it currently sits around $140 per barrel). It further claims that the current dramatic increase is unlikely to lead to increased explorations, because oil producers do not believe that the price reflects the proper value of oil, and believe that exploration based on the current value would turn out to be financially disadvantageous.

Just a quick explanation of the last bit before I launch into how that premise was argued. The other thing is that the earth is not really close to being “out of oil.” The problem on the supply side is that the easily accessible oil is running out. There’s plenty of oil still in the earth, but it’s either in politically inaccessible places (e.g. ANWR, Alaska, e.g. also big chunks of Russia) or in geological formations from which it is more expensive to extract (e.g. the tar sands of Canada). In other words, if oil companies really believed that $140 for a barrel of oil was the stable price, there’s plenty of oil they could find. There’s still much more at $200 per barrel, and so on.

So, my natural skepticism about the ability of regulations on speculators to fix matters melted away as the four panels that testified before the subcommittee in turn made their opening statements and then answered questions from the congresscritters. The first panel consists of four experts — high-level folks that either advise or study the oil industry — including Fadel Gheit, managing director and senior oil analyst at Oppenheimer & Co., and Edward Krapels, director of Energy Security Analysis. To a one they all agreed with the premises outlined above. The next panel consists of a few folks from industries that rely on oil (trucking, airlines, etc.), to provide their obligatory whining; it is skipable.

The third panel consisted of one dude — Walter Lukken, acting chairman of the Commodity Futures Trading Commission. This is the Bush-appointed guy in charge of overseeing the markets, speculators and all, and was notable mainly for how thinly his contempt for congress was veiled. This slimy little kid (looked no older then me) did everything short of telling the committee members to fuck themselves as they tried in vein to get useful information out of him. The final panel finally had some reasonable people who spoke in defense of speculation, but both unfortunately worked for agencies that directly benefit from the speculation — the market institutions themselves. The panel also had the day’s only university professor, Michael Greenberger of the U. of Maryland, who also agreed with the aforementioned premises.

There are some complications here — notably, oil speculation takes place not just on US markets but also on the ICE (Intercontinental Exchange) market, which while being housed in Atlanta is technically a British institution, making regulating it more difficult (but not as bad as it sounds). Overall, though, the subcommittee members — Democrat and Republican — seemed impressed that they had at their disposal a method to drastically reduce the price of gasoline. This hearing took place on June 23. Let’s see where they go with these findings.