Once again President Obama has gotten it wrong. He is getting good at this. I think it is the general anti-business, anti-capitalist thing he has going. This time it is in regards to oil prices.
The President has decided that “speculators” are responsible for high oil prices and he has proposed that traders in oil futures contracts be required to put up more cash (called “margin”) for their trades. Ignore for the moment that decisions on margin requirements should be made by the exchanges themselves and not by the government. Obama also wants more regulators. Big surprise there. Without getting into the nitty-gritty of futures, let’s apply some common sense.
Why does anyone engage in futures trading in oil? Well, imagine for a moment that you run an airline and you consume an enormous amount of oil in the form of jet fuel. If the price of oil and, therefore, jet fuel were to go up you are in a bad way. So what do you do?
You decide to protect yourself by buying futures contracts that let you buy 1,000 barrels of oil at a set price by a certain date. (1 futures contract is typically for 1,000 barrels of oil and futures contracts expire on a regular schedule). In effect you are protecting yourself, or hedging, against an increase in the price of oil because your futures contracts lock in the amount, price and timing of your oil purchase. Purchasing the futures contracts will have an economic cost to you. Think of it as an insurance premium.
So far so good. You bought futures contracts, you are hedged and it has cost you some money, but you are sleeping better at night.
But if you bought a contract then someone else must have sold you a contract, right? If you, the purchaser, were hedging against a price increase, what was the seller doing? Probably speculating.
Now think about this. You bought a contract to protect yourself against a price increase. Someone who sold you that contract sure hopes the price of oil does not go up, in fact they may want it to go down (or not increase too much) or they lose money. Guess what? Do you think speculators like to lose money? I don’t think so either.
Are there speculators out there buying futures contracts, who don’t really want the oil, just hoping the price of oil goes up so they can make money? You bet. Have you ever bought a stock or mutual fund hoping it goes up? Welcome to the club. I hope you made money.
Mr. President, speculators are not causing the price of oil to go up. They are providing valuable market liquidity so hedgers can hedge. This is a positive thing for the economy. Maybe that is why you are against it.
But in case you are curious, Mr. President, as to why oil prices are high, let me explain. Contrary to your belief, there is much you can do to actually help with this problem, rather than engage in your Alinskyite tactic of ridiculing speculators in a pathetic attempt to divert our attention from your chronic failures.
Prices are set by supply and demand. Prices are essentially the same for oil worldwide (different grades of oil trade at different prices). Supply (and a fear of future supply disruptions) is very much influenced by some unsavory folks, especially OPEC. I think you know them; you bowed to the King of one of the member nations. Some of them even don’t like us and want to kill us.
You have made statements to the effect that the US is producing more oil. Mr. President, you are very good at parsing your words to say something that might be technically correct, but actually leave someone with the completely wrong impression. A mere one drop increase in oil production produces “more” oil. The question is not are we producing “more” oil, but are we producing “enough” oil to make the price go down. The answer is clearly, resoundingly and unambiguously, “NO”.
Our domestic production is only one source of worldwide supply and our domestic consumption is only one source of worldwide demand. While our production may by “up”, we are not producing enough. Even though domestic consumption is weak, just like the economy you have created, Mr. President, demand is growing in many places like China, India, etc. You may have heard of some of these places, you being the President and all. There are lots and lots of people in those countries buying cars and mopeds and such and that growing demand is raising prices. China actually used to export oil, now they import it.
In spite of your belief that we are producing more oil production on federal lands, a major source of domestic supply, is down and that, Mr. President, is something you have to be held responsible for because it is the result of your policies. You did appoint Ken Salazar as Interior Secretary, didn’t you, or is that Bush’s fault, too?
One last thing. Oil is traded in dollars. Does the value of the dollar ever change? Sure. When the value of the dollar goes down, what do you think happens to the price of oil? It goes up, because someone wants more of those devalued dollars before they will sell their oil. The dollar is weak, Mr. President, in large part because of your budget-busting, huge deficit-creating, growth-stifling economic policies. That, too, is something you are responsible for. And don’t even get me started on the Keystone XL pipeline.
This is all basic, real world, Economics 101, Mr. President. I am sorry I have to explain it to you, but apparently no one else is. I had higher expectations of a Columbia and Harvard graduate.
(In the interest of full disclosure I do not trade oil futures contracts or futures contracts of any kind.)