Scapegoating SpeculatorsDespite Congress' periodic hauling of weak-kneed oil executives before their committees to charge them with collusion and price-gouging, subsequent federal investigations turn up no evidence to support the charges. Right now oil company executives are getting a bit of a respite as Congress has turned its attention to crude oil speculators, blaming them for high oil prices and calling for tighter control over commodity futures trading. Let's look at the futures market and for simplicity use corn futures discussed in my May 28th column titled "Futures Market." While corn is different from oil, both obey the laws of supply and demand, just as humans are very different from bricks but both obey the laws of gravity. Say that today's price of corn is $7 a bushel. I have a hunch that because of Midwest flooding, higher demand due to droughts and war in other parts of the world, that in May 2009, corn will sell for $12 a bushel. I stand to make a lot of money by buying corn now for $7 a bushel, holding it, and in May 2009 selling it for $12 a bushel. If many speculators share my hunch and buy more corn now, today's price, sometimes called the spot price, is going to rise let's say to $10 a bushel. Higher prices for corn, and everything made from corn, might give rise to consumer complaints. While Congress can't stop the Midwest rain, droughts and wars in far off places, it can scapegoat speculators. Let's say that Congress outlaws the corn futures market, or makes futures trading more costly. Doing so will definitely lower the spot price of corn. The price might return to $7 a bushel, making corn consumption once again "affordable." You might exclaim, "Isn't Congress wonderful?" But what about May 2009? Suppose the Midwest floods have a significant impact on corn production; there's drought and war in far off places raising the demand for corn exports.
Congressional attacks on speculation do not alter the oil market's fundamental demand and supply conditions. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil domestically available, not to mention the estimated trillion-plus barrels of shale oil in Wyoming, Colorado and Utah. Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil. I guarantee you we would begin to see a reduction in today's prices even if it took five to 10 years for us to get the first barrel. Put yourself in the place of an OPEC member knowing there would be a greater supply of U.S. oil five or 10 years, hence maybe driving oil prices lower to say $40 a barrel. What will you want to do now while oil is $130 a barrel? You would want to sell as much oil now and OPEC's collective efforts to do so would put downward pressures on current oil prices. Right now the U.S. Congress is OPEC's staunchest ally. Walter E. Williams is a professor of economics at George Mason University. To find out more about Walter E. Williams and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Web page at www.creators.com. COPYRIGHT 2008 CREATORS SYNDICATE, INC.
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