Anti-capitalist Democrats (and regrettably the Republican candidate for president) won’t like hearing it, but speculators are not to blame for high oil prices in recent months.  So sayeth the Commodity Futures Trading Commission.

In one of the broadest and most authoritative studies to date, the Commodity Futures Trading Commission has offered hard statistical data that financial trading hasn’t been driving price moves. The CFTC conducted an unprecedented Wall Street data sweep and scrutinized millions of transactions worth billions of dollars between January and June of this year.

Commodity futures markets have grown fivefold by volume over the last decade, while becoming more complex. “Index traders” are one cause. These pension funds and other institutional investors don’t buy options for commercial use, but rather roll them over from month to month as passive long-term investments. “Swap dealers,” usually investment banks, operate off the main exchanges and sell customized futures packages to firms. These aggregations of options and derivatives are designed to match particular needs and spread risk more broadly.

Lo and behold, the CFTC found that index traders and swap dealers actually reduced their stake in crude oil futures as prices spiked. The number of contracts held by these investors betting that prices would increase — the net long position — fell by 11%, and more were shorting oil than going long over the six-month period. In other words, index traders and swap dealers were driving the future price of oil down.

I hate it when I’m right.  Oh well, on to the next excuse for trying to exert more government control over private markets.

Check out this bit of wisdom from Nancy Pelosi on Meet the Press.

Rep. Pelosi: I believe in natural gas as a clean, cheap alternative to fossil fuels.

Good thing natural gas isn’t a fossil fuel!  I propose using gasoline as an alternative to oil.

There is certainly no shortage of dour stories about the negative impact of high gas prices on, well, everything.  That is the media’s forte, though, finding the worst in any situation.  But there are a few headlines poking through that show some positive side effects of high fuel prices.

• $4 gas helping revitalize small towns - People are shopping locally instead of driving to larger cities.
• Traffic deaths fall as gas prices rise - 9% drop in motor vehicle deaths during first five months of the year.
• For Some Ohioans, Even Meat Is Out Of Reach - This is supposed to be a sob story, but more costly food is just what the doctor ordered for the, uhhh, rotund ladies in the accompanying picture.

Some of the ire over high gas prices has recently caused some, including Congress, to set their sights on speculators in the oil markets.  The fact is that such demagoguery only exposes the ignorance of those shouting the loudest.  Speculators of all kinds are key elements of any thriving market and history bears out that restricting their investments only exacerbates perceived “problems.”

A friend at work was complaining about speculators when I asked him what he thought about Southwest Airlines speculating in fuel prices.  The air carrier has done quite well despite the general downturn in commercial aviation because they took a risk and bought futures contracts for fuel on the assumption that prices were going to rise.  (It should be said that they were one of the few, if not only, airlines with the cash on hand to sign those contracts a few years ago that helped secure their strong position.)  They are currently getting a majority of their fuel for about 40% of the going price.  That is speculation.  It enables them to make money while charging reasonable fares.

My friend relented and admitted that all speculators are not bad, just those who purchase the commodity with no plans to use it.  Southwest was different because they use the fuel in their operations, he explained.  I asked what he thought about wholesalers.  Those individuals purchase raw materials and finished products directly from manufacturers with no intent to consume them in any operational process.  They purchase them with the hopes that they can sell them for more - hopefully much more - than they paid.  That is speculation.

Speculation is how markets work and we all engage in it to some extent.  Unfortunately most people can’t conceptualize how speculation serves to stabilize prices and supplies over the long run.  Speculators are in it to make money and when professional investors put their money at risk they don’t tend to do so at random or to punish society.  They make informed decisions based on available facts in the hopes of maximizing their returns.  They will dispassionately bet on the price going up if that is what the facts suggest or down if the facts suggest otherwise.  Remember - “… from their regard to their own self interest,” as Adam Smith said.  This can be seen in political markets such as Intrade.  Forget what the talking heads on television and radio say.  If you want to know who is going to win an election then follow who people are betting their hard earned money on.

Let’s look at oil, since it is the fuel behind this post, although you could substitute any commodity directly into this paragraph.  When smart people who study the oil market for a living think that future demand will outstrip available supplies then they will speculate accordingly.  Before you curse at them think about the positive consequences of their actions.  Oil companies will recognize that futures prices are higher and they will make decisions to expand exploration and production into areas that were not profitable at lower prices.  Because of this recognition of futures prices the increased production will work to offset the anticipated supply deficit.  In fact, the oil companies could expand production too rapidly in the hopes of making large profits and cause prices to fall.  Without the speculation the companies would have no way to know how to react to what will happen in the future and therefore may not be able to prepare for surges in supply or other perturbations that speculators may have identified.  That lack of information could cause prices to swing more rapidly and unexpectedly in either direction.

No one likes to pay high prices for gas.  I know that I don’t.  But there comes a point where rational analysis has to stand in the way of stark emotion and political posturing.  It is unseemely to some that speculators make money on oil while gas is $4 a gallon.  However, keep in mind that many of those speculators also lose money (they don’t call it speculation for nothin’) and that without their efforts the price could be even higher.

From CNN:

Sen. John Warner, R-Virginia, asked Energy Secretary Samuel Bodman to look into what speed limit would provide optimum gasoline efficiency given current technology. He said he wants to know if the administration might support efforts in Congress to require a lower speed limit.

Congress in 1974 set a national 55 mph speed limit because of energy shortages caused by the Arab oil embargo. The speed limit was repealed in 1995 when crude oil dipped to $17 a barrel and gasoline cost $1.10 a gallon.

Things like this just get my blood pressure up.  The federal government shouldn’t even have the authority to implement a national speed limit.

I just started driving about the time the previous one was repealed.  I’m sure someone could tell me how they justified imposing the limit on the states, but I would guess that it was done by threatening to withhold federal funds from states that didn’t comply.

Business Week has a story about a gas station chain in Georgia and Florida that is giving a 6 cent per gallon discount to customers who make their purchase with cash instead of a credit card.  You could also say that the station is charging a 6 cent per gallon fee to credit card users.  It’s an attempt by the company to pass along costs associated with accepting credit card payments.

I’m guessing this won’t become a wide spread phenomenon, but you never know.  Some travel centers already charge lower prices for big rig drivers who pay with cash.

With gasoline prices cresting the four dollar mark, President Bush is asking Congress to revoke the federal ban on offshore drilling.  The Democrats predictably refused and chose to offer up a bunch of anti-capitalist clap chap as their rationale.  My only question to Bush is: why not do this when your party controlled Congress?

I’m not completely sold on expanding production myself.  Our nation is, in fact, addicted to oil and the only way an alternative source of energy will be found is for high prices to stimulate market efforts to find the best replacement(s).  Expanding production could kill or harm the efforts of private venture capital investments in new energy - especially if some global event caused demand to drop and prices fell through the floor.

On the other hand, oil is a very good energy source for a number of reasons and it will be difficult to find anything better (let alone anything almost as good).  It has good energy density, portability, and the head start of an expansive infrastructure to support its use.  It doesn’t make much sense to leave known reserves of such a high quality source of energy just sitting underground while energy prices batter us and the market labors to find a suitable alternative, which may take a very long time.  I’m inclined to support expanding production, but it is a decision that should not be rushed or made out of political expediency.

The Democrats offered up their own “solution” to high oil prices: nationalize oil refineries.  Yeah, that should work out just great.  Do we still have to call them Democrats or can we just dispense with the formality and call them socialists?  The line of separation gets thinner every day.

And the winner is… Hillary Clinton.

First of all she rips off John McCain’s gas tax holiday pander.  No points for creativity.  I’m not particularly sanguine about the prospects of such a temporary tax removal having a significant impact on prices at the pump.  The fact is, and people hate to hear it or refuse to believe it, but prices are as high as they are due to tight supply and stubborn demand.  If the tax were removed demand would rise, forcing prices back towards their current levels.  Don’t get me wrong, I’m all for lower taxes, but don’t pitch them using false logic.

But Hillary’s plan is far worse than McCain’s for its sheer presumption of voter stupidity.  She actually plans on making up the lost revenue by hitting oil companies with additional taxes.  Hmmm…  I wonder what would happen.  What are the odds that those companies pass on those costs to consumers just like they do with all other costs?  About 100%.  No relief to motorists whatsoever.  But she would score points with her fiscally ignorant, anti-capitalist base.

Oh, and Hillary is also a Global Warmitarian like McCain and her support of the gas tax holiday demonstrates the frailty of her faith.

Part 1

Many times for over a year I’ve decried the foolish headlong government plunge into ethanol. Basically anytime the government anoints a winner in the marketplace the government will be proven wrong for any number of reasons. One of the many predictable outcomes of increased governmental support for ethanol, higher food prices, has become a reality.

The Washington Post had a good column recently aptly titled “Ethanol’s Failed Promise” that outlined the many flaws with biofuels. I was particularly amused by the line, “Food-to-fuel mandates were created for the right reasons.” Ohhhh, the liberal’s lament. It’s always about good intentions with them, not sound, well reasoned policy. Any degree of government interference is justifiable if your heart is pure.

Seriously, who thought it was a good idea to use precious arable land for fuel production instead of food production while there are still people starving in the world?

Part 2

On a related topic, I recently wrote that John McCain’s proposal to eliminate the federal fuel tax for the summer revealed his lack of adherence to the global warming creed. Eliminating the tax would encourage more consumption of fuel, which is exactly the opposite of what a devout global warmitarian would want. Now the Wall Street Journal has come to the same conclusion. They state that proposals such as McCain’s make “a hash out of the climate-change policies that the candidate purports to favor.”

If such politicians were honestly concerned with the survival of our species their recourse would be simple and easy to make: artificially force up fuel prices. Tax it. Regulate it. Bludgeon it to death. Instead what we get are politicians who seem to be eager to just gain more power and control since their contradictory cocktail of policies belie their tenuous belief in the man-made global warming faith.

Update: More on McCain’s hypocrisy from Newsweek:

[A]ttorney and former GM exec Frank Dunne finds the climate-change hawk’s call for a gas-tax holiday “intellectually dishonest.”

[Tom Kloza, energy analyst with the Oil Price Information Service] goes a bit further, calling a gas-tax holiday “caca.” “It represents pandering. You’re not leveling with the American public,” says Kloza.

This time they targeted the evil oil companies - you know, the ones that employ thousands of Americans and whose products are purchased everyday by Americans and others around the world.  Their cost basis for getting their product to market will increase if this bill becomes law, which means that you and I will pay more for gas and other petroleum products.  Just thank your local Democrat next time you fill up and you feel that pain in your wallet.  They really stuck it to the oil companies average Americans who eventually foot the bill.

The Alabama delegation was split along party lines with both Democrats (Cramer and Davis) voting for the tax hike and all Republicans opposing it.