President Obama's recent proposal to rein in market speculation is a dangerous and unwise step toward government control of oil prices. By giving a government agency the power to control margin requirements for speculators and declaring them to blame for rising gasoline prices, it seems that this administration wants to try to use the force of the government to influence prices by dictating who should or should not participate in the marketplace. This proposal to give the Commodity Futures Trading Commission the power to control margin requirements would make the markets less reflective of the real market fundamentals for hedgers and speculators and would damage the credibility of the market's price discovery ability.
[See a collection of political cartoons on energy policy.]
Margin requirements are not to be used to try to manipulate price because the market's sole purpose is for price discovery. If you try to influence prices by raising margin requirements, then the price is not valid. Margins are supposed to reflect volatility and to make sure that market participants have the capital to cover any potential losses in its transactions. If you try to influence price with margins, then the marketplace becomes meaningless.
The president does seem to acknowledge the historic demand growth that we have seen for India and China over the last 12 years, but he seems to have a hard time distinguishing the difference between market speculators and market manipulators. The president said, "We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher—only to flip the oil for a quick profit. We can't afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick. That's not the way the market should work."
[Read Obama Pushes Crackdown on Oil Speculation.]
Yet that is not how this market is working. The president's own task force on oil market manipulation has failed to find any evidence of this. The CFTC has failed to find any. In fact, there is no credible evidence at all that oil prices are being manipulated, unless of course you consider Fed policy designed to make deflation go away and drive prices higher.
The president's answer to high oil prices is to find a scapegoat to justify more government spending, more government regulation, more "cops on the beat," and ultimately the government control of prices. President Obama, looking at the surge of speculative liquidity in the market, quoted CFTC Chairman Gary Gensler as saying, "Imagine if the NFL quadrupled the number of teams but didn't increase the number of refs. You'd end up having havoc on the field, and it would diminish the game. It wouldn't be fair." Yet what really would not be fair is if the referees decided to put on helmets and play for the team they wanted to win. What would not be fair is if the referees tried to determine the outcome of the game. We cannot allow politics or anger over high oil prices to destroy the most credible, liquid, transparent oil market in the history of the world, nor should we make the same mistakes we have made in the past when it comes to oil price controls. We need to allow the markets to work and keep politics out.
