Editorial Board

Scapegoating Oil Speculators Won’t Ease Pain at the Pump

No one, least of all President Barack Obama, should expect oil or gasoline prices to fall because of the five-point plan he unveiled at the White House yesterday.

Obama is about higher energy costs -- they can act as a drag on economic growth, and many people blame the chief executive when prices at the pump approach $4 a gallon. His proposal calls for adding staff at the Commodity Futures Trading Commission to monitor oil markets, spending more on information technology to track trading, stiffer penalties for manipulators, limits on the size of the bets speculators can make, and increased disclosure by the CFTC of trading data.

Yet there is almost no chance that the package will be passed by Congress, and in any case it would have little effect on near-term prices.

At least the president acknowledged that there “are no quick fixes” for higher oil prices. That’s because Obama knows that the increase in gasoline prices can be traced largely to:

-- Instability in the Middle East, particularly threats by Iran to close the Strait of Hormuz in the event of an attack on its nuclear facilities. About a fifth of the world’s oil passes through the strait.

-- The worldwide economic recovery. The U.S. economy has shaken off the hangover of the financial crisis of 2008, and the International Monetary Fund yesterday raised its forecast for global economic growth this year to 3.5 percent from 3.3 percent.

Role of Speculators

The temptation to blame speculators for higher oil prices, while wrong-headed, has a certain appeal. It is of a piece with a broader narrative -- on display in both the Occupy Wall Street and Tea Party movements -- that the benefits of growth are going to an ever-narrower slice of the populace.

Yet speculators aren’t inherently bad. Quite to the contrary: They serve a vital purpose, helping create a market of buyers and sellers. Many academic researchers have found that speculators, by anticipating future price moves, can reduce volatility.

It is true that traders, as opposed to actual users such as airlines and truckers, account for the bulk of the transactions in oil futures markets. But that doesn’t mean they are to blame for higher oil prices. Speculators also operate in the markets for natural gas, where prices have plunged almost 60 percent in the past year because of vast increases in supplies. Speculators can push prices up or down, but they can’t repeal the laws of supply and demand.

As for outright price manipulation? It surely happens, and we don’t take issue with the government trying to catch and punish those who break the law. Just don’t expect to see the results of enforcement efforts next time you fill up.

Obama is correct about one point. Republicans are kidding themselves and voters when they argue that unfettered drilling in environmentally sensitive areas will lead to $2.50-a-gallon gasoline. Maybe Obama’s adversaries are reminiscing about those days not so long ago when gasoline was $1.63 a gallon. That was the price in December 2008, when it looked as if the world financial system might unravel.

The short-term market for oil is influenced by forces far beyond the control of the White House. What a president can do is devise policies that promote conservation, encourage the development of alternative and renewable energy, and work toward smart extraction of domestic fossil fuels. Trying to make the U.S. economy less dependent on oil, as Obama has done, is the best idea out there.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.

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