classical economics
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Oil Scam in Balance
By Wayne Jett © June 16, 2008
    The quoted price of crude oil stands today at $137 per barrel. The U. S. Energy Information Administration says: “For the eleventh consecutive week, the U.S. average retail price for regular gasoline increased to another record high, this time exceeding $4 a gallon for the first time. The price rose 6.3 cents to $403.9 cents per gallon, 96.3 cents higher than last year at this time.” On the price of diesel fuel, the EIA said: “The average price slipped [1.5 cents] to 469.2 cents per gallon.”
    While this central economic condition ravages truckers, airlines, farmers, fishermen, workers and unemployed, political and media observers ponder its implications with mild bemusement. A growing sense of urgency seems apparent, however, among key members of House and Senate considering the possibility that “speculators” may be driving up the price of crude oil and its derivatives.
Legislative Action
    Bart Stupak (D-MI), chairman of the House subcommittee on Oversight and Investigations of Energy and Commerce, introduced legislation that would require the Commodities Futures Trading Commission to monitor trading in West Texas Intermediate crude oil, even if it occurs on foreign “dark markets.” He has no evidence of manipulation of prices by specific parties, but Stupak says present CFTC regulation of crude oil trading is “a system that allows for manipulation and that system needs to be fixed." Stupak’s subcommittee will hold a hearing on the bill June 23.
    Joseph Lieberman (I-CN), chairman of the Senate committee on Homeland Security and Government Operations, heard testimony on the same subject a month earlier that strongly evidenced reasons for curbing commodities futures trading practices. Lieberman indicates further action to “look through” banks to enforce position limits of hedge funds which buy commodity swaps, but the timing of his efforts is unclear.
The Captured Regulator
    For its part, the CFTC says it is now urgently investigating to determine whether evidence exists of manipulative practices in crude oil futures contracts. This is the same regulatory agency whose chief economist recently testified to Senator Lieberman’s committee that CFTC had been vigilant in policing commodities futures and had seen no evidence of manipulation. In a similar vein, only last October CFTC told Congress the agency had no jurisdiction to monitor trading in crude oil futures occurring among institutions off the New York Mercantile Exchange.
    Boone Pickens, the billionaire hedge fund manager, scoffs that any suggestion the price of crude is being manipulated by speculators amounts to searching for a “scapegoat” rather than address the issues of “peak oil.” Academics pitched in with assurances that markets simply won’t allow conspiracies to work, so manipulation of the price of crude oil is really not a possibility.
Hunting Pack Theory
    What some miss, or conceal, is that hedge funds and other “organized money” investors do not operate as conspiracies. They conduct themselves more as members of the hunting pack, much as wolves do. A leader chooses the hunt, the target, the tactics and the time. Others join the pack as independent actors seeking to advance their own interests. They add their own talents and resourcefulness to those of others, attacking or withdrawing as they see fit. If the target is overwhelmed with their participation, they share in the bounty or booty.
    Regardless, the fundamental importance of energy will drive attention to this subject as November presidential and congressional elections approach. At best, remedial legislation may be enacted before the August political recess. With Saudi promise of increased oil production and encouragement of U. S. tax cuts, perhaps American politicians will get the message. The price of crude oil is about 50% higher than market conditions justify, and every dime of excess drains blood and food from humanity daily. ~