Obama continues blaming speculators

I have tried several times to explain how speculation works, but Democrats can't pass up a chance to bash businesses.

GEORGE STEPHANOPOULOS, HOST: Let's talk a little bit more about the economy. Gas prices are starting to come down this week, but the president wanted to show he's on top of it, saying he's prepared to crack down on speculators.

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: My administration will take new executive actions to better analyze and investigate trading activities in energy markets and more quickly implement the tough consumer protections under Wall Street reform. None of these steps by themselves will bring gas prices down overnight, but it will prevent market manipulation and make sure we're looking out for American consumers.

(END VIDEO CLIP)

STEPHANOPOULOS: Keith, the president did made a concession there. The problem is they actually hadn't been able to come up with any evidence that speculation was driving up the price. There's a lot of hunches, no hard evidence.

KEITH OLBERMANN: Yeah. One of the -- one of the things I turned to, to try to establish that was to look at the average gas price at various key moments, and the lowest price in the last six years, the nadir of gas prices at the pump, was the day of this president's inauguration in 2009. There has to be some connection between that being the least busy political moment of a president's career, where you're not going to -- you're not going to hurt them, you're not going to harm him that way, and the price of gas. There has to be an almost deliberate or at least a side effect quality to that. There must be.

The rambling here about conspiracy theories is crazy.  Speculators make money my arbitraging away price differences.  To sell gas when you think that it will rise in the future is a sure way to lose money.  The same is true if you buy it up when you think that it will be lower in the future is another way to lose money.  For a massive market like oil where this conspiracy trading increases the profits of other speculators to go in the other direction.

New piece in Philadelphia Inquirer: Speculators smooth out the rough spots

My new piece with Grover Norquist in the Philadelphia Inquirer starts this way:

With regular gas prices topping $3.70 last weekend, angry politicians are blaming the higher prices on speculators and greedy oil companies. On Monday, The Hill newspaper reported that 23 senators and 45 congressmen, all Democrats except for one independent, called for urgent action against the "speculators" they hold responsible. Sen. Bob Casey of Pennsylvania demanded, "Consumers shouldn't be forced to pay higher prices at the pump because of speculative bets on Wall Street."

These politicians want the Commodity Futures Trading Commission to use its new regulatory powers under a law signed by President Obama two years ago to limit the amount of oil that speculators can buy.

This isn't a new concern. Last April, when regular gas prices hit $4 a gallon, the president launched a Department of Justice investigation into what he called "manipulation in the oil markets that might affect gas prices."

Unfortunately, neither the Democrats in Congress nor Obama appear to have a clue how markets work. The policy reminds one of Richard Nixon's attacks on speculators during the 1970s. . . .

Nutty Sen. Bob Casey on oil prices

Do any of these Democrats understand that speculation smooths prices over time? That speculators make money by causing price differences to get smaller over time? This article also shows how dangerous the stupid Dodd-Frank bill is. From The Hill newspaper:

Democratic Sen. Bob Casey (Pa.) is pressing the Commodity Futures Trading Commission (CFTC) to help ease rising gasoline prices.
In a letter sent to CFTC Chairman Gary Gensler on Sunday, Casey called on the agency to implement a rule that would limit speculation in the oil market and is two years in the making.
“Consumers shouldn’t be forced to pay higher prices at the pump because of speculative bets on Wall Street,” Casey said.
“Nearly two years ago Congress gave the CFTC the tools to crackdown on speculation in the oil market, and with sky high prices at the pump it’s time they used it.”
The Dodd-Frank law gives the CFTC the authority to limit the ability of speculators on Wall Street to inflate the price of oil by putting in place position limits. . . .

UPDATE: Other Democrats get on board.

A letter Monday to the Commodity Futures Trading Commission (CFTC) from 23 senators and 45 House members underscores how gas prices have soared to the top of the political agenda on Capitol Hill and the campaign trail. . . .
“It is one of your primary duties — indeed, perhaps your most important — to ensure that the prices Americans pay for gasoline and heating oil are fair, and that the markets in which prices are discovered operate free from fraud, abuse and manipulation,” states the letter from lawmakers including Sens. Bernie Sanders (I-Vt.), Bill Nelson (D-Fla.) and Ron Wyden (D-Ore.) and Reps. Maurice Hinchey (D-N.Y.) and Louise Slaughter (D-N.Y.). . . .

Bill O'Reilly goes after oil companies yet again

Of course, there is the false statement about Obama not being able to do anything to impact the current price of oil through future production.
I agree with virtually nothing in this discussion, but I am putting it up to remember to possibly write something on it.

Obama continues going after Oil Speculators

High gas prices are solved by raising taxes on oil companies? More on speculators unjustifiably raising prices? At least that what Obama was advocating in his weekly Saturday radio address. See my earlier post on his attacks on speculators available here.

Now, whenever gas prices shoot up, like clockwork, you see politicians racing to the cameras, waving three-point plans for two dollar gas. You see people trying to grab headlines or score a few points. The truth is, there’s no silver bullet that can bring down gas prices right away.

But there are a few things we can do. This includes safe and responsible production of oil at home, which we are pursuing. In fact, last year, American oil production reached its highest level since 2003. On Thursday, my Attorney General also launched a task force with just one job: rooting out cases of fraud or manipulation in the oil markets that might affect gas prices, including any illegal activity by traders and speculators. We’re going to make sure that no one is taking advantage of the American people for their own short-term gain. And another step we need to take is to finally end the $4 billion in taxpayer subsidies we give to the oil and gas companies each year. That’s $4 billion of your money going to these companies when they’re making record profits and you’re paying near record prices at the pump. It has to stop.

Instead of subsidizing yesterday’s energy sources, we need to invest in tomorrow’s. . . .

On Wednesday, ExxonMobile will be announcing its profits for the latest quarter, and with the soaring gas prices its profits will be quite high. Of course, higher profits are what you want if you want to encourage more energy being produced.

How does media coverage of the higher prices now compare to the higher prices under Bush? A couple discussions are available here and here.

Meanwhile the Obama administration is doing everything it can to stop oil production in the US.
EPA Rules Force Shell to Abandon Oil Drilling Plans
Protecting lizard would put jobs at risk
Oil companies should pay their 'fair share'

UPDATE: "Obama pounces on Speaker's remarks, urges end to oil subsidies"

In a letter to the leadership of both chambers and both parties, Obama used House Speaker John Boehner's words against him, referencing the Ohio Republican's criticism of the oil companies in an interview with ABC News.
"I was heartened that Speaker Boehner [Monday] expressed openness to eliminating these tax subsidies for the oil and gas industry," Obama wrote. "Our political system has for too long avoided and ignored this important step, and I hope we can come together in a bipartisan manner to get it done."
The president also urged Congress to get behind his energy plan even though he acknowledged that Republicans won't agree with much of it.
"I hope we can all agree that, instead of continuing to subsidize yesterday's energy sources, we need to invest in tomorrow's," Obama said.
Sen. Charles Schumer (D-N.Y.) also seized on Boehner's remarks, saying his comment that large companies don't "need to have" some subsidies was "almost too good to be true." . . .
“The Speaker made clear in the interview that raising taxes was a non-starter, and he’s told the president that. He simply wasn’t going to take the bait and fall into the trap of defending 'Big Oil' companies," Steel said.
"Boehner believes, as he stated in the interview, that expanding American energy production will help lower gas prices and create more American jobs. We'll look at any reasonable policy that lowers gas prices. Unfortunately, what the president has suggested so far would simply raise taxes and increase the price at the pump."
In the interview with ABC, Boehner said: "I don't think the big oil companies need to have the oil depletion allowances, but for small, independent oil-and-gas producers, if they didn't have this, there'd be even less exploration in America than there is today." . . .

Further UPDATE: From Fox News:

But Boehner's office pushed back Tuesday, suggesting the speaker wants to see a more comprehensive approach before signing on to any changes.
"The speaker wants to increase the supply of American energy and reduce our dependence on foreign oil, and he is only interested in reforms that actually lower energy costs and create American jobs," spokesman Brendan Buck said in a statement. "Unfortunately, what the president has suggested so far would simply raise taxes and increase the price at the pump." . . .

If Obama really wants to reduce the true cost of energy, stop subsidizing really costly alternative "green" energy. Part of the cost of energy are all these taxpayer funded subsidies for producing the energy.

Boehner's ABC interview is available here.

What will the new GDP numbers show this week?

The gross domestic product estimate for the first quarter of 2011 is due Thursday. For the first six quarters after the recovery under Obama, GDP growth has averaged about 2.95 percent. Under Reagan, given what was probably at least as bad of a recession, GDP growth averaged 7 percent, more than twice as much. Already the poor growth numbers expected to be released on Thursday are being explained away by high oil prices. With prices reaching $3.896 per gallon on April 20th, they are indeed quite high. But this is akin to leaving out oil and food price increases in measuring inflation. Obama blames speculators for the high prices, while Obama should look at government for responsibility.

If it isn't speculators, what then? For those who take the old claim about monopoly power by gasoline companies, this chart might be useful.


UPDATE: IMF bombshell: Age of America nears end

According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now. . . .

The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies.

Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.

Just 10 years ago, the U.S. economy was three times the size of China’s. . . .

Obama still doesn't get it on economics

Reuters writes: "Obama blames speculators for rising fuel prices"

Obama doesn't understand that "speculators" smooth the swings in prices. Speculators make money by eliminating price differences over time. If they think that prices will rise, they buy oil now and store it to sell when those higher prices arise. If prices don't rise, those speculators LOSE money, losing their OWN money. Obviously there is a lot of turmoil in the Middle East. If Saudi Arabia has political trouble or other oil countries have problems, what happens to the price of oil then? BY storing some oil in case those events occur, speculators will make oil available when that short fall occurs.

President Barack Obama on Tuesday blamed speculators for driving gasoline prices higher and straining American consumers, saying there was enough oil in world markets to meet demand.

Speaking at a community college in suburban Virginia, Obama said increasing production of U.S. oil and creating a market for fuel-efficient cars would help meet the country's energy challenges. . . .

Rising fuel prices are a persistent concern for the White House, which is concerned about their impact on the economy and on voters' wallets as Obama runs for re-election.

Average U.S. gasoline prices hit $3.84 a gallon last week, the most expensive since August 2008, as oil prices have soared above $100 a barrel. . . .

Obama said that global oil supply is adequate and that speculators are driving up prices significantly.

"It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. There's enough oil out there for world demand," Obama said.

"The problem is ... speculators and people make various bets, and they say, you know what, we think that maybe there's a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we're going to bet that oil is going to go up real high. And that spikes up prices significantly." . . .

Here is the transcript of part of his talk.

Now, I wish I could tell you that there was some easy, simple solution to this. It is true that a lot of what’s driving oil prices up right now is not the lack of supply. There’s enough supply. There’s enough oil out there for world demand. The problem is, is that oil is sold on these world markets, and speculators and people make various bets, and they say, you know what, we think that maybe there’s a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we’re going to bet that oil is going to go up real high. And that spikes up prices significantly.

We’re now in a position where we can investigate if there’s unfair speculation. We’re going to be monitoring gas stations to make sure there isn’t any price gouging that’s taking advantage of consumers. But the truth is that it is a world commodity, and when prices spike up like this there aren’t a lot of short-term solutions. What we have are medium- and long-term solutions.

Now, one solution is making sure that we’re increasing production of U.S. oil. And we have actually continually increased U.S. production, so U.S. production is as high as it’s ever been. The problem is we only have about 2 to 3 percent of the world’s oil reserves, and we use 25 percent of the world’s oil. So when you say we should be using traditional sources, the problem is we’ve got finite sources when it comes to oil. And that means we’ve got to find some replacements. . . .

UPDATE: More on speculators from the Obama.

President Barack Obama said Thursday that the Justice Department will try to "root out" cases of fraud or manipulation in oil markets, even as Attorney General Eric Holder suggested a variety of legal reasons may be behind gasoline's surge to $4 a gallon.

"We are going to make sure that no one is taking advantage of the American people for their own short-term gain," Obama said at a town-hall style meeting at a renewable energy plant in Reno.

The national average price for a gallon of regular gasoline was $3.84 on Thursday, about 30 cents higher than a month ago and almost a dollar higher than a year ago.

Obama, decrying such levels as yet another hardship "at a time when things were already pretty tough," said Holder was forming the Financial Fraud Enforcement Working Group.

The task force will focus some of its investigation on "the role of traders and speculators" in the oil-price surge Obama said. The group will include several Cabinet department officials, federal regulators and the National Association of Attorneys General.

In Washington, Holder said he would press ahead with the investigation, even though he did not cite any current evidence of intentional manipulation of oil and gas prices or fraud.

"Based upon our work and research to date, it is evident that there are regional differences in gasoline prices, as well as differences in the statutory and other legal tools at the government's disposal," Holder said in a memo accompanying a statement announcing the task force. "It is also clear that there are lawful reasons for increases in gas prices, given supply and demand."

"Nonetheless, where consumers are harmed by unlawful conduct that has the effect of increasing gas prices, state and federal authorities will take swift action," Holder said. . . .

The AP article also made this inaccurate claim:

There's not much Obama can do to affect the price of gasoline in short term, something he acknowledged in his remarks. Gas prices have risen steadily as a result of tensions in the Middle East and northern Africa and rising demand from China and other emerging economies. . . .

The reason that this is inaccurate is simple: greater future supplies of gas increase current gas supplies. Just as higher future prices cause people to save gas to make it available when prices are expected to be high, the reverse is also true. Lower future prices mean that there is little reason to save gas for the future and existing inventories will be run down.

Here is part of his speech on Thursday.

"Last month, I asked my attorney general to look into any cases of price gouging, so we can make sure no one’s being taken advantage of at the pump. Today, we’re going a step further. The attorney general’s putting together a team whose job it will be to root out any cases of fraud or manipulation in the oil markets that might affect gas prices — and that includes the role of traders and speculators. We are going to make sure that no one is taking advantage of the American people for their own short-term gain." . . .

Some of the political fallout is discussed here. It isn't true that something can't be done in the short-run. Greater future supplies will reduce prices in the future and that in turn will reduce prices today. You don't have to wait for the supply to show up to reduce prices.

House Republicans are planning bill introductions, hearings, markups and floor votes on legislation aimed at expanding domestic oil production in response to high gasoline prices.

The plain truth that there is realistically nothing Congress can do in the short- or mid-term to affect gas prices won’t get in the way of both parties trying to score political points by complaining the other is not addressing the problem.

"The White House and the rest of the Democrats who run Washington are terrified about the political impact of gas prices, because many of their policies — like the national energy tax — are explicitly designed to raise energy prices,” said Michael Steel, spokesman for House Speaker John Boehner.

Obama on Thursday pointed to high gasoline prices for his sagging poll numbers. "My poll numbers go up and down depending on the latest crisis and right now gas prices are weighing heavily on people," he said at a Los Angeles fundraiser. . . .

How do Speculators make money?

Speculators make money by arbitraging away price differences. They smooth out price differences. Do they always accurately predict when prices will rise or fall? Of course not, but if they guess wrong about this, they lose their money. Over time speculators have proven remarkable accurate at making these predictions and the loses that they risk from guessing wrong definitely gives them strong incentives to get things right.

Now comes the notion of taxing financial transactions to reduce the return to speculation (link to Paul Krugman). What this tax will do is increase price swings over time. Suppose that the transaction costs of buying and selling oil as well as storage costs come to 10 cent a barrel. In that case, you would have to expect the price to rise by a dime before it would pay for speculators to arbitrage away any expected price increase. Now suppose that you add a tax of 20 cents. Well, of course, the increase in price would have to be 30 cents before speculators will act to limit the rise. Is that good? As usual, Krugman's piece doesn't have what amounts to economic reasoning to defend his position.

Democrats: No Senate vote on allowing more drilling

The Hill newspaper has this news:

Reid: No drilling votes in debate over oil speculation
By Manu Raju
Posted: 07/14/08 04:07 PM [ET]
Senate Majority Leader Harry Reid (D-Nev.) said Monday that he would not allow a vote on an amendment giving states new authority to seek oil off their coasts when he brings a Democratic energy bill to the floor later this month. . . .

“We want oil and gas companies to drill on the leases they’ve been given,” Reid said.

He added that oil companies should report to Congress their activities on their leased land and said Congress will invest in renewable energy by pushing through a stalled package of expiring tax incentives.

Democrats blame market speculators on oil industry futures for playing a role in propping up energy prices, and are drafting a bill targeting the practice, which will be unveiled Wednesday. When the Senate votes on that bill, as soon as this month, Reid said he would not allow amendments dealing with oil drilling, which the Republicans will almost certainly seek.

"I said and was very clear that we need to focus on issues of specific matters," Reid said.

The reaction puts Democrats in line with their presidential candidate, Sen. Barack Obama (Ill.), who opposes lifting the offshore-drilling ban. Sen. John McCain (R-Ariz.) reversed his longstanding support for the ban, and has said that boosting supplies will help bring down soaring gas prices. . . .