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Oil Prices and the Myth of 'Market Manipulation'
With oil and gasoline prices near record levels and an election on the horizon, President Barack Obama has proposed cracking down on “oil speculators.” At a press conference on April 17, the President stated, “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 ... while millions of American families get the short end of the stick. That’s not the way the market should work.” Once again, Mr. Obama has revealed his lack of understanding about energy markets. Producers and consumers of crude oil, who make selling and purchasing decisions well into the future, utilize contracts for future delivery to lock-in prices today. This is not speculation but hedging. Yes, there are some traders who are not in the market to take delivery of oil but who are simply placing bets on future price movements. But for every “winner” in the speculation game there will be a “loser.” So on balance speculators aren’t having a significant impact on prices. In fact, economic research has shown that speculation can actually bring more stability than volatility to commodity markets. Specifically, the President wants to increase sixfold the surveillance and enforcement staff at the Commodity Futures Trading Commission (CFTC) at a cost of $52 million and impose fines of $1 million to $10 million a day on firms that engage in “market manipulation.” Aside from the difficulty of determining exactly what constitutes market manipulation, the imposition of such draconian oversight will simply push oil and other commodity trading to markets abroad, with attendant losses of jobs and prestige in the U.S. financial sector. The impact on oil prices will be zero. If the President is serious about pushing down oil prices, he should reconsider his veto of the Keystone XL pipeline and order relevant federal agencies to expedite the issuance of permits to drill on federal lands, the outer continental shelf, and the Gulf of Mexico.