Obama Energy Policy: Throw Out the Baby with the Bath Water

Most of us can relate to the day to day activities of the futures markets through the price of gas we pay at the pump. The average price per gallon in California was $4.235 per gallon. The easiest way to score quick political points is suggesting a plan to reduce that price. President Obama campaigning in the Rose Garden of the White House last week introduced his solution to the problem and what he believes has lead to the problem in the first place.

The Presidents new plan calls for targeting speculators by increasing regulations
and regulators. He plans on targeting market manipulation by going after
everyone else in the market. The plan comes with a price tag of $52 million. I
do agree that manipulation of the market is wrong but his solution you will see
doesn’t fix the problem but perhaps adds to it.

The President doesn’t understand the issue. He does not know the difference between Manipulators and Speculators. He interchanges them in his speech declaring the policy. Speculators are people who out of their best judgment take a position in the market. This is both legal and ethical.  Manipulators are
those that use illegal activities or inside information to control the price of
a commodity, a problem that has legislation already in place and only needs to
be enforced.

I have written in the past about how speculators are good for the market. Speculators provide liquidity by creating a market where people can buy and sell their commodities. They take the other end of trades and step in front of freight trains both when the market has gone too far down or up.  For my complete article on speculators please see the following link: http://www.dhstelegram.com/blog/2011/11/04/why-is-speculation-important-to-our-economy/

The Flaws

Speculators take information and turn it into Price. As we get information on what is going on in the Middle East and what the new legislative policies will be Speculation takes this information and reflects it in the price of that commodity. This is important because it avoids large violent moves in the market. It is better that the market slowly trend up with concerns with Iranian Oil than to wake up one morning and seeing that price of  oil up 70% overnight.  It is better if we work over way up in a controlled amount than to be hammered as we were in the 1970s.

Increased Margin Requirements, or requirements to put up more cash per position one takes, only helps the biggest firms.  If it is going to cost more to invest in the market less people will be able to afford to do it driving small investors out of the market. Thus when only a few big funds are going to be left the value of their position in relation to overall market is going to increase thus what was supposed to be an anti-munipilitation policy is going to make it easier to manipulate the markets. What a Petri Dish is to bacteria an ill-liquid market is to a manipulator.

This plan also hurts those businesses that are sensitive to the price of oil by limiting or increasing the cost of “hedging” their risks. Hedging risk is a practice where you take a position in one market at a time it is beneficial to another interest of yours. Airline companies may want to lock in prices at a point when the price is lower in order to have consistent ticketing prices than buying oil every day on the spot and having uncertainty every single time they fuel their planes.

Instructure when airlines put on big positions it comes across as speculation thus when required increasing their margins it is only an added cost to the company. Leading to goods and services becoming more expensive, resultant will be an increased burden on the very families that the president advocates taking a burden off from.

President Obama acknowledged that the driving force for oil prices now are global increase in demands by nations such as India and China. If he recognizes these problems then how is targeting speculation going to fix the problem? He has aimed at the bull’s eye on the wrong target.

The Obama administration again is engaging in unfair practices. The Constitution allows for people to have equal protection under the law. Manipulators are in the wrong speculators are in business. I am all for taking steps to kill manipulation but against killing business.

Free Market Capitalism is the solution to our problems. The invisible hand controls the market better than any government burecrat. Before one makes a policy it is wise to understand the terms and definitions of key words not just read some sentences of a teleprompter that interchange two completely different practices.