06-17-08 by dugan
Sen. John McCain’s call today to lift a federal ban on drilling off the nation’s coastline won’t win him friends in California, and probably Florida, but the part of his energy speech that struck me was his statement on oil market regulation. He seemed to endorse, and strongly, some regulatory steps that could actually reduce prices at the gasoline pump. McCain said:
"There is the further problem of speculation on the oil futures
market, which in many cases has nothing to do with the actual sale,
purchase, or delivery of oil. When crude oil became a futures-traded
commodity in the 1980’s, the idea was to afford a measure of protection
against the historic volatility of oil pricing. It takes several weeks
to ship oil from the Arabian Peninsula to the offshore port of
Louisiana. And for the buyers, it helps to know that the price will not
suddenly fall while the oil is in transit. A futures contract assures
importers that they can sell the oil at a profit."That’s the theory, anyway. But we all know that some people on
Wall Street are not above gaming the system. When you have enough
speculators betting on the rising price of oil, that itself can cause
oil prices to keep on rising. And while a few reckless speculators are
counting their paper profits, most Americans are coming up on the short
end — using more and more of their hard-earned paychecks to buy gas
for the truck, tractor, or family car."Investigation is underway to root out this kind of reckless
wagering, unrelated to any kind of productive commerce, because it can
distort the market, drive prices beyond rational limits, and put the
investments and pensions of millions of Americans at risk. Where we
find such abuses, they need to be swiftly punished. And to make sure it
never happens again, we must reform the laws and regulations governing
the oil futures market, so that they are just as clear and effective as
the rules applied to stocks, bonds, and other financial instruments. In
all of these markets, reform must assure transparency, prevent abuse,
and protect the public interest."
I’m not as sure as McCain that the White House can or will conduct a credible investigation of energy trading, and he is not at all specific about what new "laws and regulations" he wants, or when, but his call for transparency and protection of the public interest couldn’t be more welcome.
If Congress and the White House could swiftly agree on market regulation, including oversight of unregulated electronic markets and barriers to all-out financial gambling, the price of oil would likely drop even before curbs were actually imposed.
One point of caution: McCain’s chief economic adviser is former Texas Sen. Phil Gramm, an architect and protector of the "Enron Loophole" that allowed growing electronic energy markets to go completely without oversight or regulation, inviting in gamblers and crooks. McCain needs to quickly put out specifics on his call for regulation, to persuade skeptics who figure Gramm will find a way to bury the idea.
Regulation of oil markets also needs to be twinned with regulation of refinery operations, to ensure that oil companies keep a reasonable supply of gasoline on hand. Those who remember last year’s fast spike in gasoline prices, and the similar one in 2006, may also recall that the spike was due not to oil prices but to refinery cutbacks and an inadequate supply of gasoline.
Anyone who wants to get gasoline prices under control has to close the loopholes at both ends.