Gas prices above $4 have driven Congress and presidential candidates to scramble for quick fixes and scapegoats, including a stack of bills to regulate trading in oil futures, in the name of curbing “reckless oil speculators.”
Such regulation would probably do little or nothing, but they might help airlines pay lower prices for oil while doing nothing about our gas prices.
“Oil speculators” make a worthy-sounding bad guy, in part because most people don’t really know what that label means. Speculation is the buying and selling of commodities futures contracts.
For example, if I am a trader in oil futures, I sign a contract to sell you barrel of oil on Nov. 1 for $130. Because I don’t actually own any physical oil, I may really just be buying oil that day from another trader. If the price that day is $150 a barrel, I’m losing $20. If it’s $100 a barrel, I’m up $30.
Such a seller is making a bet that oil will be lower than the price at which he sells the contract — it’s kind of like gambling. The buyer may also be a gambler, of sorts, betting that the price will be higher.
On the other hand, buying such a contract may be an insurance policy of sorts: If you actually use barrels of oil — say you’re an airline or a trucking company — buying such contracts are a way of gaining certainty on future costs. You may overpay a bit, but you remove the risks of astronomical price spikes. This is called hedging.
So speculators are the gamblers, but their actions — buying and selling futures contracts — are identical to the hedgers, such as airlines. It would be disastrous for Congress to limit the airlines’ ability to hedge, so every bill this year to limit oil speculation exempts the airlines from the curbs.
But the airlines are the driving force behind these proposed regulations. The Air Transportation Association spent $2.2 million on lobbying in this year’s second quarter alone — nearly $25,000 per day.
The organization’s lobbying filings show they lobbied on HR 6341, the Energy Markets Anti-Manipulation and Integrity Restoration Act; HR 6330, the Prevent Unfair Manipulation of Prices Act; S 3122, the Policing U.S. Oil Commodities Markets Act; HR 6130, “to provide for a study of the effects of speculation in the futures markets…”; HR 6264, “to prevent excessive speculation…”; S 3131, the Speculation Control Act; and a handful of similar bills.
These bills range from imposing direct caps on how much a single party can hold in oil futures, down to simply ordering the Commodities Futures Trading Commission to investigate whether anyone is doing anything wrong.
The problem is that curbing speculation won’t drive down the prices drivers pay for gasoline. Whether you trust the liberal Paul Krugman of The New York Times, the conservative Heritage Foundation, or most economists who have written on the issue, airlines and investors making bets on the future price of oil aren’t making a big difference — if any difference — in the price of gasoline or home heating oil. Supply and demand, combined with the collapsing dollar, are the real engines.
Why, then are the airlines fighting so hard for these regulations? How do the airlines benefit from restricting participation in the commodities futures markets, while exempting themselves from any restrictions?
Some of my sources assumed that the airlines really believe that this bill will bring down world oil prices. More likely, they see that restrictions could lower the prices the airlines pay for commodities futures while not really affecting retail oil or gas prices.
If regulation reduces the number of buyers on the future markets, it can have a slight downward pressure on the price those buyers pay — lower demand for futures contracts can reduce the prices of these contracts. But unless demand for actually burning oil goes down — and no speculation bill could bring that about — prices of gasoline or home heating oil won’t go down.
In other words, regulations that keep other people from doing what the airlines do — buying futures contracts — might help the airlines pay less for oil, but they won’t do a thing for you or me, who buy our oil not on commodities trading floors, but at the local Exxon.
Thankfully, Congress, after much sound and fury about evil speculators, looks unlikely to do anything meaningful on this issue. At least the politicians still get to claim they tried.
