Commentary: Speculators aren't to blame for high oil prices

E. Thomas McClanahan is a columnist for the Kansas City Star.
E. Thomas McClanahan is a columnist for the Kansas City Star. MCT

So now President Barack Obama has decided to go after the oil speculators. He wants to “root out any cases of fraud or manipulation.” He’s directed the Justice Department to set up a task force. Yessir, he’s determined to get to the bottom of this.

Thus commences another revival of a familiar Washington performance, staged whenever the prices of oil and gasoline rise to discomfiting levels. In the 1970s, this form of political theater led to the farce of a windfall profits tax.

The Congressional Research Service later found that the tax was flatly counterproductive: We got less domestic oil production and more oil imports.

Obama hasn’t mentioned a windfall profits tax yet (although he did during his presidential campaign), but otherwise he’s sticking to the familiar playbook: point at the “speculators.”

Never mind that it’s not only oil that’s going up. Metals and minerals and farm products are rising too, thanks in part to increased demand from fast-growing emerging economies like Brazil and China.

The price of oil is also boosted by fears of short supplies in the future, what with the Arab world in flames, Libyan oil off the market and offshore drilling in the U.S. restricted after last year’s BP blowout. So you have rising demand and tightening global supplies.

But you also have something else, something important but not much remarked upon — a major contributor to the rising prices of oil and other commodities.

If Obama seeks the real roots of this spring of discontent, perhaps he should look across town, toward the tomblike structure housing the Federal Reserve. Inside, Fed Chairman Ben Bernanke probably chuckles every time he hears Obama murmuring about speculators.

For a long time, the Fed has been flooding the economy with dollars. The goal is to head off Bernanke’s greatest fear — deflation. I’d say it’s worked. Maybe too well.

Given all those dollars, it’s hardly surprising to find the dollar prices of commodities rising along a broad front. They’re going up just as they did after 1971, when President Nixon triggered a long-term dollar drop by cutting the link between the dollar and gold.

As the late Robert Bartley wrote in “The Seven Fat Years,” the countries whose main export was oil were acutely aware of the implications of Nixon’s move. Five weeks after the gold-dollar link was cut, the Organization of Petroleum Exporting Countries told its members to “take necessary action to offset any adverse effects on the per barrel real income” received for oil shipments.

So they began jacking up the price, which is denominated in dollars. By 1974, it had risen threefold. But measured in gold, it hadn’t gone up at all. The amount of gold required to buy a barrel of oil was the same in 1974 as it was in 1971. “OPEC was simply raising its prices, like every other shopkeeper, in response to currency devaluation,” Bartley observed.

Data from recent history tell a similar story. The dollar price of oil has risen from around $25 at the end of 1999 to nearly $107 on March 31 of this year. But measured in gold, the price has dropped in the same period, from .089 an ounce to .074, as the accompanying chart shows. And while oil in dollars has more than doubled since Obama took office, the price in gold has been far less volatile. It’s basically moved sideways since mid-2009.

Obama’s suggestion that “speculators” are largely to blame is a diversion, a ruse. In recent years, the dollar has been sinking relative to oil and gold. It should be no surprise that the dollar price of both has gone up.

“The price of oil is going up because the value of the dollar is doing down,” said investment adviser Chris Butler of Overland Park-based Butler Lanz & Wagler. “It’s going down because we’re printing dollars like there’s no tomorrow. If (Bernanke) is honest, that’s exactly what he wants to have happen.”

As for Obama’s quest to discover the source of rising oil prices, his hunt for culpable speculators and gougers won’t turn up anything of market-moving significance. It never does. If he really wants to find out what’s going on with these prices, he would do a lot better to simply give Bernanke a call.


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