Streetwise Professor

April 21, 2011

The Department of Distraction Swings Into Action

Filed under: Commodities,Derivatives,Energy,Politics,Regulation — The Professor @ 3:20 pm

It is becoming clear that Obama’s criticism of speculators was not a one-off. Instead, it is part of a broader campaign to demonize them. Today’s installment of the Two Minutes’ Hate came courtesy of the Justice Department (so tempted to use quotes around that). Eric Holder announced the formation of an Oil and Gas Price Fraud Working Group consisting of Department of Justice, the National Association of Attorneys General, the Commodity Futures Trading Commission, the Federal Trade Commission, the Department of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission, as well as the Departments of Agriculture and Energy.  The Group’s charge is:

In March 2011, President Obama asked the Attorney General to work with federal and state agencies to monitor oil and gas markets for potential wrongdoing.   In response to the President’s call for action, Department of Justice leadership consulted with federal agencies and state attorneys general and discussed pending inquiries in some states, the most effective legal tools and areas that require additional exploration.   As a result of this examination and to further the central mission of the Financial Fraud Enforcement Task Force, the Attorney General formed the Oil and Gas Price Fraud Working Group.

The Oil and Gas Price Fraud Working Group will explore whether there is any evidence of manipulation of oil and gas prices, collusion, fraud, or misrepresentations at the retail or wholesale levels that violates state or federal laws and harms consumers or the federal government as a purchaser of oil and gas.   The Working Group will also evaluate developments in commodities markets and examine investor practices, supply and demand factors and the role of speculators and index traders in oil futures markets.

Here’s the Reuters feed on Obama’s announcement:

* ( RTR ) 04/21 02:30PM OBAMA SAYS HAS ASKED ATTORNEY GENERAL TO CREATE TEAM TO “ROOT OUT” FRAUD, MANIPULATION IN OIL MARKETS THAT COULD HIT GAS PRICES
* ( RTR ) 04/21 02:31PM OBAMA, IN PREPARED REMARKS, SAYS TEAM’S FOCUS WILL INCLUDE OIL MARKET TRADERS AND SPECULATORS
* ( RTR ) 04/21 02:31PM OBAMA SAYS WILL MAKE SURE THAT NO ONE IN OIL MARKET IS TAKING ADVANTAGE OF THE AMERICAN PEOPLE FOR THEIR OWN SHORT-TERM GAIN

Here’s some additional reporting on Obama’s remarks today:

“The attorney general’s putting together a team whose job it will be to root out any cases of fraud or manipulation in the oil markets that might affect gas prices – and that includes the role of traders and speculators,” President Obama said at a town hall meeting in Nevada on Thursday. “We are going to make sure that no one is taking advantage of American consumers for their own short-term gain.”

That same article quotes Northwestern polisci professor Laurel Harbridge, giving the enabling professoriate’s take on this gambit:

Laurel Harbridge says the formation of the investigative group is a way for the president to take control of the situation without taking more extreme steps.

“Doing something that suggests that there’s at least the possibility that gas prices are high because of manipulation or something like that kind of turns the high gas prices into something that he’s combating and he’s against rather than either a problem that can’t be dealt with or something that’s due to domestic policy decisions,” Harbridge said.

In other words, it’s an opportunistic effort to scapegoat others on the basis of zero evidence in order to distract attention from the real issues–but that’s cool!

Here’s a non-enabling professor’s take:

Craig Pirrong, a finance professor at the University of Houston who specializes in commodity prices, says the task force is hardly needed, since the agencies already have the tools to monitor for fraud and take action. [Yeah.  It’s like their day job.]

“This is a transparently political fishing expedition that insinuates that fraud or manipulation is distorting oil prices without providing even the flimsiest factual basis for such a suspicion,” Pirrong said. “This is part of a broad effort by the administration to deflect criticism with regard to gasoline prices.”

Actually, the “fishing expedition” characterization is probably optimistic.  Especially given Obama’s assertion of ownership of the issue, and his personal identification with the claim that speculators are distorting prices, there is a high likelihood that fishing expedition will give way to witch hunt.  Remember when Obama told bankers “[m]y administration is the only thing standing between you and the pitchforks”?   It is becoming increasingly clear that Obama won’t be standing between oil “speculators” and the pitchforks this time.  Indeed, he’s taking leadership of the mob.

What determines commodity prices is a complex issue.  Injecting superheated political rhetoric won’t improve our understanding, and in fact will inevitably have the exact opposite consequence.  This, combined with the implicit threat of legal investigations and perhaps legal action (“nice little market you have here–wouldn’t want anything to happen do it”) will have no positive consequences, and likely many negative ones.

It’s already ugly out there.  But it just got a whole lot uglier.

It would be nice if this witch hunt was as funny as this one:

I wouldn’t speculate on it, though.

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48 Comments »

  1. Populism.

    Comment by Sublime Oblivion — April 21, 2011 @ 3:25 pm

  2. That’s how those Chicago Statist Gangsters roll.

    Comment by Bob — April 21, 2011 @ 7:43 pm

  3. Follow the left wing logic. We can’t have fossil fuels because it’s bad for the environment. (No exploration, no production) We need to have ethanol because it’s great for the environment. We need to have a cheap dollar because it helps manufacturing jobs at home-we won’t export them to China.

    Meanwhile the MIddle East explodes over high food prices caused by ethanol policy and a cheap dollar.

    Blame the oil speculators.

    Comment by Jeffrey Carter — April 21, 2011 @ 8:13 pm

  4. Jeff, Jeff, Jeff. Don’t you know that logic is an instrument of patriarchal Western cultural imperialism? You obviously need re-education.

    The ProfessorComment by The Professor — April 21, 2011 @ 8:36 pm

  5. Why waste resources on a witch hunt.

    If you think “speculators” (really people who think they can avoid inflation problems with carry trades), just put a tax on long positions that don’t result in physical delivery at a rate that increases with price, and sun-sets in 3-4 years. For example:

    2.8*(P-65)%.

    It can be sold as a carbon tax and protection against pesky speculators.

    Then we’ll see whether there are witches or not.

    (It must sunset, otherwise it is in the interest of the government to keep the price high. The limited life also will make CAGW skeptics more receptive.)

    Comment by aaron — April 21, 2011 @ 8:52 pm

  6. Honestly, I find this really disturbing. Either he is really clueless about economics and finance. Or, he doesn’t care about saying things that are wrong to manipulate some votes his way. Either explanation is pretty depressing.

    Comment by David Hoopes — April 21, 2011 @ 10:17 pm

  7. Those mean, nasty speculators! What, I wonder, are they going to do about the mean, nasty speculators, such as his bro George Soros, who are shorting the dollar?

    Comment by nolanimrod — April 21, 2011 @ 10:52 pm

  8. I don’t believe I’ve ever met any leftists who support government-subsidized ethanol.

    Quite the contrary in fact.

    Comment by Sublime Oblivion — April 22, 2011 @ 1:58 am

  9. “Professor Pirrong has consulted widely. His clients have included electric utilities, major commodity processors and consumers, and commodity exchanges around the world.”

    “Conflict of interest” much?

    Comment by Jon — April 22, 2011 @ 4:06 am

  10. […] is going after speculators.  His popularity is down, so favorite populist targets are fair game.  Hey […]

    Pingback by Good Friday Breakfast Links Points and Figures — April 22, 2011 @ 4:55 am

  11. The only difference between this and comments not two weeks ago that “If you’re getting eight miles a gallon you may want to think about a trade-in” is a few polls. Viva Leadership!

    Comment by D Holmes — April 22, 2011 @ 5:14 am

  12. It’s just the opening they need to establish that the Koch Brothers are as bad as they claimed! (Truth is no defense…, welcome to the brave new world.)

    Comment by Combat Wombat — April 22, 2011 @ 5:41 am

  13. It’s all about money and the Chicago Way. If you are aiming to raise $1 billion dollars, appointing a commission to investigate a major industry will encourage donations, particularly where it is known that outcomes in the Obama administration take into account who their friends are.

    Comment by Bob — April 22, 2011 @ 5:43 am

  14. Price controls coming. The playbook was written by Lenin almost a century ago. “The worse, the better.”

    Comment by oMan — April 22, 2011 @ 5:44 am

  15. @Jon–Uhm, no, dipstick. I call ‘em like I see ‘em, and the consulting experience demonstrates that I actually have some contact with the real world, and that I’m considered sufficiently knowledgeable by people with skin in the game that they are willing to pay me to put that knowledge to work for them. Your comment is typical leftist bullshit–transforming all questions of fact and logic in into questions of motive. If you can make a substantive argument, go for it. But it is my experience that the inability to make such arguments is exactly why the likes of you stoop to questioning motive. Buh-bye.

    The ProfessorComment by The Professor — April 22, 2011 @ 5:51 am

  16. “”Doing something that suggests that there’s at least the possibility that gas prices are high because of manipulation or something like that kind of turns the high gas prices into something that he’s combating and he’s against rather than either a problem that can’t be dealt with or something that’s due to domestic policy decisions,” Harbridge said.”

    IOW, Obama needs a distraction – “Ooh, look over there! Shiny!” – so people won’t think about the abject poverty of his century-old “new ideas”.

    Every time gas prices spike, government plays this charade, and no evidence of wrongdoing is ever found. I have the feeling this time might be different, however. That’s because, to the current administration, running a business and making is in and of itself an evil act.

    Comment by alanstorm — April 22, 2011 @ 6:06 am

  17. As far as the terminology goes, it had to be “speculators”. “Hoarders” and “wreckers” were already taken…

    Comment by LTC John — April 22, 2011 @ 6:15 am

  18. Unless I’m mistaken, isn’t oil an international commodity? Just how does BO intend to stop oil prices rising without limiting the price in other markets? He could try price controls but that would result in shortages and long gas lines. I seem to remember Nixon doing something like this.

    Comment by Paul in Boston — April 22, 2011 @ 6:25 am

  19. […] on the latest push here. Reason on oil speculation here and […]

    Pingback by DoJ Forms "Oil and Gas Price Fraud Working Group" - Hit & Run : Reason Magazine — April 22, 2011 @ 7:06 am

  20. Go to this link, look at the chart, now you know why crude prices are up even though there is no shortage.

    http://research.stlouisfed.org/fred2/series/BASE

    Comment by jpintx — April 22, 2011 @ 7:06 am

  21. Energy is a world-wide market, traded in all “corners” of the world. The Great Gasbag can close every trading pit in the country but he can’t stop them in London, Hong Kong, etc. Given this knowledge, the two most likely effects of his “investigation” are (1) nothing (2) producing Carter-era shortages. My prediction is for the latter.

    Comment by Buck O'Fama — April 22, 2011 @ 7:54 am

  22. <emI call ‘em like I see ‘em, and the consulting experience demonstrates that I actually have some contact with the real world, and that I’m considered sufficiently knowledgeable by people with skin in the game that they are willing to pay me to put that knowledge to work for them.

    Heh! I sometimes get dismissed by lefties on forums when I talk about how the oil business actually works by virtue of my working in the oil business. Doing a degree in media studies is, it appears, a far better position from which to opine.

    Comment by Tim Newman — April 22, 2011 @ 8:22 am

  23. […] on the latest push here. Reason on oil speculation here and […]

    Pingback by DoJ Forms “Oil and Gas Price Fraud Working Group” | Daily Libertarian — April 22, 2011 @ 8:29 am

  24. Mr. President, where are the commissions to investigate fraud and manipulation in the precious metals markets?

    Comment by Bill — April 22, 2011 @ 8:35 am

  25. Obama’s entire presidency is a broad campaign to demonize people. This example is simply the latest. It’s unbefitting a president to have that as his core mission.

    Comment by kcom — April 22, 2011 @ 8:43 am

  26. He is just getting warmed up for full scorched earth campaign mode.

    Comment by pahoben — April 22, 2011 @ 9:21 am

  27. Yes – I remember the liberals used to talk about how the Republicans would talk in code to the white racists.

    Well, in this case, attacking speculators is a time-honored way of attacking the jooooooooooooooooooooooooooooos.

    Comment by JohnBoy — April 22, 2011 @ 9:26 am

  28. It is no surprise that fascists and enemies are resisting Glorious Leader’s call to root out saboteurs and wreckers!

    Comment by Ron Coleman — April 22, 2011 @ 9:43 am

  29. Just last week, Soros-funded “Think Progress” released a report accusing the Kochs of profiting by being “speculators” in the oil market.

    Comment by Rob Crawford — April 22, 2011 @ 10:05 am

  30. […] of this “Oil and Gas Price Fraud Working Group”. Let’s start with KP’s go-to energy finance economist, Craig Pirrong: … it’s an opportunistic effort to scapegoat others on the basis of zero evidence in order […]

    Pingback by Oil speculator witch hunt, 2011 edition « Knowledge Problem — April 22, 2011 @ 11:35 am

  31. The Obama presidency is Soros’ largest currency manipulation scheme to date.

    Comment by pahoben — April 22, 2011 @ 12:38 pm

  32. Alinsky 101–personalize the opposition, fix them in people’s minds, then demonize them.

    Just like Obama and his crew have done many times before–Rupert Murdoch personally, then Fox News and Roger Ailes, Rush Limbaugh, banks, bank executives, GM executives, insurance companies, drug companies, doctors, large corporations, Chris Christie, John Boehner, Scott Walker, Paul Ryan, the Koch’s… it’s really the only game they like to play—honest, competent, government certainly not being in their toolkit.

    The bright side is that becuase it is always built on lies and delusion it never works for long, and then they move on and look for another target to slime. Even when they stumble upon a target that deserves criticism like bank executives, they don’t do their homework or are just covering their own duplicity, so the criticism and demonization as they express it never has any validity.

    2 weeks ago the Koch brothers were Hitler reincarnated, now you never hear about ‘em. Last week it was Paul Ryan and that is fading away.

    Comment by Marty — April 22, 2011 @ 1:47 pm

  33. $5 gasoline is pretty scary to any incumbent, and to the economy.

    Oil companies were going to take a beating when that happened. May not be fair, but that’s politics.

    When markets are tight, they are subject to squeezes and manipulation… there are people we would find it economically and politically convenient to generate price spikes… it’s not totally irrational to send a shot across their bow.

    Comment by curmudgeonly troll — April 22, 2011 @ 2:10 pm

  34. Actually, I hope that the Obama administration shuts down all speculation-close all the futures pits. Can anyone say hello to $10 a gallon?

    Clearly, the Obama people know less about economics than any other subject. If they knew anything their policies would be far different. Even Bill Clinton got it eventually.

    Comment by Jeffrey Carter — April 22, 2011 @ 3:12 pm

  35. I would say what subject the Obama administration knows least about is open to vigorous debate. Any aspect of objective reality certainly has a valid claim. My personal favorite at this time is climate science.

    Comment by pahoben — April 22, 2011 @ 3:27 pm

  36. @curmudgeonly troll–A couple of comments about squeezes. 1. They tend to distort the price of the deliverable relative to other prices, rather than elevating the price of the commodity generally. So a Brent squeeze raises the price of Brent relative to other kinds of oil, rather than elevating the price of oil generally. 2. Ironically, in the US, a WTI squeeze would be very difficult under current conditions at Cushing; stocks have built up there due to growing Canadian and N. Dakota production, and the lack of transportation from Cushing to the Gulf.

    The ProfessorComment by The Professor — April 22, 2011 @ 8:04 pm

  37. If we assume for a moment that speculators are in fact inflating oil prices, the obvious next question is .. why did it take so long for the Obama Administration to task the DOJ to look into oil speculators ?

    Comment by Neo — April 22, 2011 @ 11:12 pm

  38. As soon as I heard about this I sold all my oil ETFs.

    Comment by Matt — April 23, 2011 @ 1:16 am

  39. The more the wingnuts whine, the more effective it is. Sure, you go right ahead and form a human shield in front of the commodities exchange. See where it gets ya.

    Comment by Commie — April 23, 2011 @ 2:44 am

  40. Typical tactics from our inexperienced community organizer. It is what he does whenever he tries to help, bring in the lawyers.

    Comment by dude — April 23, 2011 @ 8:43 am

  41. @The Professor: Generally speaking of squeezes, why are they so harmful? I view this as “price of doing business” of having big short positions on margin. For a squeeze to be a “distortion” of local price, it has to be: first, proven as a distortion, i.e. that prices under margin shorts are “fair”, and second, shown that the location spread in prices cannot be arbitraged away (and even if it can’t be arbitraged away, we have to look at “why”).

    Your view?

    Comment by Giladr — April 23, 2011 @ 12:58 pm

  42. […] The Department of Distraction Swings Into Action The Professor @ 3:20 pm […]

    Pingback by The Department of Distraction Swings Into Action « Cliftonchadwick's Blog — April 23, 2011 @ 8:31 pm

  43. @Giladr–There are a variety of costs–inefficiencies–that result from squeezes. You mention speculative shorts. But it is short hedgers that are really hurt. Most short hedgers are “out of position.” For example, someone using Brent to hedge a long position in some other grade (e.g., Bonny Light). A squeeze causes the Brent to rise relative to the Bonny, thereby imposing a loss on the hedger. This reduces the value of the contract as a hedging instrument.

    Moreover, a squeeze/corner results in inefficient shipments of a commodity. For instance, during the Ferruzzi squeeze in soybeans in 1989, beans were shipped upriver to Chicago, unloaded into delivery warehouses, unloaded back into barges, and shipped downriver. In the Patten cotton squeeze (which resulted in the case US v. Patten), cotton was shipped from mills in England to New York. The Supreme Court case that decided the Constitutionality of federal regulation of futures markets, Board of Trade v. Olson, described the kind of distortion that a corner can cause:

    Mr. Julius H. Barnes, in his evidence before the Federal Trade Commission, in October, 1922, describes the effect upon interstate commerce of a “deal” in May, 1922, wheat on the when the price of futures rose rapidly. Large operators collected cash wheat all over the country and headed it for Chicago for delivery at the attractive prices. This took wheat away from all the other wheat centers of the country where it normally would have remained for consumption and accumulated an almost unsalable quantity in Chicago, greatly disturbing the normal and useful flow of wheat in its ordinary and proper distribution and precipitating a crash in prices.

    Finally, corners reduce the value of a futures contract as a price discovery mechanism. Corners–or the mere prospect of corners can cause movements in prices unrelated to fundamentals. This noise in the futures price makes it a less reliable barometer of supply and demand information.

    Hope this helps. Let me know if you’d like further elaboration.

    The ProfessorComment by The Professor — April 23, 2011 @ 9:10 pm

  44. I don’t argue about commodities here or try to defend Obama, though he was left with a monumental mess.

    I stick with telling The Professor he needs to get on the Ron Paul express when it comes to dialing down our foreign commitments — before we’re forced back, 1975 and 79′ Jimmy Carter style. That would include the archipelago of bases around Russia which ole’ ZBig wanted built as part of his ‘Grand Chessboard’ blueprint.

    As David P. Goldman aka Spengler wrote in ‘Russians Play Chess, Americans Play Monopoly’, those bases in Kyrgizstan aren’t monopoly properties and Uncle Sam doesn’t collect $200 every time you pass go to pay for them. Nor, contrary to the propaganda spewed by the Weekly Standard crowd that never met a war they didn’t want escalated, does the military industrial complex (aka Putin’s ‘comrade wolf’ of the Soviet version of Tom and Jerry cartoon) pay for itself by providing security and forcing all oil transactions in dollars in return for that magic ability to print unlimited amounts of money in our own currency. ZH this weekend (a site that gets about 10,000 times more visitors than this one, though I applaud the Professor for getting a million times more hits than La Russophobe’s paid for site on his own dime) says that jig is up with the Chinese aiming to dump $2 trillion electronic greenbacks in the next few years.

    Comment by The Other Ivan — April 24, 2011 @ 7:10 pm

  45. […] […]

    Pingback by Thanks to Obama, Gas Jumps in a Flash - Southern Maryland Community Forums — April 26, 2011 @ 6:11 am

  46. […] of $4-$5-a-gallon gasoline is a much tougher sell to the general public. He’s put himself to work spinning the line that “speculators” are at fault for high prices, but the actual explanation is far more prosaic. Limited supply plus growing demand […]

    Pingback by Thanks to Obama, Gas Jumps in a Flash « Cliftonchadwick's Blog — April 26, 2011 @ 8:57 pm

  47. This monumental mess Obama was left with was partially of his own doing. Fannie and Freddie certainly enjoyed his support. From 1989 to 2008 he was the top recipient of Fannie/Freddie campaign contributions edging even Dodd. There was no stronger supporter of sub prime lending than Obama.

    Comment by pahoben — April 27, 2011 @ 8:51 am

  48. […] of $4-$5-a-gallon gasoline is a much tougher sell to the general public. He’s put himself to work spinning the line that “speculators” are at fault for high prices, but the actual explanation is far more matter-of-fact. No new wells are being […]

    Pingback by Thanks to Barack and the Left Gas, Prices are Still Rising: Illinois Conservative Examiner — April 28, 2011 @ 7:43 am

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