Streetwise Professor

April 20, 2011

Don’t Blame Me! Blame Those Damned Speculators!

Filed under: Commodities,Economics,Energy,Politics — The Professor @ 11:51 am

Obama has inserted himself into the oil speculation debate, adding his voice to the baying mob demanding that the usual suspects be rounded up for causing excessively high oil prices:

President Barack Obama on Tuesday blamed speculators for driving gasoline prices higher and straining American consumers, saying there was enough oil in world markets to meet demand.

. . . .

Obama said that global oil supply is adequate and that speculators are driving up prices significantly.

“It is true that a lot of what’s driving oil prices up right now is not the lack of supply. There’s enough supply. There’s enough oil out there for world demand,” Obama said.

“The problem is … speculators and people make various bets, and they say, you know what, we think that maybe there’s a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we’re going to bet that oil is going to go up real high. And that spikes up prices significantly.”

Glad that The All Knowing All Seeing Obama is able to assure us that “There’s enough oil out there for world demand.”  Was that before Libya, after, or both?

But let’s consider that last paragraph, about “speculators and people mak[ing] various bets.”  (Are speculators not people?  Or are some people who bet not speculators?  I’m confused.  Not least by the fact that we’ve been told repeatedly that Obama is so0000 articulate.  Or at least his teleprompter is.)

I say: don’t damn these people, but thank the Lord for them.  They are looking  to the future, and evaluating factors that could impact supply and demand in the future.  They are collecting and evaluating information to attempt to determine the likelihood that oil (and other commodities) will become more or less scarce.  This is essential because expectations about the future are crucial for our decision making today: how much oil to store, how many wells to drill, what kind of cars and machinery to build and buy.  You can’t do things right today unless you evaluate future risks carefully.

Yes, sometimes speculators arrive at pessimistic conclusions that cause prices to go up today.  But here’s the thing: without this “speculative” price impact, there will be no adjustments today to the risk of potential future shocks, meaning that the impact of these shocks will be even more severe in the future.

For instance, a rational response to a real risk of a future supply disruption in the Middle East–and does any sentient being believe that the risk of such a disruption has not increased?–is to store (and produce) more oil today.  That increased storage does tend to drive up current prices.

But let’s say that there is no informed speculation, and as a result no additional oil is stored or produced.  If a supply disruption indeed occurs, that oil that isn’t stored isn’t available to cushion the price impact the disruption causes, meaning that prices will spike more without the speculation than with it.  This speculation has made the present a little less pleasant, but only in order to reduce the likelihood of much greater unpleasantness in the future.

Indeed, if there is a criticism to be made of speculation, it is that too much information is collected and prices are too accurate.  Individuals collect information to earn a profit at the expense of the uninformed.  The expenditure of real resources to obtain a transfer is welfare reducing, all else equal.

Even if you buy that critique, though, you can’t criticize speculation on the grounds that Obama chooses.  By collecting information related to future supply and demand conditions, speculators acting as Obama describes ensure the more efficient allocation of resources over time.  Sometimes that indeed causes prices to be higher today–but that’s not a bad thing because it reduces the likelihood of even greater price spikes in the future.

Obama’s resort to populist anti-speculative boob bait is a piece with what we’ve seen in the last days.  I thought Obama and his people had figured out that he was overexposed and had limited his appearances.  But then he gave two speeches–one on Libya, the other on the budget–that went over like lead balloons.  Obviously acting presidential didn’t work, so Obama went back to the one thing he thinks he can do: campaign.

So in April of 2011, we’re seeing appearances and rhetoric that you’d expect to see in October, 2012.  Indeed, apparently the Ryan plan has stung him deeply, and he is responding in full Alinskyite “Pick the Target, Freeze It, Personalize It, and Polarize It” mode.  The level of mendacity is astounding, and in a perverse way, Ryan should be flattered.

How long did that era of new civility last?  Just asking.

This is distressing and revealing.  It is distressing because the nation faces a truly existential fiscal crisis.  It is revealing because it is now painfully obvious that the only thing Obama knows how to do is to fall back on political demagoguery and dishonest personal attacks, delivered in campaign settings long, long before the campaign should begin.

The fact that Obama has joined the anti-speculation know nothings reveals that he’s not the least bit interested in doing anything serious about energy either.  It’s so much easier to blame speculators who are actually providing the signal service of (a) ensuring that market prices reflect information about future supply and demand, and (b) thereby encouraging immediate responses in consumption, production, and storage that will mitigate the adverse impact of those future supply and demand risks.  That’s because it’s so much easier to shoot the messenger than to do something constructive about the message.

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  1. Who in the U.S., other than Obama, is in a better position to punish specutators? If Obama wanted to punish speculators who run up prices he should use the powers of his office to further an agenda that would provide for more domestic drilling and promote policies that would allow for greater future supplies.

    Having a feckless foreign policy and no national energy policy at all only helps to push world energy prices higher.

    Comment by Charles — April 20, 2011 @ 12:51 pm

  2. >The expenditure of real resources to obtain a transfer is welfare reducing, all else equal.

    But in this case the resources are not expended solely to obtain a transfer, they are expended to collect information that is needed to avoid supply shocks, as you point out yourself. So how do you define the “too much information” state here? And can anyone tell when that state is reached?

    Comment by Ivan — April 20, 2011 @ 1:45 pm

  3. Hi, Ivan. Basic point is that there can be too much of a good thing. Prices can be too informative. There can be too much information collection and analysis.

    That’s a point that’s pretty easy to demonstrate theoretically, but impossible to prove empirically. Measuring the social value of information is impossible, and measuring the private costs incurred in collecting it equally so.

    As a consequence of this immeasurability problem, I would never advocate using this theoretical argument as a basis for public policy. I raise it just to point out that the intellectually serious objection to speculation is 180 degrees removed from Obama’s objection

    The ProfessorComment by The Professor — April 20, 2011 @ 2:54 pm

  4. Hey, Charles. Exactly right. One of the things that people are speculating on is how badly Obama will screw up on anything related to energy. Right now the prohibitive favorite in that bet is “a lot.” He could really shaft them by doing something sensible.

    The ProfessorComment by The Professor — April 20, 2011 @ 2:56 pm

  5. This is Nixon announcing U.S. default in 1971:

    Obama is beginning to sound the same old verbose.

    Comment by Giladr — April 20, 2011 @ 3:49 pm

  6. The reaction to S&P downgrading the outlook of US debt to negative was interesting. The knee jerk reaction was that the treasuries fell and the SP500 fell as well. But within a few hours the treasuries rose again to recover all losses. It was as thought investors felt that this warning will lead to US policy action soon……If that doesn’t happen, well there will be a 200+ basis points move in the short end of the treasury curve by the end of summer.

    Comment by Surya — April 20, 2011 @ 6:56 pm

  7. […] course, with oil prices rallying, and the rest of the commodity sector on a tear, Obama blames the speculator.  Did he really go to an Ivy League school?  Because he seems  as dim as some people on the […]

    Pingback by Breakfast Links Points and Figures — April 21, 2011 @ 5:03 am

  8. Who does Obama think is selling to the speculators?

    Anyone? Bueller? Anyone?

    Comment by Green as Grass — April 21, 2011 @ 6:33 am

  9. […] Professor: Don’t Blame Me! Blame Those Damned Speculators! Obama has inserted himself into the oil speculation debate, adding his voice to the baying mob […]

    Pingback by Daily Reading – Thursday, April 21, 2011 | Tainted Alpha — April 21, 2011 @ 7:19 am

  10. Blaming the ‘greedy speculators’ certainly seems an example of economic ignorance or political mendacity of a FD Roosevelt/Bolshevik type…the early campaigning on the other hand would indicate to me that the Obama regime is fearing either a primary challenge or polling that is starting to dissolve even base support. I expect this to fail to help and even stranger policies to follow. Beware the Ides of August.

    Comment by Westie — April 26, 2011 @ 11:48 pm

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