Sunday, May 11, 2008
Regulating Up The Wrong Tree
I hate to say I told you so, but I did. Regulators are piling on the oil industry, in the wake of a public backlash after oil crossed $120, and fears of $150 to $200 oil percolated through the media into the mainstream. CW is that oil is upwardly mobile regardless of the situation on the ground.
The Federal Trade Commission last week said it would delve into the workings of the oil industry, examining scenarios such as the withholding of supplies from the market, as it prepares to write rules banning market manipulation. To bolster U.S. leverage over Middle East oil producers, Senate Democrats are threatening to block various arms deals with Saudi Arabia and other members of the Organization of Petroleum Exporting Countries. The House Judiciary Committee is holding hearings this month on high gasoline prices, and has called on OPEC's secretary general, Abdalla Salem El-Badri, to testify. - Regulators Target Oil Industry, Siobhan Hughes, Wall Street Journal, May 6th 2008
On the other hand, Senate Republicans are seeking hearings on the fall of the dollar. The GOP lawmakers said the hearings should focus on the impact of the Fed's rate cuts, the threat of potential tax increases on investment, the effect of trade policy on exports, and the potential for federal policies to discourage bringing new oil supplies online. - Republicans Seek Hearings on Dollar's Fall, Henry J. Pulizzi, Wall Street Journal, May 3rd 2008
Maybe the two sides might consider teaming up and holding joint hearings on the price of oil and the fall of the dollar? Far be it from me to belittle the honorable intentions of Congress, and besides, I dare say the oil industry could do with a little more oversight, but the problem is that all these would be regulators are barking up the wrong tree. For starters, the Democrats are simply pandering to their base when they imply that oil producers are creating a shortage. Secondly, as far as the fall of the dollar is concerned, the Republicans should maybe take note that the Fed is simply reacting to the markets. Piling on them for reducing interest rates when there's a credit crunch is like compaining about firefighters breaking in your window when the house inside is on fire.
My point here is that an excess of capital in the commodity markets is beginning to hurt ordinary people. The oil boom is not taking place in a vacuum. And neither is the rice shortage or the increasing worries about feeding the planet. It's all part of the global financial ecosystem, which has gone out of whack due to the recession in the U.S. Simple logic is that all the money sucked out of the U.S. stock markets is being pumped into commodities. Which is creating a boom in futures, and a perception of increasing demand. If left alone, it'll get back to normal if and when the U.S. market stabilizes. Oil will drop back to just under $100, and worries of food shortages will subside.
Only question is - Can we survive this period of zooming commodity prices without sustaining permanent damage to the way things work? The regulators growling at oil producers and the Fed will slowly realize, provided this crisis continues, that they have the wrong target. What I mean is, regulators might realize that it's not the oil producers who are speculating and try to put a temporary cap on the price of oil - Markets be damned. That would no doubt be an extreme step, but it could happen, given a big enough backlash.
State controlled commodity pricing has been around in a lot of countries for decades now, and these countries have been able to ride over such 'artificial' problems created by global speculation, since the global trading prices don't actually get passed on to consumers. No doubt it would shatter the existing free market system, with a maze of ramifications too big to be explored here. But it would have a big calming affect on consumers, bump up spending and stabilize both the dollar and the U.S. stock markets. Are we at that stage yet? Nope, but if the stock markets don't regain confidence, that's where this boat is headed to. It would need a big Democratic majority in Congress, and a Democratic White House, and maybe another big crisis on Wall Street which jilts investors badly. Is a perfect storm like that so far-fetched?
The Federal Trade Commission last week said it would delve into the workings of the oil industry, examining scenarios such as the withholding of supplies from the market, as it prepares to write rules banning market manipulation. To bolster U.S. leverage over Middle East oil producers, Senate Democrats are threatening to block various arms deals with Saudi Arabia and other members of the Organization of Petroleum Exporting Countries. The House Judiciary Committee is holding hearings this month on high gasoline prices, and has called on OPEC's secretary general, Abdalla Salem El-Badri, to testify. - Regulators Target Oil Industry, Siobhan Hughes, Wall Street Journal, May 6th 2008
On the other hand, Senate Republicans are seeking hearings on the fall of the dollar. The GOP lawmakers said the hearings should focus on the impact of the Fed's rate cuts, the threat of potential tax increases on investment, the effect of trade policy on exports, and the potential for federal policies to discourage bringing new oil supplies online. - Republicans Seek Hearings on Dollar's Fall, Henry J. Pulizzi, Wall Street Journal, May 3rd 2008
Maybe the two sides might consider teaming up and holding joint hearings on the price of oil and the fall of the dollar? Far be it from me to belittle the honorable intentions of Congress, and besides, I dare say the oil industry could do with a little more oversight, but the problem is that all these would be regulators are barking up the wrong tree. For starters, the Democrats are simply pandering to their base when they imply that oil producers are creating a shortage. Secondly, as far as the fall of the dollar is concerned, the Republicans should maybe take note that the Fed is simply reacting to the markets. Piling on them for reducing interest rates when there's a credit crunch is like compaining about firefighters breaking in your window when the house inside is on fire.
My point here is that an excess of capital in the commodity markets is beginning to hurt ordinary people. The oil boom is not taking place in a vacuum. And neither is the rice shortage or the increasing worries about feeding the planet. It's all part of the global financial ecosystem, which has gone out of whack due to the recession in the U.S. Simple logic is that all the money sucked out of the U.S. stock markets is being pumped into commodities. Which is creating a boom in futures, and a perception of increasing demand. If left alone, it'll get back to normal if and when the U.S. market stabilizes. Oil will drop back to just under $100, and worries of food shortages will subside.
Only question is - Can we survive this period of zooming commodity prices without sustaining permanent damage to the way things work? The regulators growling at oil producers and the Fed will slowly realize, provided this crisis continues, that they have the wrong target. What I mean is, regulators might realize that it's not the oil producers who are speculating and try to put a temporary cap on the price of oil - Markets be damned. That would no doubt be an extreme step, but it could happen, given a big enough backlash.
State controlled commodity pricing has been around in a lot of countries for decades now, and these countries have been able to ride over such 'artificial' problems created by global speculation, since the global trading prices don't actually get passed on to consumers. No doubt it would shatter the existing free market system, with a maze of ramifications too big to be explored here. But it would have a big calming affect on consumers, bump up spending and stabilize both the dollar and the U.S. stock markets. Are we at that stage yet? Nope, but if the stock markets don't regain confidence, that's where this boat is headed to. It would need a big Democratic majority in Congress, and a Democratic White House, and maybe another big crisis on Wall Street which jilts investors badly. Is a perfect storm like that so far-fetched?
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