If I have one disappointment with President Barrack Obama it is the slow and unconcerned way with which he and his administration is dealing with oil speculation. Oil speculation has hasten the destruction of GM and Chrysler. It has paralyzed the airline industry and has brought scores of Third World and developing countries to their knees. In general, oil speculation is retarding the progress of the entire globe. It is draining the financial reserves of the US while providing unearned and undeserved windfall to countries, most of whom are enemies of the US.
Oil speculation, and the speculation in other commodities is part of a dangerous phenomonen perpetrated by greedy Wall Street crooks. Or is this what is taught in American business schools? They advocate that the securitization of commodities is a novel way to create "wealth". Wealth cannot be created in this way. Wealth is an abundance of the 'things' needed to sustain life or the means to acquire those 'things'. The emphasis is on 'things that sustain life'. Money by itself cannot sustain life. The economy does not exist so that people make money. The economy exist because people live and they need things to sustain their lives. It is by the provision of these things that people are then able to make money. If economic activity does not provide goods or services that people need to live; or add some value towards the provision of goods or services that people need to live, then that activity is unsustainable and futile.
The question therefore is what value do oil speculators add to life? The oil broker who brings an oil supplier in touch with an oil end user adds value and is playing a useful role. What value does an oil speculator add when he goes into a market place, creates an artificial demand for a commedity he has no intention of taking possession of. Eighty percent of all oil futures are placed by people who have NO intention of taking the oil. What arrant nonsense is this?! This practice must be stopped forthwith. I am amazed that the entire non oil producing world has not raised up in arms against this folly of an idea!
The free market fanatics among us will be outraged by any suggestion to stop this harmful practise. I am a lover of the free market too. I believe that people should be free to bring any new idea to market. They should not have to be jumping through hoops or be required to get the approval of any thick headed buracrat before an idea can be implemented. However, once the idea is implemented its impact should be assessed and when an idea proves to be injurous to other people that idea should be shut down immediately. For those who think that stopping oil speculation would be a serious blow to free markets, I ask why is there no futures market in pharmacuticals, that would be unconsionable, would it not? Why are there restrictions on food speculation? Its because speculation can be dangerous.
Restricting speculation in oil is even more urgent than the restriction on food speculation. The truth is almost every country can grow its own food. Some will be less efficient than others. But except for countries that are drought prone, most countries could survive if food speculation drove up the price of food. Few countries are energy producing. Their only response to high prices caused by artificial demand of speculators is to pay through their noses or perish.
There is no redeeming social value that can be derived from oil speculation. The little good that is done is unintended! The environment impact was not by design. In any event other measures are being implemented to address global warming. The world already knows that oil is a wasting asset that has to be replaced sooner or later. What is the use in pumping up the price prematurely? We are all going to die sooner or later but no one hasten the time of his death.
If oil speculation cease to exist it is only the hedge fund and other money managers who promise people higher returns who would be negatively affected. They are the only ones who make money from this activity from the fees they charge. So called investors think they make money but over the long run they don't. Enron is a perfect example of what outcome to expect. Enron cornered the energy market and set ruinous prices which devastated California - they are yet to recover from that price gouging. And where is Enron today? It is a bankcrupt has been. Its principals are dead or in prison. The so called investors who are chasing high yields should realize that in order to pay 10% consistently, Bernard Madoff had to embark on a Ponzi scheme. The investors in Long Term Capital, that hedge fund that nearly brought the financial system down when it failed, before mortgage backed securities and credit default swaps did, would agree with me that the chasing of high yields is but an illusion. What people are fueling is the inate tendency of mankind to be gamblers. Most gamblers lose! The sad thing is that when it comes to oil speculation, in order for the few addicts to get their kicks the entire world has to pay.
Lets look at the benefits that would be derived if oil speculation was banned:
1. Price Stability- The first goal of a government is to secure its people. The next is to pursue sound economic policies that will lead to price stability. Yet America has forced upon the world a practice which causes the price of the most essential commodity that the world uses to fluctuate daily and with wild gyrations. Banning speculation would ensure more stable prices.
2. Less Dependent Third World Countries - Oil the way it is currently priced is forceing lesser develop countries to become mendicants. They have to rely on aid and grants to sustain survival status.
3. Improved Balance of Payments - Both America's and non oil producing countries balance of payments would improved as it would have to borrow less to pay ever increasing oil bill.
4. Quicker Recovery From The Worst Recession since the Great Depression - As soon as the economy shows sign of life the speculators are ever present to suck blood making it real difficult for recovery to take hold. What are the underling economic reasons for oil to be at $72.00 per barrel in this economy?
5. Removal of an Added Tax - The high cost of oil is like an added tax on the world economy. We all know what happens when taxes are lowered or removed.
6. More productive use of capital - the money that is now used for speculation could be used for more oil exploration, more lift capacity, more transportation of oil and more refining capacity. It is comical to see the limited capacity for oil refining which exist, yet hedge funds sitting on trillions of dollars euphamistically talk about they are investing in oil when they speculate.
What Should Be Done
Just ban the practice. Whatever unintendent consiquence that may occur can in no way out weigh the know benefits and the indirect benefits that are bound to flow. During the height of the financial meltdown, Short Selling was banned temporarily. The free market system did not collapse. Short Selling, another asinine concoction design not to add any value but just to make money, should have been permanently banned. How can the selling of a stock that one does NOT have thereby creating a supply disequlibrium make any economic sense? This is for another article. Only the producers of oil and the end users of oil should be allowed to meet and make a market. Both oil producers and end users should be licenced and only people who are licenced as such or their representative should be allowed to trade.
Dorlan H. Francis
Personal Financial Planner
Author of: Life Insurance - The Cause of Economic Prosperity
Available at Xlibris.com
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