Defending oil speculators to the president

Mr. President, Give Us a Break

Now it has risen to the level of the Presidency. President Obama is now perpetuating the dangerous myth that oil speculators are conspiring to drive oil prices higher. Nothing could be further from the truth. There is indeed a conspiracy to drive prices higher, but that conspiracy is within the Federal Reserve and by happenstance, the policies of Obama’s administration. Never in recent memory has a President had policies that have been so anti-oil and because of that, the President and his policies are one of the major reasons why oil prices are where they are today.

Take for example the president’s crowning achievement: His health care legislation. By driving through this unfunded legislation during a major recession that cost, according to an estimate by the Wall Street Journal, has added $950 billion to our nations trillion dollar plus budget deficit. Our deficit is so large that Standard and Poor’s lowered our credit rating outlook to negative from stable on the President’s watch that now has driven the value of the dollar lower thereby making oil more expensive.

The Federal Reserve of course has been rooting for inflation and that is another reason why speculators are not to blame for reflecting what is a real market fundamental. What is more is the fundamental value of the dollar that we exchange for that precious barrel of oil. What about the confidence behind the government that is issuing that printed piece of paper. Especially when that government keeps telling us they are going to print more dollars, more pieces of paper. Because Obama can’t get spending under control the Fed has to do the heavy lifting to keep the economy afloat.

The Federal Reserve has a desire to increase oil prices to avoid the look of deflation. The government could help by reducing spending. That would increase the value of the dollar and make it less imperative that the Fed print more money to keep our debt looking attractive. The Fed and their policies have made being short commodities a dangerous proposition indeed. Quantitative easing is as stimulative to the economy as an interest rate cut. It sends a flood of money to the emerging markets thereby stimulating more oil demand and inflation. The oil prices are reflecting this devaluing of the dollar and confidence in the full faith and credit in the United States of America which is slipping dramatically.

At the same time, the President’s war in Libya and the general uprisings across North Africa and the Middle-East known as the ‘Arab spring” caused in part by the dissatisfaction with rising food and energy costs, are also partly the responsibility of the President. The inflationary policies that have stirred these nations have happened under the President’s watch. The risk premium that has been added to oil because of risks to the region, not only in Libya but in Iran, Bahrain, Saudi Arabia, Yemen, Nigeria, Egypt, Jordan, Syria. Even in China there is unrest and now they have crackdowns on the “Jasmine Revolution” that threatens to spread unrest in China as well.

This is not speculation. This is the market reacting to the real and growing risk to crude oil supply. This is a valid fundamental reason for rising oil prices and serves an invaluable economic purpose. The market will move to ration supply and decrease demand to try to protect the economy and ensure that we will have enough oil should supply be cutoff. That’s what markets need to do. They have to be defensive and anticipate. If they did not anticipate, order could be removed from the marketplace. It could lead to shortages and disruption of supply and wild price moves.

The President also has increased the price of oil by his actions taken after the Deep Water Horizon spill. As the Wall Street Journal reported, “When the Obama administration imposed a blanket moratorium on offshore drilling, much attention was paid to its impact on the local economy and individual companies. At the time, oil prices were around $85 a barrel and gasoline in the U.S. cost an average of $2.858 a gallon. Crude-oil and natural-gas production is expected to decline this year, according to estimates from the Department of Energy and private analysts. Offshore oil output, most of which comes from the Gulf, will average 1.55 million barrels a day this year, a 13% drop from 2010 estimates, according to U.S. Energy Information Administration figures. In 2011, the 10-month suspension in drilling activities and a slower permitting process will have resulted in the loss or, at least the delay, of 375,000 barrels of oil day, said energy consultancy Wood Mackenzie. That is roughly equivalent to one-third of the Libyan production that remains shut down because of political turmoil.”

Mr. President, these actions have reduced supply and in turn raised prices. Speculators did not impose a moratorium, you did. At the same time you have thrown billions of dollars at alternative energies that may not impact demand and bring down prices for what some estimates say 10 to 25 years if ever, while ignoring the most promising source of energy and the answer to our energy woes and that is natural gas. If the President made natural gas job one and took some of that money that he threw at his political backers like GE that paid no income taxes for alternative fuels and put it towards infrastructure to switch our counties cars to natural gas we could cut our dependence on foreign oil by half in the next 5 to 10 years.

The other argument made by the misguided and uninformed critics of oil speculators is that the “long only funds” and ETF’s have oil as a investment vehicle has distorted the price. Or that high frequency traders that trade in and out many times both long and short have driven up prices. Nothing could be further from the truth. Never before has the oil market been more liquid or transparent. Execution of trades is better than it has ever has been. Business, funds and speculators can now more effectively manage their risk better than at any time before in the history of the markets. Now the President and his political advisors are going to be tempted to meddle in the market place, potentially creating an environment that could lead to shortages of supply and hoarding. We saw what government manipulation of the oil market could do in the 1970’s when we had gas lines and shortages that created a recession and put many people out of work and caused long-term pain for the US economy.

Some argue that record open interest and volume that far exceeds what we have seen in the past, proves that speculators are driving prices. That is not true. What it proves is that the Fed and its policies are driving investment to commodities. What it proves is that the global oil market is larger than it has ever been reflecting the billions of people in China and India and other parts in the globe that are active participants. It reflects the trillions of dollars of investment that is going to have to be made to meet growing global demand.

Speculators are assuming an ever greater amount of risk as the global economy has gone through one of the biggest shocks in history. Without their participation in the market, the global economy would have come to a halt. Remember how bleak things were when the global credit markets froze. Speculator’s assumption of risk has saved millions of jobs and created more jobs and have kept millions of business’s in business whether they participated in the futures markets or not. The future prices reflect the true state of the global economy and force us to face up to reality and not someone’s jaded and biased view of the world.

So Mr. Obama, please don’t attack and use the free markets and oil speculation as political cover for the decisions you have made that has increased the price of oil. It is time we listen to the message that the oil market is trying to send. You can’t print your way to prosperity; you can’t run budget deficits forever. You need  to take advantage of our own abundant natural resources. We can’t build an economy on inefficient wind and solar energy and other fuel sources that may never actually work on a grand scale. Don’t kill the messenger because if you listen, the messenger will give you the answer! Free markets for free people and God Bless America! Happy Easter!

Future’s Mag