Despite Congress' periodic hauling of weak-kneed oil executives before
their committees to charge them with collusion and price-gouging,
subsequent federal investigations turn up no evidence to support the
Right now oil company executives are getting a bit of a respite as
Congress has turned its attention to crude oil speculators, blaming
them for high oil prices and calling for tighter control over commodity
Let's look at the futures market and for simplicity use corn futures
discussed in my May 28 column titled "Futures market." While corn is
different from oil, both obey the laws of supply and demand, just as
humans are very different from bricks but both obey the laws of
Say that today's price of corn is $7 a bushel. I have a hunch that
because of Midwest flooding, higher demand due to droughts and war in
other parts of the world, that in May 2009 corn will sell for $12 a
bushel. I stand to make a lot of money by buying corn now for $7 a
bushel, holding it, and in May 2009 selling it for $12 a bushel. If
many speculators share my hunch and buy more corn now, today's price,
sometimes called the spot price, is going to rise let's say to $10 a
Higher prices for corn, and everything made from corn, might give
rise to consumer complaints. While Congress can't stop the Midwest
rain, droughts and wars in far off places, it can scapegoat
speculators. Let's say Congress outlaws the corn futures market, or
makes futures trading more costly. Doing so will definitely lower the
spot price of corn. The price might return to $7 a bushel, making corn
consumption once again "affordable." You might exclaim, "Isn't Congress
wonderful?" But what about May 2009?
Suppose the Midwest floods significantly affect corn production;
there's drought and war in far-off places raising the demand for corn
exports. What do you predict will be the availability and prices of
corn in May 2009 after Congress has outlawed, or made futures trading
more difficult? If you answer less corn and much higher prices, go to
the head of the class.
By outlawing or impeding futures trading in corn, Congress
encouraged Americans to ignore the future. Had Congress not interfered,
people would use less corn now, making more available in May 2009.
Thus, one of very valuable functions performed by the speculator is the
allocation of resources over time. It makes sense to take the future
into account when making consumption decisions today.
The futures market, by the way, is no bed of roses. My hunch about
corn supply and demand conditions might be dead wrong. Its May 2009
price might be $3 a bushel and I would have to sell at a loss. Futures
trading is risky business.
Congressional attacks on speculation do not alter the oil market's
fundamental demand and supply conditions. The long-term price of oil
would be lowered if Congress permitted exploration for the estimated
billions upon billions of barrels of domestically available oil, not to
mention the estimated trillion-plus barrels of shale oil in Wyoming, Colorado and Utah.
Some politicians pooh-pooh calls for drilling, saying it would take
five or 10 years to recover the oil. I guarantee you we would begin to
see a reduction in today's prices even if it took five to 10 years for
us to get the first barrel.
Put yourself in the place of a member of the Organization of Petroleum Exporting Countries knowing there would be a greater supply of U.S.
oil in five or 10 years, maybe driving oil prices down to, say, $40 a
barrel. What will you want to do now while oil is $130 a barrel? You
would want to sell as much oil now and OPEC's collective efforts to do
so would put downward pressures on current oil prices. Right now the U.S. Congress is OPEC's staunchest ally.