Lots of words have been written lately about oil and why it’s trading at $135+ a barrel and what Congress can do about it and blah blah blah. Of late, most of the blabbering has been about speculators and how they drive the cost of oil up artificially. Today, on Capitol Hill, one Michael Masters of Masters Capital Management claimed that if Congress were to find a way to eliminate so-called speculators from the market, oil would be trading at somewhere near its fair value of $65-$70 a barrel within 30 days.
Wouldn’t that be nice? If we just eliminated speculators from the market, we could all afford to drive to work again. Who wouldn’t want to get in on that deal? Those crazy speculators, driving up the price of oil when all I want to do is drive to work without it costing me $60.
The problem with this amazingly easy fix for our gas worries is that’s it is most likely pure, unadulterated bullshit. It’s a fix for a problem that is easy for politicians to get behind in an election year but isn’t likely to solve things in the near or long term and also has unfortunate effect of having no effect on the actual problem that’s causing not only the rise in oil but also the rise in gold and corn and every other commodity right now. That actual problem is that our monetary system is seriously screwed up and that paper money isn’t worth very much.
Tim Iacono has been yelling this for two years now and of course, no one is listening. Look, does anyone out there really think that inflation is currently in check? Think your paycheck goes just as far as it did 12 months ago? Think it makes any sense at all for the government to measure inflation without measuring food or energy these days? Really?
The cause of that inflation is that for the past 5 years, money has been cheap. That’s why we have a housing market catastrophe on our hands. When the world is awash in cheap money, the majority of it being in US Dollars, that money has to go somewhere. When the holders of large numbers of Dollars can’t make money real estate or bonds or the market, that money goes into commodities, including oil.
From Tim’s post linked above, I couldn’t agree more with this statement:
Just once it would be nice to hear someone say to Congress, “There’s just so damn much paper money in the world today, most of it in the form of U.S. Dollars, that people feel they have to do something to protect themselves from its declining value. If the government would be a little more honest about inflation and if you could get a reasonable rate of return on your money elsewhere, then maybe pension funds wouldn’t be so keen on buying oil futures”.
It’s critical to understand that it’s not the people in the market speculating on the price of oil in the next 12 months that are the problem. It’s the fact that the Fed and the US Government have made the US dollar damn near worthless in the world’s eyes through missteps and blunders. That’s the problem.
The next time you fill up and it costs you $60 or $75 or $100, don’t blame speculators. Blame Congress. They are the ones at fault here. Until they can face the hard problems of inflation and the dollar’s continuing decline, commodities including oil will only continue to get more expensive. Eliminating speculators isn’t going to do a damn bit of good and is far more likely to have unintended consequences that are a great deal more painful than $4 a gallon gas. If we allow them to artificially affect the market by eliminating a significant portion of possible investors, the monetary system is only going to get sicker and it isn’t completely implausible that it might get terminal. Fix the core problem, not the symptoms.