Before Regulating Oil, Remember the '70s

I’ve come to the conclusion that American politicians followed closely by American journalists have absolutely no facility for comprehending historical lessons. Today’s case in point is the move towards limiting “speculation” in oil.

Now the potential for repeating history might be somewhat muted if this movement were limited to the oil futures market but as so often happens this thing is starting to take on a life of its own. For example, ponder this from the Economist Free Exchange:

The other question is whether limiting speculation is the best way to reduce volatility. Another way of looking at this issue is, why do we care about big swings in oil prices? We care, of course, because oil is a key economic input, and volatility is extremely damaging (and self-perpetuating, as volatility makes long-term investment unattractive). In a post on this subject, Justin Fox quotes Milton Friedman saying that the only stable exchange rate regimes are free floating and fixed. If free floating oil prices are undermining economic activity, then perhaps a price intervention is warranted. In particular, a floor would protect a minimum level of investment in exploration and production.

A number of commentators have recommended a petrol price floor as a means to reduce price volatility (and raise revenue, if the floor was achieved with a variable tax). If the goal is to reduce volatility, it makes much more sense to attack that directly, rather than play around with trading or regulatory intervention in the hopes that the desired result will obtain.

I’m going to be charitable and assume that the author was either not alive in the ’70s or is too young to have remembered those days. We’ve been down this road before. The Nixon White House tried to manipulate the price of oil and what we all received for their efforts were shortages and interminable lines to refuel one’s automobile.

Frankly, I’m not sure exactly what he proposes as he speaks of creating a floor for gasoline which he would create by levying a tax. He suggests that this floor which would presumably be above the market clearing price would be set high enough to encourage exploration. But if the floor is accomplished via taxation how do the excess profits make their way back to the producer for exploration. Are we to believe that government will collect these taxes and then forward them onto the producers so they can go find more oil. Governments mind you that are hostile towards the industry. Strains credulity doesn’t it.

Once upon a time we learned that the oil markets are much bigger than the government of the U.S. That market shrugged at our attempts to manipulate it and simply took its bat and ball and went away and played elsewhere. It was a lesson learned the hard way and one would hope that it would have lingered in our subconscious. Apparently it hasn’t, so now a new generation will get its ears pinned back. I would only ask that those of us who do remember and went through this once automatically get a place at the front of the gas line.

Comments

[INTP-Investor:]

"Speculating" in oil - a hard, daily needed commodity with few alternatives (unlike metals and foodstuffs) - plays into the hands of the producers by increasing the price. The burden of the price increases always hits those on the margin of subsistence the hardest - just like debasing a currency does. Certainly, the rich - being amoral - certainly could care less about the plight of the mass on the margin, but the "masses on the margin" definitely have a vested interest. Greed and excess on the part of the French and Russian monarchies resulted in alienating the masses. The results are published in the history books.

Jul 09 12:01 PM

[User 357705:]

Profit is the only consideration? To some perhaps. That's why the guillotine is about to stage a spectacular comeback!


On Jul 09 12:32 PM er64e wrote:

> Tell a politician about a problem and he or she will derive a way
> government can fix it.
>
> Tell a Wall Streeter about a problem and he or she will derive a
> way to profit from it.
>
> good articles>... bit.ly/12NCJR

Jul 09 01:13 PM

[MarkitWacha:]

Great article. Politicians are naturally arrogant, and if they manipulate the market, in the name of preventing manipulation, so be it. The government is never benevolent.

Like my Bolivian expatriot friend says, people won't understand until they see a description of blood on the street. Maybe that loses a little in translation, but you get the idea.

Jul 09 01:51 PM

[Tony Petroski:]

I lived through the '70's. Certainly windfall-profits taxes and price controls were disastrous during the Carter years and we shouldn't repeat those mistakes.

What is different is that while prices were rising (before controls), the rises were gradual. We had nothing like the swings in the price of gasoline, $2.93 a gallon as you drive to work, $3.15 a gallon on your way home. And these wild price swings all at a time of flat or declining demand. These swings smack of speculation and if nothing else, impose a cost on those guys who have to hoist different prices 3 times a day onto the sign in front of the station.

Jul 09 02:06 PM

[User 357705:]

As are Wall Street types. There is enough arrogance in USA to provide a lifetime supply to the rest of the world's population for the next millennium!


On Jul 09 01:51 PM MarkitWacha wrote:

> Politicians are naturally arrogant,

Jul 09 02:07 PM

[user396040:]

Oil price regulation in the 1970's was a disaster; natural gas price regulation was even worse. All sorts of inefficiencies occur - a plant that makes insulation(and whose product would reduce natural gas consumption) is curtailed because of the federal rules of curtailment. Ships from all over the world stop in the United States to fill up because we have held the price below market. There are shortages of gasoline because DOE forgot that, every so often, there is a month with 5 weekends. The problem is that economists sometimes compare the market with a system of regulation which is transparent, well administered, honest and efficiently organized. Of course, that is not the system of regulation that the political process produces. Lets not go back there.

Jul 09 02:41 PM

[Keltorttruth:]

Tony Petroski - you need to read Craig Pirrong's article about the lack of speculation before you discuss things you clearly do not fully understand. (I don't have a link, but he's on Seeking Alpha and he will open your eyes to a few facts that most either choose to ignore or simply haven't seen.)

As for User 357705, you're damn right we're arrogant and have every right to be! As long as we remain capitalist (vs socialist), we will remain the most powerful, most innovative, most individually charitable and proudest nation on earth and I am not about to apologize for it.

Jul 09 04:00 PM

[User 357705:]

From Websters:

arrogant: exaggerating or disposed to exaggerate one's own worth or importance often by an overbearing manner

Yep! Fits to a tee!


On Jul 09 04:00 PM Keltorttruth wrote:

>
>
> As for User 357705, you're damn right we're arrogant and have every
> right to be! As long as we remain capitalist (vs socialist), we
> will remain the most powerful, most innovative, most individually
> charitable and proudest nation on earth and I am not about to apologize
> for it.

Jul 09 04:51 PM

[G. L. Turner:]

KELTORTTRUTH - Come on! Pirrong is a Shill for Big Oil and GOV SACHS - his testimony and his article are gaggin at best...don't fall for his 'scientific sounding bs'...he ws 'trotted' out to the hearings by the Reps adn Big oil last year, and he put out the article this spring by the same group. If his stuff was so valid, he would have participated with discussions during the year. Instead, he only 'shows up" when BIG OIL or Gov Sachs feel that they are not going to be able to manipulate 'their free-for-all futures markets' to their liking!

Jul 09 11:14 PM

[derryl:]

I agree with GLTurner.

Keltorttruth: read the comments after Pirrong's article. Pirrong's position is not defensible.

On the other hand I agree with Tom Lindmark about regulation of oil markets. It doesn't matter whether it's speculators or government policy doing the damage, market interference produces expensive distortions that you and I pay for.

Jul 10 02:47 AM

[Ferdinand E...:]

That's funny, one of the arguments in favour of speculation is that it reduces price volatility. Of course, everyone doesn't believe this, as I found out when I attempted to convince some ignoramuses in France a couple of centuries ago, but if you think about the difference between a liquid and a non-liquid (i.e. thin) market, it should be obvious.

Jul 10 10:47 AM

[TinyTim:]

Jeez, talk about regulation and everyone goes ballistic.

I also don't know what their price floor is about. I get the distinct impression though the point of the article was about reducing speculation, not price controls.

Coincidentally, the CFTC did this in 1979 by restricting (pardon me, regulating) position size in response to the Hunt Bros allegedly trying to corner the silver market (remember Trading Places)

Jul 10 05:28 PM

[Keltorttruth:]

Thanks Derryl, I'll check out the comments and see if there are sound, logical reasons to doubt the man (rather than ideological ones).

Jul 13 10:38 AM