Energy markets and speculators

Calling President Bush's proposal to lift the 18-year moratorium on new offshore oil drilling "a political gimmick" that he will not allow to come to the floor, Senate Majority Leader Harry Reid is instead pushing his own proposal, a bill requiring the Commodity Futures Trading Commission to curb excessive speculation in energy markets.

The bill, which stalled Friday when Sen. Reid was unable to find 60 votes to overcome GOP demands for numerous amendments including one to allow more offshore drilling, would require traders to provide more information about over-the-counter transactions, and also adds restrictions to U.S.-based traders buying and selling on foreign exchanges.

(Rep. John Larson, D-Conn., would go much further, prohibiting anyone without the ability to actually accept delivery of crude oil from buying a futures contract on an over-the-counter derivatives market. "That could effectively eliminate speculative trading," CNN reports.)

The Democratic strategy responds to fierce public pressure for the Congress to "do something" about soaring oil and gasoline prices. It presumes oil industry claims that prices are rising because of "supply and demand" considerations are bunk -- that the real problem lies with "speculators" bidding up the price of oil in the futures markets.

Also on Tuesday, a federal task force led by the Commodities Futures Trading Commission and including staffers from the Departments of Energy and Agriculture, the Treasury, the Federal Reserve, the Federal Trade Commission and the Securities and Exchange Commission released an interim report on their investigation into the rising fuel prices, The New York Times reports.

Their conclusion?

The task force says its research "does not support the hypothesis that the activity of these groups (the futures traders) is driving prices higher."

Instead, the task force found the rise in oil prices over the past five years is primarily due to -- guess what? -- "rapidly rising consumption and sluggish growth in energy supplies worldwide."

Price hikes, of course, are a major way a properly functioning market notifies suppliers that it may now be worth their while to go explore for new sources, or to begin producing a commodity -- oil, in this case -- from sources previously judged uneconomical.

Thus, despite the popular wailing, Economics 101 teaches us that rising fuel prices are not a problem, but rather a necessary step toward solving the real looming problem that we might not have seen coming but for the research of the futures traders -- oil supplies not rising quickly enough to meet near-future demand.

"The report's key finding was that speculative investors more often changed their positions after prices moved, not before," The Times reported Wednesday.

That suggests that these traders "are responding to new information -- just as one would expect in an efficiently operating market," the government task force reported. (The group's complete report is due in September.)

"In identifying the drivers of energy prices," according to the Times, "the report noted that oil consumption grew 3.9 percent between 2004 and 2007. At the same time, oil supplies lagged that demand, with production growth from nations outside the Organization of Petroleum Exporting Countries slowing to levels well below historic averages."

But if the markets are working properly -- simply serving as alarm bells to notify us of the real problems, which lie in the area of supply and demand -- what earthly good will it do to impose more restrictions on the free and proper operation of the futures markets?

In fact, couldn't that do some harm -- kind of like silencing an obnoxious smoke alarm so it can't wake us up the next time?

Given that reducing energy consumption would be a good way to cripple the U.S. economy, wouldn't it make more sense to -- just thinking off the top of our heads here -- build more refineries, and open likely new oil fields to drilling?

Good heavens. If that's true, could that mean George Bush and the "evil oil men" are the ones who've been telling the truth, while it's Harry Reid and the Democrats who are "lying to the American people"?