Friday, April 20, 2012
Obama's Snipe Hunt
By William Tucker on 4.20.12 @ 6:09AM
Our president goes on a wild goose chase against "speculators."
Watching President Obama stumble through his energy crisis, it seems only a question of whether he will end up channeling Jimmy Carter or President Cristina Fernandez de Kirchner of Argentina.
The latter, in case you missed it, just announced that her government will be seizing a 51 percent interest in YPF, the Argentine subsidiary of Repsol, the Spanish conglomerate that is the 15th largest refiner in the world. In most places, that would be called theft, but in the banana republic of Argentina it's just business as usual. In making her announcement, Fernandez de Kirchner stood directly beneath a wall-length portrait of Eva Peron haranguing the masses sometime back in the 1940s. It was an irony that nobody seemed to notice. Who knows, maybe there's a Broadway musical in Cristina's future.
What prompted the move by the President, who succeeded her husband in 2007, was that YPF, originally founded by the Argentine government in the 1920s and privatized in 1993, wasn't producing enough oil. Why wasn't it producing enough oil? Because the government has imposed price controls. And like price controls everywhere, they have discouraged production while encouraging overconsumption. As a result, Argentina has ended up importing expensive foreign oil despite large discoveries of shale oil in recent years.
This blast from the past can only remind us that one government intervention in the economy always leads to a bigger one and that, despite this sordid history, old leftist ideas never die. There will always be some demagogue telling us that the government can do a better job at running things than the people who know their business. Kirchner probably doesn't know enough about oil to tell you the difference between a hydrocarbon and a carbohydrate but as a lawyer, she is sure that once she and her friends are running YSF, oil will gush forth like Moses striking the rock.
So that brings us back to our own Man of the People, President Obama, who is really only in the kindergarten of such retrograde policies but giving it a try. On Tuesday he stood in the Rose Garden flanked by his two apostles of freedom and justice, Treasury Secretary Tim Geithner and Attorney General Eric Holder, and announced the solution to our energy problems will be hunting down and prosecuting evil "oil speculators" who are responsible for driving up the price of gas in the U.S. Who are these individuals? We don't have any names but we can already be sure they are "millionaires and billionaires" and don't pay any taxes. Why, aren't these the same people who are messing up the entire economy?! Well, what we do know is that Mitt Romney is their friend.
Before we go any further with this, perhaps we should ask, just what are "oil speculators" and why is it so important that they be hunted down? Here is the answer. Oil speculators are investors who think the price of oil is going to go even higher in the future. For whatever reason, they expect supplies to get tighter. Therefore they are willing to buy oil at a premium today in the anticipation that prices are going to go even higher tomorrow. It's a gamble. You don't automatically make money. Sometimes you lose a whole lot.
What speculators do, however, if they guess right, is smooth out the availability of supplies between the present and the future. By paying a higher price now, they assure that prices will be lower in the future. In effect, they hold supplies off the market today so that they will be available next week or next year when things become even more scarce. Adam Smith described this as preventing a "dearth" from becoming a "famine":
When the government, in order to remedy the inconveniences of a dearth, orders all the dealers to sell their corn at what it supposes a reasonable price, it either hinders them from bringing it to market, which may sometimes produce a famine even in the beginning of the season; or if they bring it thither, it enables the people, and thereby encourages them to consume it so fast as must necessarily produce a famine before the end of the season.… No trade deserves more the full protection of the law, and no trade requires it so much, because no trade is so much exposed to popular odium.
Unfortunately, there are always politicians around, like President Obama, who are willing to encourage that odium for political purposes.
The biggest oil speculator of all is the federal government. At present the government has bought 727 million barrels of oil and stockpiled them in caves in Louisiana so that they may become available in case we face a dearth of oil tomorrow. This is, of course, the Strategic Petroleum Reserve, which holds enough oil to replace all our imports for 80 days. These purchases made over the years have subtly driven up the price of today's oil, yet we are still very glad to have it because it could play a crucial rule in our future. The SPR has been drawn on four times: in 1991 during Operation Desert Storm (21 million barrels), in 1996-1997 in order to pay off part of the federal debt (28 mb), in the aftermath of Hurricane Katrina when production in the Gulf of Mexico was disrupted (11 mb), and during 2011 because of tensions in the Middle East (30 mb).
The current run-up in price could qualify as another such emergency. The reason private investors are driving up futures prices is that they are anticipating a shooting war in the Persian Gulf. As Secretary of Defense Leon Panetta testified this week, we have been "within an inch of war almost every day." Quite frankly, the Obama administration could well justify making some small releases from the SPR, since these tensions are having an impact on prices. But at this point it would probably be wiser to hang on to those supplies in case something more serious happens. If the President would explain all this to the public, people might be a little more tolerant about bearing the hardship. Unfortunately, his own anti-energy policies and past quotes about raising gasoline prices have overshadowed all this. So instead, he has to make a big show of tracking down "speculators."
Right now I would say it's time to start an office pool on how long it will be before the President or some congressional Democrat starts talking about price controls. Then we follow right in Jimmy Carter's footsteps and have a repeat of the "oil shortages" of the 1970s. That's the problem with government intervention in the marketplace. One you intervene, things only get worse, which creates a new clamor for even more intervention. Just ask Cristina Fernandez de Kirchner about that one.
Three weeks ago, I wrote a column saying you could count me out on defending George Zimmerman in the Trevor Martin case. At that point the country seemed on the brink of racial warfare. Al Sharpton was on television every night, African-American youths were rioting in southern cities, the New Black Panthers had put a price on Zimmerman's head. Then a week later there were racial killings in Tulsa and it appeared the country might be pushed over the edge.
Now suddenly everything is quiet. You hardly see a story on the news. What happened? Well, there was an arrest. The Florida prosecutor finally got around to deciding that the circumstances demanded a second-degree murder charge. In Tulsa, the alleged killers were arrested very quickly and will probably be facing the death penalty. Mind you, none of this says that any of these people are guilty. It just means that somebody in authority is acting and that everyone will have their day in court.
It's a good lesson in the purpose of the justice system. It is there to keep the peace. If police and prosecutors and judges don't deal with a situation like the Zimmerman-Trayvon Martin shooting, then someone else will. Instead of being tried in a court of law, it will be tried on television every night or in the streets. Judges and prosecutors and law school professors have somehow gotten lost in the conviction that their only responsibility is to make sure that no one is ever wrongly accused or convicted of anything. They talk endlessly about how the justice system pits "the lone individual against the awesome powers of the state." But if the state has awesome powers, it also has awesome responsibilities. It has to keep the peace in a nation of 300 million individuals, many of whom dislike each other and are not hesitant to act things out. The calm that has descended upon both the Trayvon Martin and Tulsa, Oklahoma cases are a good example of just how important those responsibilities can be.
To read another article by William Tucker, click here.
Posted by Brett at 2:42 PM