Burn the witches with gas

Paul Jacob

4/24/2011 12:00:01 AM - Paul Jacob

Last month, the President of the United States of America sicced his dogged army of regulators and prosecutors on the petroleum industry. Not for oil spills, mind you, but for raising prices.

Actually, he instructed his teams of lawyers and other federal operatives to work with state agencies looking for fraud in fuel markets. In the last few days, he’s made much of his crusade, talking it up on TV and radio. Backing up the prez, the Attorney General just formed the Oil and Gas Price Fraud Working Group.

The group is most interested in the role of speculators. They’re to blame!

But, with various senators and representatives huffing and puffing about “unwarranted” gas price hikes, what our government forces are really doing is engaging in a witch hunt.

And they’ve chosen a convenient target, well-suited for witch-huntery.

In Europe and America, right up to the Age of Enlightenment, witch hunters tortured and executed thousands upon thousands of innocent women and men. Behind it all? Fear. Fear of the plague. Fear of hidden influences. Fear of specialized knowledge (many “witches” were “wise women,” herbalists and midwives). Fear of the unknown.

And there are few things more unknown, today, to your average politician — or, perhaps, your average NPR-listening/TV-watching American — than prices. Or the role of speculators.

But ignorance is no excuse for a witch hunt.

This is what we know: Gas prices have risen in nominal values. Since gas is important to us, we all get a tad annoyed. I do, too. Such price increases mean I must spend less on other goods than I used to. It hurts to economize when things were going along so swimmingly before.

When, this “swimmingly”? You know, when the financial market was collapsing and the federal government hysterically over-reacted by throwing trillions of dollars of money it didn’t have at . . . speculators.

But hey: If speculators losing money in a huge, fiasco-of-a-bubble in 2008 were worth restoring to their previous glory, what is the reasoning behind turning on speculators when the price of a commodity rises?

I know, I know: Policy in a representative democracy cannot be consistent. But still, shouldn’t politicians have some notion of consistency? An itsy-bitsy one, at least?

Apparently, housing prices are supposed to go up forever (insane idea, to even want such a thing), and gas prices must never move up!

Incredulity rises when one realizes that if gas prices rise because of speculation, they likely fall because of it, too. But when that happens, no one thinks to set up a posse.

The last time I wrote in this venue about gas prices, I predicted a gas price collapse. Which happened soon after. I wasn’t particularly prescient. I just noted that nearly everyone was talking about “gas prices rising forever” and grew suspicious. So I found an economist wise to the peaks and valleys of such commodity pricing, and, with his perspective and forecast in mind, I realized that the necessary plunge was about to take place.

Now, no plunge seems imminent.


First, speculators and businessmen are privy to more information about real production factors than you and I are. Or any regulator on Obama’s witch hunt team. It would be hubristic to pretend to know what the “correct” price for oil “should” be — if you are sitting on the sidelines with no skin in the game. (Speculators, barring leverage, put their skin in the game.)

Truth is, Obama doesn’t have the courage to say “I don’t know what the price should be, and neither do you.” That would be honest. Alas, he probably doesn’t believe the corollary to this: “I shouldn’t be setting prices, anyway.”

Second, though, is a perennial issue when it comes to price levels. The current gas price spike may be simply a reaction to the fall of the dollar. Gas prices haven’t really risen, people tell me (including readers commenting on my own Common Sense commentaries) — instead, the dollar in which prices are denominated is losing value (trillions thrown around by the Fed to “ease” our way out of a depression) so what is rising is the nominal price. Real prices have remained stable.

A good question to ask economists who study major markets is: Could speculation be the mechanism by which markets most quickly react to the inflationary actions of the Federal Reserve?

When prices rise, the first place to look is always to the Fed. Inflation is about money. Inflation’s advocates (and they have been many, throughout history, and they have a name: “money cranks”) place much of their hopes regarding the efficacy of increasing the money stock on people being clueless about the natural consequences of same.

And, most of us are. Which is why classic monetary inflationary pushes take time before the horror part of the cycle sets in, before panic ensues, before markets collapse and we hit the inevitable bust. It takes time for everybody to adjust to the new money influx.

But the modern world is filled with folks who aren’t numskulls. They anticipate inflation. So prices rise more quickly to meet the expansion of money.

If you want a conspiracy, or downright fraud, the oil markets don’t look that promising. Not really. Look, instead, to money — which in the U.S. is controlled by our government’s special creation, known since annus diabolis 1913 as the Federal Reserve System. It’s job is to create money out of thin air — a sort of legalized fraud — and, when it really gets going, it can really do some damage. At present, it’s frantically trying to create a new boom to offset the last bust.

Great job, guys.

But, at the gas pump, we can see some of its effects.