The Mouth Is Quicker Than the eye
When you’re Barack Obama, you can pursue an Orwellian rhetorical style because you have several crucial factors in your favor: You’re young. You’re good-looking. You have a pleasant deep voice. And you can blunt any criticism, no matter how cogent, just by saying “You’re only beating up on me because I’m black.”
Now that Obama has thrown campaign-finance reform under the bus (it doesn’t suit his newly-affluent circumstances), he has to deal with the price of gasoline. He’s come out with a rather esoteric set of regulatory proposals to deal with the issue, which has remarkably become perhaps the most important one of the summer.
I’ll take you through a short explanation of what our Hero thinks he wants to do, but as you’ll see, his bottom line is rather different from what you might think it is.
I’m one of a handful of people who have been telling you all along that a significant amount of the price of oil comes from financial rather than fundamental activity.
There are people who pump oil out of the ground, and they naturally want to sell it. There are other people who turn crude oil into industrial products like gasoline, and they naturally want to buy it. This is fundamental supply and demand.
But there are a lot of people who buy and sell crude oil (in the form of futures contracts, options on futures, in the stock market, and via swaps) only because they think the price will rise or fall in a particular stretch of time. These people are called speculators.
Specs have come in for a lot of angry fingerpointing as the price of crude oil has risen, but they’re an essential part of the structure of commodities markets and always have been. They supply the liquidity that makes it possible for the hedgers to manage their risk.
Now it turns out that speculative activity tends to exaggerate price movements when everyone thinks the market is headed one way or the other. And these days, everyone thinks oil is rising in price (for a lot of reasons, including the global demand picture and the weak dollar), so a significant amount of “paper oil” has been forward-purchased by people who have no intention of actually taking delivery of the stuff.
This accounts for a quite significant amount of the price of oil. How much? My guess is that financial buying accounts for about a third of the barrel price, a solid $45 or even more.
But the real answer is that no one knows. And this is where Barack Obama comes in.
You see, Superman has understood that We The People (that would be schlubs like you and me) don’t think we should be paying $4/gallon for gasoline. There’s enough agita in this both to require a response, and to constitute an opportunity.
While John McCain has come out in favor of increasing supplies of domestically-produced energy as a way of lowering its price, Obama has come out against speculation instead. Hang with me here, because this gets a little hairy.
Everyone who buys and sells commodities on an exchange (like the New York Mercantile Exchange, where crude oil trades) is required to meet some strict requirements. They have to put up a minimum amount of capital, which acts to limit how much they can trade (for NYMEX members, it’s about 8% of the value of the oil they buy or sell); their positions are marked to market every night; and the exchange reports all trading to the Commodities and Futures Trading Commission (CFTC).
But it turns out that for a handful of reasons, an unknown but certainly very large amount of crude-oil trading manages to escape these regulations. A lot of trading goes through the London Intercontinental Exchange (“ICE”), where it doesn’t get reported to the CFTC. And a lot of it isn’t in the form of futures contracts at all, but rather in over-the-counter swaps contracts, that are essentially legal agreements made between hedge funds and large banks or Wall Street firms, and that effectively circumvent the position limits on normal trading.
Now Barack Obama, in full Orwellian mode, wants to blame this non-transparent trading activity on some rule changes that were made during the Clinton Administration. Since they benefited the Enron Corporation in its pas-de-deux with the Devil, these rule changes are called “the Enron loophole.”
And of course, Wendy Gramm (wife of Senator Phil) was a director of Enron and later Commissioner of the CFTC. And you know that Senator Gramm is advising the McCain campaign. So now Barry
Orwell Obama is saying that John McCain is to blame for this set of rule changes that Bill Clinton signed into law.
Anyway, Superman says that the key to reducing the price of oil is to “fully eliminate” the Enron loophole. The reason he has to say it like that, is because the loophole has already been closed, and not by him. Several days ago, the current CFTC commissioner announced stricter position limits and reporting requirements for US accounts trading crude oil to take effect in 120 days, even for accounts trading in London. And in any case, the basic transparency problem has been known to the US Senate since 2006, when a Finance subcommittee published a widely-ignored report on the problem.
So Superman thinks he can wave his long, graceful arms, grin his broad grin, and get you to think he will bring transparency to the crude oil markets.
He had the good sense to also recommend that global coordination among regulatory authorities will be required to make this happen, because obviously London ICE answers not to the CFTC but rather to Britain’s Financial Services Authority (FSA).
That sounds like a good idea, except that it’s not Barry’s either. Authorities like New York Fed President Geithner, Treasury Secretary Paulson, and Fed Chairman Bernanke have been saying it for months now, along with eminent private citizens like Alan Greenspan and a host of Wall Street bigshots.
So full transparency in futures trading is many years away, if it’s even possible at all. And at any rate it solves a data problem, not the underlying issue, which is that crude oil is in demand, and not just by people who want to turn it into fuel.
What Obama hasn’t said yet is whether he actually believes that crude oil speculation should be curtailed rather than simply better reported. There is very definitely a role for sensible regulation of futures markets, and there is a role for better regulation than we have today.
I’m entirely open to having this conversation. But I’d really like to see Superman lay his cards on the table first, since he’s running for President and I’m not. Then we can talk.
There is a final bit of irony from Barack Obama when he talks about the price of crude oil (which is important to most people not in itself but because it affects the price of gasoline). Barry is completely convinced (as he has let slip on occasion when he thought we weren’t listening) that the price of gasoline is now too low.
That’s because he wants to force the usage of less oil in the United States of America. That’s why, in dealing with a proximate political problem, he chose to completely ignore the supply side of the oil-price equation.
Let’s be honest about this. You might be able to make crude oil less expensive by curtailing speculation, if you can find a way to do it without completely destabilizing this crucial global market.
But you won’t ultimately make more energy available to American consumers that way. And that suits Barack Obama just fine.
-Francis Cianfrocca (“blackhedd”)