The links in the piece can be found here:
http://johnrlott.tripod.com/op-eds/FoxNewsDefSpeculators051208.html
This piece is mistitled.
Article published Monday, May 12, 2008, at Fox News.
High Gas Prices Are Not Something New
By John R. Lott, Jr.
With oil prices closing above $125 a barrel of oil on Friday, angry
politicians are blaming the higher prices on everything from
speculators to greedy oil companies. Last week some Democratic
Senators demanded "urgent action . . . to adequately investigate
whether speculators are driving up prices."
Democrats are proposing to protect the American people from "greedy
oil traders who manipulate the market." Senator Barack Obama wants
price gouging by oil companies to be a federal crime.
Everyone wants lower prices, but many politicians seem unable to
understand that speculators actually smooth out wild swings in prices.
Speculators make profits by buying oil when the price is low and
selling it when it is high, and doing that protects consumers.
Tensions rose last week because of Venezuela financing Columbian
terrorists. Columbia looked like it might retaliate and send troops
into Venezuela, the world's sixth largest oil ex****ter.
There was an obvious risk that Venezuela's oil ex****ts could be
stopped. Oil prices increased immediately. They didn't wait for the
war to actually break out. By buying oil now in order to set it aside
if supplies are interrupted if the conflict escalates, is good for
consumers. Storing oil for then will prevent what would have been even
higher prices. Politicians obviously thought speculators were
unjustified to start bidding up prices. After all, war might never
occur. Yet, if speculators didn't do that and Venezuela's ****pments
are halted, the much bigger increase in oil prices would surely cause
politicians to really call for the scalps of everyone in the oil
business.
The speculators are taking a real risk with their own money. If no war
occurs and prices fall, few in congress are going to shed tears over
the money that the speculators would lose. If war breaks out and
prices only rise a fraction of what they otherwise would have gone up,
who is going to thank the speculators for a job well done?
Speculators are actually extremely accurate in predicting the future.
But it is not just in oil prices.
Markets do a remarkably good job compared to polls and pundits in
predicting election outcomes. In 2006, trading markets correctly
predicted the outcome of every U.S. Senate race. In 2004, they
correctly guessed the presidential vote in every state but Alaska.
Similar accurate predictions have been seen in everything from how
much money movies make to who will win s****ts league champion****ps.
Possibly all that isn't too surprising when people put their own money
at risk, but do politicians' really want to compare the accuracy of
their predictions with that?
Bidding up prices today also produces another benefit. Higher prices
today reduce consumption and increase inventories and thus reduce how
much prices will rise tomorrow. All this ensures that the overall
increase in price will actually be less.
The possibility of higher prices when disasters strike also gives oil
companies an incentive to put aside more oil to cover those
emergencies. Storing oil is costly, and if we expect oil companies and
speculators to bear those costs, you had better compensate them.
The irony is that letting the companies charge higher prices actually
reduces customers total costs because there will be more gas available
when the disaster strikes. Unfortunately, Venezuela's risks are not
the only production problems that have been occurring. Last week,
Nigeria, the eighth larger oil ex****ter, faced rebel attacks on a
major oil center. Over the longer run, the U.S. has refused to
increase production of oil despite huge untapped reserves. While New
York Sen. Charles Schumer and other Democrats lambast Saudi Arabia and
other countries for not increasing oil production enough, these same
politicians have consistently voted against any increase in U.S. oil
production.
Senator Obama sees part of the solution in a massive windfall tax on
American oil companies. Putting aside the fact that having politicians
blame oil companies is a bit hypocritical — U.S. oil companies have
paid more than three times in taxes to the government than they have
earned in profits over the last 25 years — higher taxes on profits
will reduce production and increase prices. A higher tax on profits
will mean fewer investments in producing oil and that in turn will
mean less production in the future.
Ironically, Democrats won the 2006 elections and took control of both
the House and the Senate by promising they would reduce gas prices.
Yet, with regular gas now selling above $3.67 a gallon, Americans can
only longingly remember the average prices of about $2.20 a gallon
that Democrats were complaining about in early November 2006. The
Democrats' bigger sin is that they seem to have no understanding of
how markets work.
As Robert Samuelson recently pointed out, high gas prices have long
been in the making. But puni****ng speculators and oil companies, while
politically popular, will only hurt consumers.
*John Lott is the author of Freedomnomics and a senior research
scientist at the University of Maryland.
--
“Your Rights will last only as long as your Ammunition!”
-- Rev. Shawn Cole
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