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REVIEW & OUTLOOK
Dubai's Favorite Senators
June 10, 2008
The first refuge of a politician panicked by rising prices is always to blame "speculators." So right on time for this election season, Congress has decided to do something about rising oil prices by shooting the messenger known as the energy futures market. Apparently this is easier than offending the Sierra Club by voting for more domestic energy supply.
Futures markets aren't some shadowy dangerous force, but are essentially a price discovery mechanism. They allow commodity producers and consumers to lock in the future price of goods, helping to hedge against future price movements. In the case of oil prices, they are a bet about supply and demand and the future rate of inflation. Democrats nonetheless now argue that these futures markets are generating the
wrong prices for oil and other commodities.
And who are these "speculators" driving up prices? The futures market operator Intercontinental Exchange says that an increasing share of its customers are not financial houses but commercial firms that need to manage oil-price risks "“ refiners, airlines, and other major energy consumers. Another term for these "speculators" would be "American business."
Not ironically, the leaders of Capitol Hill's shoot-the-messenger caucus are among those most culpable for the lack of domestic oil supplies. Senator Maria Cantwell (D., Wash.) has been threatening to hold up appointments to the Commodity Futures Trading Commission until the CFTC increases regulation of oil trading. In the best tradition of bureaucratic self-protection, the CFTC's acting chief Walter Lukken has agreed to investigate.
Ms. Cantwell's recent press release on "outrageous energy prices" didn't mention her own contributions to the problem. According to the Almanac of American Politics, she "successfully worked the phones" in 2005 to round up enough colleagues to block drilling in the Alaskan wilderness. Ms. Cantwell has also backed a slew of mandates and subsidies that have helped to raise food prices by diverting corn and other crops to fuel. She even claims to have helped create the biofuels industry in her state.
Her counterpart in the House is Michigan's Bart Stupak, who claims special credit for a permanent ban on drilling in the Great Lakes and has also cast votes against exploration in Alaska and off the California coast. With $4 gasoline, this is a man in need of political cover as Michiganders head into the summer driving season. A spokesman says Mr. Stupak is hoping to roll out a new bill by the end of this week to require "additional reporting and oversight' in the oil futures markets.
Then there's New York Senator Chuck Schumer, another staunch opponent of new domestic oil supplies. Mr. Schumer has egged on the Federal Reserve's rate-cutting binge that has contributed so much to the oil price spike. But, with impeccable political timing, he now suspects "price manipulation by speculators" is the real cause of rising gas prices.
Mr. Schumer's answer is the "Consumer-First Energy Act," due for a cloture vote in the Senate today. Bundled with a windfall profits tax on oil companies, the plan also includes an increase in margin requirements for those who wish to trade oil futures. This would of course make it more expensive to trade in U.S. futures markets, which in a world of computerized, instantaneous trading means that those trades would merely move to markets overseas. As luck would have it, the Dubai Mercantile Exchange celebrated its first birthday last week with the launch of two new oil futures contracts that compete with those offered by American exchanges.
Leave aside the question of whether Mr. Schumer believes that the Dubai exchange, which is majority-owned by Middle Eastern governments, will offer more consumer protection than America's shareholder-owned exchanges. This is the same Chuck Schumer who warned in 2007 that heavy regulation threatens New York's pre-eminence in global finance. Along with Mayor Michael Bloomberg and former Governor Eliot Spitzer, Mr. Schumer introduced a long report on the threats facing New York with a short note that specifically mentioned Dubai as an increasingly formidable competitor. That of course was not an election year.
If Democrats won't believe futures traders, maybe they'll heed their biggest political funder. When Senator Cantwell invited hedge-fund billionaire George Soros to testify last week, she probably didn't expect the backer of left-wing causes to deviate from her market-manipulation narrative. But among other things, Mr. Soros noted that "Regulations may have unintended, adverse consequences. For instance, they may push investors further into unregulated markets which are less transparent and offer less protection."
Democrats will find that moving jobs to Dubai from New York and Chicago will not end the commodity inflation that they themselves have helped to create.
Gas is about to get cheaper at the pump
