Crude Senatorial Loggerheads

Senate Republicans had hoped to put an end to the now purely Congressional moratorium on offshore drilling, via an amendment to the anti-free-market bill which aimed to make the government the arbiter of the appropriate amount of speculation in energy markets.

Harry Reid was unduly scandalized by the prospect of exploiting cheap domestic energy sources and couldn't allow his misguided scapegoatery to be diluted with substantive and effective measures.  He tried to ram it through as was, but it fell 10 votes shy of cloture.

Naturally, Reid handled this blow to feckless demagoguery with grace and aplomb.

Reporters tried to pin Reid down Thursday on the amendment issue.

In the exchange, Reid told one reporter she should “watch the [Senate] floor more often. … You might learn something.”

Another reporter explained she had watched the Senate proceedings and said it was not clear he was … offereing separate amendments, to which Reid asked the reporter if she “spoke English.”

“Turn up your Miracle Ear,” Reid added.

Reid may need to check his own comprehension of English. He did allow only two amendments on the bill, which Dick Durbin confirmed during a floor speech. If Reid can’t count to two, he should stop worrying about the English skills of reporters and get into a remedial math class.

Part of what's confusing Reid and his ilk is the distinction between speculation and manipulation.  Speculation isn't a bad thing.  Indeed, it's a very good thing.  Without speculators, you'd only have natural hedgers participating in commodity futures markets.  Prices would be much less stable and market participants with unwanted inherent exposure to those prices (including farmers, airlines, manufacturers, retailers, and shareholders and customers of the whole lot) would have a much harder time offloading that undue risk.  In short, speculators are a crucial part of a robust marketplace that moves us toward a more optimal allocation of risk.  Without them, the liquidity and efficiency of the marketplace suffers and so does every participant in that market (which definitely includes you).

Manipulation is something quite different (though this is the concept many lawmakers hope you envision when they rail against speculators).  Market manipulation involves deceptive and distortive practices intended to take unfair advantage of other market participants.  This does happen, but happily we don't need kneejerk-prone legislators to save us from it because it's already proscribed by law.  The CFTC, which has regulatory authority over futures markets, just charged Chicago investment firm Optiver and its Dutch holding company with breaking these very laws.

This is good news and bad.  Well, and neutral.  The neutral news is that Optiver's activities certainly had a near-zero impact on the overall price of oil.  Their million-dollar skim was a drop in the multi-quadrillion-dollar ocean of commodity futures markets.  The good news  of course is that the CFTC has caught an alleged market manipulator.  The decidedly bad news is that a lot of people will glean precisely the wrong lesson from the case.  They'll see it as proof that oil prices are indeed being manipulated by market speculators and that speculation thus needs to be drastically reined in and much more tightly regulated.  As discussed above, speculation is not only a legitimate activity amid futures markets, it's vital to their smooth functioning and imposing onerous restrictions on it will cause the market itself (and its 6 billion participants) to suffer.

Manipulation is bad.  It's rare and it has very little if any impact on real prices, but it's illegal, it's unfair, and the CFTC and federal law enforcement are already empowered to deter, detect, and punish it.  Speculation and manipulation are wholly different activities, notwithstanding the desire among many legislators that you conflate the two, in hopes that they might scapegoat one (a big population of tangible, demonizable, typically high-income people) with the sins of the other, and convince you they're "doing something" about the high price of oil.

The most reliable, most immediate way to extend oil's harrowing plummet that's seen prices shed as much as $22 in two weeks (with prices dipping below $123 per barrel today) would be for Congress to finally lift the stupefyingly senseless drilling moratorium.

Unfortunately, it looks like we won't be making any headway on that front today.  And if this bill does get another chance after the Congressional recess (and assuming Harry can be persuaded to let his colleagues vote on amendements), the cost of eliminating the drilling ban will almost certainly include letting the federal government ride roughshod over a key component of well-functioning free markets.