Obama: Big Oil's Best Buddy
It’s counterintuitive. But it now appears that Democratic presidential (almost) nominee Barack Obama is Big Oil’s best friend in Washington.
Obama late last week unveiled his approach to attacking high gasoline prices. He targeted energy speculators, specifically investment bankers using oil prices to hedge against the value of the dollar.
According to a Reuters account, Obama would close the “Enron loophole” that exempts energy trading from oversight by the federal Commodities Futures Trading Commission,” although CFCT oversight is quite weak. Obama would also limit the trading markets for oil commodities, increase transparency of trades, and increase margin requirements for oil trades (commodity trades have no margin trading limits, as opposed to stocks).
This is all pretty smart stuff, and could have a dramatic impact on oil prices.
Because Obama’s the certain Democratic nominee, his views of policy issues are now orthodox Democratic Party policy. They might even make policy sense, as in the case of his assessment of speculation and the market.
The House Energy Committee’s oversight subcommittee followed up on Monday (June 23) with a hearing on the importance of speculation on crude oil prices. It was an enlightening moment, as numerous expert witnesses testified that the marginal price for a barrel of crude—absent speculative forces driving up prices—is about $65/bbl.
While an Obama supporter (full disclosure: I’ve been giving his campaign $15/month for more than 18 months), I was initially skeptical of the speculation initiative. It sounded like easy pandering to me, aka normal Democratic practice.
But at the end of the testimony at the House subcommittee on Monday, I was persuaded. Obama’s got something going here. Commodities speculators—most prominently Goldman-Sachs, and other investment bankers—are pushing prices on commodities markets way beyond the marginal price of crude oil, the witnesses testified. It’s a speculative bubble.
It turns out that speculators are flying high with little regulation. Unlike stocks, regulated by the Securities and Exchange Commission, commodities markets do not have serious margin requirements (meaning they can gamble with little cash up front), and aren’t subject to reasonable rules about insider trading.
For example, Goldman-Sach’s research arm can issue bullish predictions about long-term oil prices—$200/bbl—that support the long price strategy of its oil trades. Markets respond by going long. Goldman rakes in gold. Shades of Enron.
This cries out for federal legislation to curb unlimited commodities trading schemes that push up crude oil prices at the expense of consumers. Obama appears to be on the right track. Wow. Imagine that.
Ironically, Obama’s approach rejects the Democratic Party orthodoxy that “Big Oil” is the culprit. The evidence supports Obama; there is little to suggest that major oil companies are exploiting markets, despite their large nominal profits (big companies return big upfront profits, regardless of their scale against earnings).
Will Big Oil recognize that Obama is their savior? Not likely, as the oil companies are knee-jerk Republicans most of the time. But maybe they should take a closer look at Obama, who is willing to take Big Oil off the Democratic agenda as big targets.
McCain will respond with the classic Republican rant—drill, drill, drill. There’s nothing wrong with this mantra, but the Obama folks will point out that new production takes year to get into the market.
The world has two market problems. One is acute: current oil prices driven by speculation. The other is chronic: long-term inability to access promising oil reserves, such as offshore the U.S. and offshore Brazil. The US petroleum industry should be grateful that Obama has focused on the acute problem. That should provide time to look at the chronic ailments in the oil market.