Thursday, June 5, 2008

Congressional Theater of the Absurd

"I was watching the Big Oil execs testifying before Congress. That was my first mistake. If memory serves, there was lesbian mud wrestling over on Channel 137, and on the whole that's less rigged. ... The NOPEC bill is, in effect, a suit against OPEC, which if I recall correctly, stands for the Oil Price-Exploiting Club. ... But, before we start suing distant sheikhs in exotic lands for violating the NOPEC act, why don't we start by suing Congress? After all, who 'limits the production or distribution of oil' right here in the [US] by declaring that there'll be no drilling in the Guld of Florida or the Artic National Mosquito Refuge? ... More to the point, if the House of Representatives has now declared it illegal ' for the government of Saudi Arabia to restrict oil production, why is it still legal for the Government of the [US] to restrict oil production? ... So instead Congress hauls Big Oil execs in for the dinner-theater version of a Soviet show trial and then passes irrelevant poseur legislation like the NOPEC bill. ... But government 'change,' Obama change, NOPEC change is nothing to do with that. In fact, it obstructs real dynamic change", Mark Steyn (MS) at, 26 May 2008.

"Gasoline prices are through the roof and Americans are angry. Someone must be to blame and the obvious villian is 'Big Oil' with its alleged ability to gouge consumers and achieve unconscionable 'windfall' profits. Congress is in a vile mood, and has dragged oil industry executives before its committees for show trials, issuing predictable threats of punishments, e.g., a 'windfall profits tax. 'But if there is a villian in all of this, it is Congress itself. ... Indeed, as oil industry executives reiterated in their appearance before the Senate Judiciary Committee on May 21, 15% of the cost of gasoline at the pump goes for taxes, while only 4% represnts oil company profits. ... On the other hand, supply has been curtailed by the cartel-like behavior of foreign national oil companies, which control nearly 80% of world petroleum reserves. Faced with little competition in the production of crude oil, the members of this cartel benefit from keeping the commodity in the ground, confident that increasing demand will make it more valuable in the future. Despite its pious denunications of the behavior of U.S. investor-owned oil companies (IOCs), Congress by its actions over the years has ensured the economic viability of the national oil company cartel. ... Domestic price controls ensured that the OEC cartel would face little or no competition in the production of oil. Price controls were exacerbated by other wrongheaded policies stimulated by the two 'energy crises' of the 1970s. One of the most egregious was the infamous 'windfall profits' tax, designed to punish oil companies for alleged profiteering. But since it applied to even newly discovered oil, its main empact was to discourage the exploration and drilling that would have increased oil supplies. ... For instance, Frank Zarb, who had been Jimmy Carter's 'energy czar,' predicted that decontrolling the price of crude oil would lead to gasoline prices of $10 a gallon", Mackubin Thomas Owens (MTO) at the WSJ, 29 May 2008.

"The British government, pressed for solutions to soaring fuel prices, said it will exempt about 30 existing North Sea crude-oil and natural-gas fields from some taxes and approved the development of two North Sea oil fields, which could begin production in early 2009. ... Tax changes to certain North SDea production operations will allow new oil and gas fields to be carved from unprofitable parts of 30 existing fields", WSJ, 29 May 2008.

"U.S. regulators disclosed a broad nationwide probe into potential oil-market manipulation and said they are expanding surveillance of energy markets. ... Lawmakers in Congress have been pressing regulators to crack down on manipulation, as politicians seek to demonstate ahead of the fall elections that they are responding to soaring gasoline prices. ... Many economists and oil-industry executives say possible shenanigans by market traders have little or nothing to do with the high price of oil. ... The CFTC has expanded an investigation, disclosed previously by the Wall Street Journal, into alleged short-term manipulation of crude-oil prices via a widely used price -reporting system run by Platts, a unit of McGraw-Hill Cos.", WSJ, 30 May 2008.

"With criticism mounting that pension funds are culprits in the run-up in gas and food prices, the pension industry is starting to mobilize to protect its ability to invest in commodities markets. ... But in recent days, critics from farmers to politicians have questioned whether trading by pensions and other institutional investors should be restricted. .. 'We're not driving up the price of rice in the Third World,' says Bob Greer, an executive vice president at Pimco. ... Since the end of 2005, index-linked commodity investments has doubled to $260 billion, according to Citigroup", WSJ, 30 May 2008.

I agree with MS. The NOPEC bill is a joke. It will be as big a flop as the windfall profits tax.

I remember Zarb's prediction. By 1986, oil was $10 a barrel. The attacks on Big Oil are absurd. Assume its executives are "greedy". Were the greedy yesterday, a week ago, a year ago, ten years ago, 100 years ago? Since they were always greedy, their greed does explain changes in the oil price. Thanks George Stigler for making this argument in your "Organization of Industry" class.

Apparently the Brits have taken half of Uncle Miltie's phrase to heart, i.e., "if you want less of something tax it". Apparrently the Brits want more oil.

Hasn't the CFTC anything important to do? I have an idea, shut the CFTC and let the SEC do the investigation. Why? The SEC harasses short-sellers. Since the CFTC is apparently after the longs, an SEC investigation would change the investigation's focus.

What are these index-linked investments? Irving Fisher's "compensated dollar" in action. See my 18 November 2007 post. Why shouldn't pension funds diversify out of dollars? Suppose they didn't? Would the Pension Benefit Guarantee Corp. or Department of Labor say they failed to properly discharge their fiduciary duties to the pensioners?

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