Why President Obama is Dead Wrong on Energy Policy

This past month, President Obama targeted “energy speculators” and tacitly blamed them for higher energy costs. In short, Obama seeks to spend over $50 million more each year in order to stymie what he considers needless speculation. I know many of my readers truly despise my rants on the government. They see them as “political” or “partisan” or even worse, “not relevant to their investments.”

Unfortunately, the actions of governments are highly relevant to our investments. I wish it weren’t so.

Anyone who knows anything about markets knows that speculator participation tends to be good for prices. By Obama’s definition, a speculator is anyone who makes profits when energy prices rise.

But he fails to recognize that speculators can also lose money when prices rise. Or they can make money when prices fall.

The real definition of a speculator is someone who makes a directional bet on prices – usually over a short duration. Moreover, in every transaction in energy futures, there’s a counterparty. So if some speculators are making huge profits as prices rise, then an equitable group of speculators taking the other side of the trades are losing big.

So what’s the true cost of Obama’s increased regulation and speculator blame-game?

I can’t say for sure, but it’s hard to see how these more aggressive regulations won’t have a slightly chilling effect on speculators. The effect of less liquidity (the number of people and dollars trading in a given market) is that price swings tend to be more exaggerated and volatile.

That’s bad for American energy consumers. If Obama wants to decrease energy prices, he shouldn’t discourage speculation.

Nor should he encourage it!

Encouraging speculation is just as bad as discouraging speculation. We all remember what happened when investors were encouraged by the government to speculate in real estate.

My point is that the government cannot improve the function of markets by picking winners and losers. If you’re pro-regulation, you might point to the housing boom and bust as a reason for MORE regulation – but you would have to completely ignore the cold hard facts that the government wholly enabled the crisis – and still does to this day. The crisis would NOT have occurred without the massive amounts of support it received in the form of Fannie Mae and Freddie Mac, over a decade of “accommodative” interest rate policy, a Federal mandate for home ownership and the tacit guarantee of government bailouts that you and I are still clamoring to get out from underneath.

The best way to guarantee a speculative crisis is to stand idly by while the Government adds more regulation and safeties into the market.

The next crisis is underway as sure as I’m typing these words to you. You just have to make sure you’re on the right side when it unfolds.

I don’t know what it will be. It could be in the stock market. Or in currencies. Or in Treasuries.

In any event, you have to full comprehend that the Government will take critical measures to “fix” the problem – just as they did with the real estate crash. And their measures will make things worse, not better. Their measures will likely involve a huge amount of newly minted currency units. Unless you own rock-solid claims on real assets like gold, silver, oil, natural gas, coal, etc. – then you will experience a commensurate loss in standard of living.

Invest accordingly.