President Obama

Today I’d like to debunk some of the biggest misconceptions about what tapping the SPR achieves.

(By the way, you can click here and here to read parts I and II of this topic.)

Francis F. wrote in to tell me why tapping the SPR is a good idea:

"This is why:

This strategy has worked even if briefly, as a spear in the side of speculators who I consider the scum of this earth. The speculators will take note as well. The direct effect at the gas pump resulting in savings for the consumer and the psychological effect on the economy cannot be denied or underestimated."

Thanks Francis.

By far, most of the people writing in to disagree with my criticism of the President tapping the SPR cited the need to somehow punish the evil speculators.

Never mind that Obama’s official reasoning has nothing to do with punishing speculators. Officially, we tapped the SPR because of supply disruptions from Libya.

But let’s forget about Libya for now. I really want to put this speculation story to bed, for once and for all.

A recent study released by the Board of Governors of the Federal Reserve revealed that there’s NO EVIDENCE that speculators cause higher prices.

Read that sentence again.

Now, you might think that the Fed Governors are capable of deceit, and I certainly agree with you. But it would be in the best interest of the Fed to find proof, any proof, that speculators are the cause of higher prices.

Why?

Because if you’re looking to prosecute the folks responsible for higher prices, then you’d be remiss if you didn’t put the Governors of the Fed in the lineup.

Take speculators out of the mix, and it’s a very, very short list of folks left to take the blame.

Here’s some relevant language from the Fed’s paper that should put the "speculator" argument to rest:

"These studies nevertheless find no convincing evidence that speculation in the futures markets has led to spot price inflation…

Evidence in the study shows that during December 31, 2007 to June 30, 2008, the behavior of crude oil prices and speculative activity were negatively correlated."

So why would politicians blame speculators? Well, they’re an easy target. Speculators for the most part are much wealthier than the average person, and to the lay-person, they appear to provide no value whatsoever. They seem to profit when prices rise.

And since prices seem to rise for no discernable reason and speculators profit at the same time, it’s a small leap of logic over a giant chasm of misinformation and general ignorance about the futures market to assume that speculators CAUSE prices to rise.

Again – the Federal Reserve finds that speculators do not cause prices to rise, but rather, that rising prices tend to attract speculators.

Moreover, blaming speculators gives politicians a popular excuse to assert more control over markets.

As President Obama’s former chief of staff Rahm Emanuel famously said, "You never want a serious crisis to go to waste."

High gas prices are the crisis. Oil market speculators are the "culprit."

The solution? Massive reform of the market that supposedly stymies speculators but in actuality only transfers more wealth from the private sector into government coffers. Capital controls ensue, making it more difficult to move money around. Eventually, I think we’ll be looking at much, much higher oil prices, and that crisis will be used by the government to excuse a variety of Orwellian policies.

In the meantime, we’ll see speculators continue to be demonized, because the story is easy to swallow.

Don’t be cajoled into believing the party line. Don’t be tricked into thinking that your freedoms need to be curtailed in order to protect you from some unseen threat.