Why is gas $4 a gallon? You can partially blame Enron. The rest is on us.

I’m sure I’ll catch some flak for criticizing deregulation, however, somethings just do better with regulation.

Banks are one. Bear Sterns proved that. Mortgage funds are another- Countrywide proved that. And, if you want to know why commodities trading needs regulation- well, Enron proved that.

I highly recommend either reading, or listening to this entire interview on American Public Radio’s Marketplace. Ryssdal is the host of the show, Greenberger is a former government regulator.

Marketplace: Deflating the oil bubble
Ryssdal: Why is it so hard to figure out what’s going on in commodities markets — oil specifically?

Greenberger: Well, the reason it’s hard to figure out is about 30 percent of our crude oil energy futures are traded in what is called a dark market — that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation being passed, all energy futures traded in the United States or affecting the United States in a significant fashion were regulated by United States regulators under a very careful regime that had been perfected over about 78 years and many observers believe that because those markets are not being policed, malpractices are being committed and traders are able to boost the price virtually at their will.

Ryssdal: You’re not really telling me that seven years on, we’re still paying the price for Enron, are you?

Greenberger: Well, this has been called the “Enron Loophole” and there are many legislators working very hard to close that loophole. There is tremendous concern about this on Capitol Hill and on a bipartisan basis, people are drafting legislation to try and get a handle on this and not eliminate speculation, but bring the speculation under the kind of time-tested controls that were used until Enron had its way and amended the law to escape traditional tested regulation on speculative activities.

George Soros, who is a master investor, thinks that the speculation bubble may pop, bringing yet another jolt to the economic system:

Marketplace: Did speculators fuel the oil run-up?
Over the weekend, George Soros gave an interview to the Daily Telegraph in which he described today’s oil prices as a bubble ready to pop. Most analysts pooh-pooh the role of speculation in today’s oil market, but some new evidence suggests that Soros may well be right.

My American Enterprise Institute colleague Desmond Lachman observes that institutional investors own and hold more than a quarter trillion dollars worth of oil today, up from virtually zero half a dozen years ago. If these positions were ever unwound they could exert an abrupt downward jolt to the price of oil.

The reality is, while many of us may feel like we’re working for gas money, at some point, America has to trade in its conspicuous consumption of oil and start making smart economic policy. Not just with encouraging things like public transit and high speed rail that decrease consumption, but in re-evaluate the “benefits” of living far from work.

As long as we’re dependent on oil (foreign or domestic) we’re going to be working for gas. Increasing domestic production wouldn’t make near as much difference as implementing incentives not to use so much gas- as my “Walk to work” tax credit idea would.

The Arabs are scratching their heads about this latest bump in prices- demand hasn’t grown, except amongst the speculators, and with a plunging dollar paying the oil producers less, we’re walking a fine line between staying a world economic power- and a third world nation when the rest of the world stops wanting anymore dollars.

Isn’t macro econ fun?

It’s time to take the casino out of Wall Street, before the games really cripple our country.

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3 Responses

  1. Walter June 21, 2008 / 5:11 pm
    Who cares who’s is to blame. What are we going to do about it. From my viewpoint, there are 2 or 3 options. Sell your car, buy a bike and take mass transit. Drive less or buy an electric car or a car powered by hydrogen. And option 3 is buy a pair of comfortable Nike’s and get ready for some walking. Since all of these options are out of the question for me, I decided to try and do something about it. While looking around, I stumbled across GasBankUSA, located at http://www.gasbankusa.com. The site talks about fixed price gasoline and locking in at a fixed price. An interesting concept and a little better than my magic 8 ball which continually tells me “try again later” everytime I ask it where are gas prices going OR will gas prices continue to rise. Looking through this site, it looks like a way to take control over something we had no control over in the past.
  2. Greg Hunter June 22, 2008 / 10:12 pm
    Well, well it is the speculators – Not, at least not anymore than any other commodity. People are investing in things that matter (wheat, oil, coffee, etc) while dropping investments in frankly things that do not – Big Houses and Big Cars.

    If one would like to study an analysis of the Soros discussion, travel to the site that has predicted this day for several years.

    We needed to work on this problem when Jimmy Carter identified it or at least post 911, when Peak Oil was already in evidence, but we went to war and kept shopping. Nice.

    demand hasn’t grown

    Now where did you pull that statistic out? What has not grown is production of “easy oil” and despite what is being said by the Saudis have not increased production in 5 years. The “easy oil” is gone or going much like there is no anthracite left in the coals fields the Oil that America refines is in more rapid decline than the “sour oil” that other countries are building refineries to process. The other problem with the production in the oil producing countries is that the producers are using more of their own oil internally instead of exporting the product. Saudi, Kuwait, Russia and Venezuela are part of this “problem” The other main problem for the US is that some of our largest suppliers are in terminal decline in production (THEY PEAKED). Mexico’s production has been dropping since 2005 and Venezuela for the past ten years.

    So America is just beginning to pay the price of not building a sustainable infrastructure and the choices that our illustrious leadership have put us in is very tenuous. War, population reduction, zero economic growth and limited opportunity for people going forward are things to look forward to in the future.

    There is nothing like oil and at 5.00 a gallon, it is still a bargain.

  3. David Esrati June 23, 2008 / 5:01 am

    Sorry, should have known Greg would catch it-
    “Demand hasn’t grown” enough to justify the price hikes we’ve seen…
    thanks.

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