[Pen-l] Dean Baker on oil speculation

["Jim Devine" <jdevine03@xxxxxxxxx>]

Dean Baker / Beat the Press

June 30, 2008

Mallaby's Failed Effort to Scare on Oil Price Regulation

We regularly see efforts to push favored public policies by trotting
out really big numbers that are supposed to scare people. For example,
there is a whole contingent running around Washington who talk about
the country's $75 trillion long-term deficit as a way to push cuts to
Social Security. The real story is that the bulk of the projected
shortfall (about 6 percent of future income) is attributable to
projections of exploding health care costs and has nothing to do with
Social Security.

Washington Post gives us another example of would be scary numbers
when he tries to warn off regulation of oil prices by referring back
to the price controls of the Nixon presidency. Mallaby tells readers
that "administering the controls on energy alone took an estimated 5
million man-hours per year."

Are you scared. Let's see, most workers put in 2000 hours a year, so
this means that it took 2,500 people to administer energy prices under
Nixon. I had never given this one too much thought, but I probably
would have guessed something considerably higher. After all, energy
accounted for well over 5 percent of GDP and was the most problematic
sector of the economy in terms of pushing prices higher. So,
containing prices in energy required 2,500 people -- the same number
who might occupy a small town in Iraq --that one doesn't scare me. I
would not argue for oil price controls (I agree with many of Mallaby's
points), but I would caution against being scared away by seemingly
big numbers.

Undoubtedly, most of the increase in oil prices is real. Is some of it
due to speculation? It seems almost impossible for me to believe it
isn't. There are sharp movements in oil and other commodities. These
sharp movements are not just responses to changes in underlying supply
demand. Inevitably speculation exaggerates these moves.

In response to the question of where is the oil being stored. First,
with a product with highly inelastic [short-run] demand [and supply --
JD], we don't need very much oil to be pulled off the market to affect
the price. But the obvious place that the oil would be stored is in
the ground. Do we know exactly how much oil would be pumped at $140 a
barrel, if producers anticipated it would rise no higher? Obviously
the rate of current production will depend on future price
expectations of price. That doesn't make for a grand conspiracy of
speculators, but it does mean that the expectation of higher prices in
the future can lead to higher prices in the present.

This doesn't mean we should have price controls or ban speculation. My
policy recommendations would be to tax the speculation [a Tobin tax].
We tax casino gambling, why not tax gambling in financial assets? We
could easily raise over $150 billion a year on a comprehensive set of
financial transactions taxes. We could even use the money to pay for a
cut middle class income taxes.

For oil, how about a windfall profit tax? We can use the money to pay
for tax cuts for energy conserving home improvement. Will that reduce
the amount of investment in new drilling for oil? Probably, but we can
almost certainly do more to influence the energy market in the future
through conservation.

--Dean Baker

-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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