The surging populist sentiment to severely limit trading in crude oil futures is gaining momentum. (For the record: I don't trade crude oil futures. There is no ax to grind here.) There is an excellent article on the subject today by John Fount on TheStreet.com. Here is a link to his article:
Does No One Remember the Pain of the '70's?
It turns out that we have been down this road before, during which high gas prices encouraged a government -- one Republican, the other Democrat -- to try to limit fuel costs by intervening into the financial markets. Fuel shortages, long lines and much higher gas prices were the result.
As a teenager, one day I was driving home from an evening with my parents and grandparents in my grandfather's car. I don't recall the event. My grandfather was a doctor. He had turned the radio on, and the news came on. The news mentioned that because of tight fuel supplies and price controls, rationing was going to be imposed upon drivers at the gas pump. We all laughed and mocked at the idea that gasoline would be rationed. As we pulled off the highway exit near home, my grandfather pulled into a gas station. As we pulled up to the nearest pump, a service station attendant came out. He approached the car and told us that we would only be permitted to pump 8 gallons of gasoline. We were all shocked. Needless to say, the sentiment in the car changed in a moment as reality suddenly hit us all in the stomach. Fortunately, since my grandfather was an MD, after showing identification, he was permitted to fill his gas tank.
As a teenager, one day I was driving home from an evening with my parents and grandparents in my grandfather's car. I don't recall the event. My grandfather was a doctor. He had turned the radio on, and the news came on. The news mentioned that because of tight fuel supplies and price controls, rationing was going to be imposed upon drivers at the gas pump. We all laughed and mocked at the idea that gasoline would be rationed. As we pulled off the highway exit near home, my grandfather pulled into a gas station. As we pulled up to the nearest pump, a service station attendant came out. He approached the car and told us that we would only be permitted to pump 8 gallons of gasoline. We were all shocked. Needless to say, the sentiment in the car changed in a moment as reality suddenly hit us all in the stomach. Fortunately, since my grandfather was an MD, after showing identification, he was permitted to fill his gas tank.
It seems that the only solution that we know will work to bring down oil prices is the only one that Congress is determined not to use -- exploring for oil. Instead, Congress yesterday passed a mandate upon the CFTC to restrict trading in oil futures. These disruptions always have unexpected consequences, and those consequences are almost always detrimental. The proposed supposed cure is even worse than the disease. This will certainly disrupt prices -- perhaps even temporarily lower them -- for a time. (Operative word -- temporarily.) As the futures market seeks to adjust, turmoil in the markets will be the result.
As this disruption in the financial markets occurs, gradually the adjustment will take place. It will punish the bad policies that sought to constrain the free flow of capital and resources, thus resulting in much higher oil prices, long lines at gas pumps (as oil flows to places where it is welcome at current market prices, and flows away from countries -- like the U.S. -- where it isn't welcome), capital flight away from the financial markets of the United States, and a substantially lower Dollar (capital flight devalues the currency of the country it is fleeing from).
This capital flight alone is tremendously significant, because it will ignite more inflation, and it has the potential to ignite hyperinflation. I remember seeing the consequences of capital flight while living in South American countries as a young man. Most Americans were blissfully enjoying the Martin Luther King holiday when a $50 billion liquidation of a rogue trader at Societe Generale caused the Dow stock index futures to drop 570 points. Fortunately, the markets recovered overnight, and Americans were largely oblivious to it. What would be the impact on the Dollar and our capital markets of capital flight of $2-3 trillion (with a "t"), as investors send their money to markets where it is more welcome?
Many similar types of policies have been imposed on the Venezuelan people by Marxist President Hugo Chavez, and food shortages of even basic commodities like eggs, bread, and milk, have been the result. The same policies being proposed now by both presidential candidates Obama and McCain will start this new round of calamitous consequences, if codified into policy.
These policies have been tried before during both Republican and Democrat administrations during the 1970's, but no one seems to be willing to learn the lessons of history. Our egotistical pride blinds us to the wisdom of times past.
As this disruption in the financial markets occurs, gradually the adjustment will take place. It will punish the bad policies that sought to constrain the free flow of capital and resources, thus resulting in much higher oil prices, long lines at gas pumps (as oil flows to places where it is welcome at current market prices, and flows away from countries -- like the U.S. -- where it isn't welcome), capital flight away from the financial markets of the United States, and a substantially lower Dollar (capital flight devalues the currency of the country it is fleeing from).
This capital flight alone is tremendously significant, because it will ignite more inflation, and it has the potential to ignite hyperinflation. I remember seeing the consequences of capital flight while living in South American countries as a young man. Most Americans were blissfully enjoying the Martin Luther King holiday when a $50 billion liquidation of a rogue trader at Societe Generale caused the Dow stock index futures to drop 570 points. Fortunately, the markets recovered overnight, and Americans were largely oblivious to it. What would be the impact on the Dollar and our capital markets of capital flight of $2-3 trillion (with a "t"), as investors send their money to markets where it is more welcome?
Many similar types of policies have been imposed on the Venezuelan people by Marxist President Hugo Chavez, and food shortages of even basic commodities like eggs, bread, and milk, have been the result. The same policies being proposed now by both presidential candidates Obama and McCain will start this new round of calamitous consequences, if codified into policy.
These policies have been tried before during both Republican and Democrat administrations during the 1970's, but no one seems to be willing to learn the lessons of history. Our egotistical pride blinds us to the wisdom of times past.
There is another excellent article in the Wall Street Journal today by famed energy expert Martin Feldstein on how we can lower the price of oil almost immediately. It can be found here:
We Can Lower Oil Prices Now
Feldstein mentions two possible remedies that would help to lower oil prices immediately. Both would be better than one or the other. But the politicians don't appear to be growing any new spines in the near future.
Those who are unwilling to learn the lessons of history are doomed to repeat them. It seems that we are determined to learn our lessons form the school of hard knocks instead. It will be painful medicine. Very painful, indeed!
Prepare for long lines at the pump and very costly crude! It's soon coming to a gas pump near you!
