by Bruce Krasting
So the president of the United States has ordered the Attorney General to go after the speculators who have been drive up the price of oil and therefore gas. What can I say about this? Does the President think the American people are stupid? No one is going to fall for this line of crap.
Up front, let me acknowledge my guilt in this matter. I’m a speculator. I try my best at it. Some of my best friends are speculators. Many of my readers are speculators. In one-way or the other we are all speculators. Those that don’t think they speculate are actually speculators.
My local oil delivery company let’s me play in the big casino. I bought an option at a fixed price for 5,000 gallons of heating oil. The premium for the option was 20 cents a gallon. So I paid them $1,000 cash. That was sort of gambling money. If the cash price were to fall I’d get the lower price. If it rises, my cost is locked in. Last I looked I was 70 cents in the money. My option cost was 20 cents so I’m “up” 50 cents on 5,000. That’s $2,500 so I’m feeling good on this spec.
It’s not hard to find ways to make money in a rising energy market. I don’t have the balls to trade Brent futures. I overweight energy names in the global stock market. It’s worked pretty well.
I have some investments with funds that do trade energy futures (a “macro” directional fund). They’ve been doing great. I have nothing to do with their market bets, but since I (and many others) provide the equity I have to take some responsibility for their actions.
So if the AG is looking for someone who’s hands are “dirty”, well, I guess I’m on the list. If he did look me up, I would tell him that it was the Ben Bernanke that told me to do it. If the Justice Department wants to lean on me they also have to lean on the Fed.
If the AG, Eric Holder, bothered to look it wouldn’t be too hard for him to see that the blame for all this speculating can be laid at the feet of the Fed. Mr. Holder will not need a PhD in Economics to make this conclusion. All he has to do is read the FAQ’s on the home page of the Federal Reserve. From the FAQ (link):
Monetary policy also has an important influence on inflation. When the federal funds rate is reduced, the resulting stronger demand tends to push wages and other costs higher.
Ah! This is easy. When the Federal Funds rate is low, inflation rises. The price of goods rise! So what is the policy on Federal Funds? Also easy. It has been ZERO for the past two and a half years! What’s the outlook for ZERO interest rates being maintained? That’s easy too!! The Fed tells us every six weeks or so:
Interest rates will be kept exceptionally low for an extended period of time.
So the Fed is telling us in its FAQ that they want goods to go up in price. Now all they have to do is push me into action as a speculator. More from the FAQ:
policy actions can influence expectations about how the economy will perform in the future, including expectations for prices
To me, this is pretty clear, hopefully Holder will agree. The Fed has succeeded in its effort to change my expectations of the future of my energy costs. With my expectations being influenced, it is only natural that I would react. When I pay $1,000 to lock in a price to heat my home it is exactly what Bernanke would want me to do. I’m the best evidence that he has that his policy is “working”.
I think most Americans understand that we import half our oil and that the value of the dollar is a big factor in the price we pay for crude. A weak dollar causes the price of oil to rise. So what's the Fed’s policy on the dollar? Once more from the FAQ:
movements in the exchange value of the dollar represent an important consideration for monetary policy--such movements exert influence on U.S. economic activity and prices
Bingo! The desired consequence of the Fed’s monetary policy is to devalue the dollar in order to increase economic activity. But that same action also results in higher imported prices for crude. The only conclusion that I can come to is that higher oil prices are the desired consequence of Fed policy. Bernanke has brought me to the water and strongly suggested I should drink some. It's all spelled out in the FAQs. Its not hidden in some obscure language. Shame on me (and the President) if I had ignored such an obvious outcome.
The President and the AG need to determine why folks like me are speculating rather than just blaming me for high prices. When they look at the facts they can’t help but see that it is Bernanke that’s behind all that high priced gas. The speculators like me are just the mechanism that Bernanke uses to achieve his ends.
