Every crisis needs a culprit

Michael Masters was quite the star on Capitol Hill today as he testified before the Subcommittee on Oversight and Investigations, a group that is currently tasked with delving into the question of what role "speculation" is playing in soaring energy prices.

With just a little prodding from elected officials, he went so far as to say that, if his recommendations are turned into legislation, the price of gasoline will drop by 50 percent within a month.

Who could have possibly imagined that solving the near-term global energy crisis could be that simple?
He had lots of company on the panel of experts, all of whom were singing pretty much the same tune - just get rid of the speculators and oil will drop to $65 or $70 a barrel and all will be right again in the world.

The most interesting parts of the Masters testimony were the repeated references to "speculators" disrupting the "price discovery process" between producers and consumers, a contention that is being hear quite often in the "hang the speculators" camp.

While there is a case to be made for commodities futures markets not being intended and perhaps not capable of handling the amount of money that seems to desperately want to go there these days, the fact that so much money desperately wants to go there these days remains the fundamental problem that no one wants to talk about.

Maybe the right price is being discovered as part of this process.

There are occasional references to the weaker dollar causing higher energy prices, which are then routinely dismissed since a 30 percent decline in the dollar couldn't possibly cause the price of oil to double or triple.

That argument ignores the fact that all paper money is declining in value.

And then of course there's the growing demand from Asia to go along with flat global oil production for the last few years. But these explanations don't seem to satisfy elected officials who view themselves as problem solvers.

Just once it would be nice to hear someone say to Congress, "There's just so damn much paper money in the world today, most of it in the form of U.S. Dollars, that people feel they have to do something to protect themselves from its declining value. If the government would be a little more honest about inflation and if you could get a reasonable rate of return on your money elsewhere, then maybe pension funds wouldn't be so keen on buying oil futures".

Interestingly, the Commodities Futures Trading Commission noted in a fact sheet that "speculative positions have not been increasing during the past year". Some variation of this statement has been heard a number of times in recent weeks, though no one seems to want to listen to it.

The "hang the speculators" angle and the chants of "close the Enron loophole" have drowned out those arguing that the doubling of the oil price over the last nine months can't reasonably be blamed on "index speculators", then name applied by Mr. Masters to pension funds that invest based on well-known commodity indexes.

According to this Bloomberg report, analysts at Sanford C. Bernstein noted in a written report to the committee "Every crisis needs a culprit. Active speculation is a catalyst for market movements, not an underlying cause.''

Wouldn't it be embarrassing for both Congress and Michael Masters if all the speculators were banned from energy markets and the oil price just continued to go higher?