Calming Tensions With Iran Is the Real Solution on Oil
President Obama's proposal to enforce oil market regulations is irrelevant
April 20, 2012
The president is right; speculation does impact the price of gasoline. Unfortunately, he is wrong to think that there is anything that the government can do about it, or that his plan would lower the price of gasoline.
Efforts to reduce the price of oil by targeting "speculators" or "market manipulation" are doomed to fail because oil is a global market set by global changes in supply and demand. Speculation is a natural part of that price because of the uncertainties of future swings in the market. Speculators drive up the price of oil when there is fear of a tight market in the future, but can also push the price down when it looks like supply will exceed demand.
To ban all speculation would not only be counterproductive, it would be futile. Increased enforcement and action here in the U.S. is only likely to drive more trading overseas to major banking centers like London, Hong Kong, and Dubai. Americans would then be stuck paying a high price for oil without the additional transparency that Securities and Exchange Commission and Commodity Futures Trading Commission rules require.
Ultimately, the root cause of today's upward pressure on oil prices is not any sort of desire to manipulate markets or make unfair profits—it is the threat of another war in the Middle East. A conflict between Israel and Iran, possibly including the U.S., would put the 15 million barrels of oil per day that sails through the Strait of Hormuz at risk. Oil speculators are rightly placing a "risk premium" on world oil supplies because a closure of the Strait of Hormuz would catastrophically drive up the oil price.
If the president and his Republican opponents, both in Congress and on the campaign trail, really want to bring down the price of gasoline at the pump, we need to diplomatically resolve issues with Iran, not further ratchet up tensions. Other efforts, whether its President Obama's proposal to enforce oil market regulations or Republican efforts to promote greater U.S. oil production, will be irrelevant to gas prices.