All the talk on both sides of the Atlantic Ocean about the need to curb speculators in oil is part of a larger trend we’ve seen since the onset of the credit crisis and this deep recession: governments want to control more aspects of economies and markets.
The elected leaders of France and the United Kingdom teamed up on an op-ed piece in The Wall Street Journal today to decry oil price volatility. The argument of Gordon Brown and Nicolas Sarkozy is that oil is too important to be left to the short-term profit seekers who inhabit markets.
U.S. regulators and Congressmen also rail against oil “speculators” and want curbs put in on trading.
We’ve seen all this before. You can make the argument that any traded asset, from cotton to Treasurys, is too important in the real world to let prices be subject to “speculation.” But without “speculation” you don’t have liquidity and you don’t have the ability of consumers and producers of commodities to hedge against future price changes. Curbing oil trade would be the start of a dangerous and slippery slope. Too often, any sort of price control leads to supply shortages as incentives are removed to produce.
This urge to control also makes the implicit assumption that the imperfect direction of elected politicians and unelected regulators acting in what they view as the public interest is better than the imperfect confluence of private investors and interested companies all trading in their own self interest. In that choice of imperfections, I’ll still back the wisdom of crowds, with each actor seeking advantage and profit, as a mechanism to determine prices, even of crucial commodities such as oil.