An organization that calls itself “Stop Oil Speculation Now” put out a press release Friday, with the now-customary laundry list of demands. The bottom line is that it wants Congress to limit the number of contracts that individuals or groups can trade speculatively in the energy futures markets.
The organization never uses the initials of its adopted name. At any rate, I havenâ€™t yet come across a reference to SOSN. That is understandable. How does one pronounce SOSN? “Soused-in”?
But let’s get back to basics. The overall price of the goods and services produced by an economy (ignoring the small portion traded in barter) must equal the amount of money in circulation multiplied by the velocity at which the money is circulating. There isn’t a lot of room for velocity increase, so for the most part the overall level of prices is determined by the money supply, which in these days of fiat money is determined by central bankers. Inflation, in other words, isnâ€™t a cost-push problem. It’s a monetary problem.
Were the monetary problem resolved (no easy matter, surely, but SOSN isn’t proposing anything that would help there) then price increases in any one industry would result in price decreases elsewhere. The overall height of a see-saw doesnâ€™t rise just because one side of it rises. There is no â€ścost-pushâ€ť elevation of the whole see-saw!
SOSNâ€™s membership consists of businesses, and trade organizations for businesses, that use a lot of hydrocarbons. The Air Transport Association takes a leading role.
What is going on here, I suspect, is properly described as â€ślegislative arbitrage.â€ť If you knew what Congress was going to do tomorrow, you could make a good guess which industriesâ€™ assets would increase in value as a result, and which would decrease. So youâ€™d take a long position on the former and a short on the latter. Likewise: if you believe that the ATA will prevail in limiting speculation, and you believe that this in turn will reduce the price of hydrocarbons, you might well want to buy equity in U.S. airlines.
My own view is that speculation (which is not to be confused with manipulation) is part of the solution, not any part of the problem. If speculation and the markets in which it occurs result in increased prices for hydrocarbons â€“ well, that is a signal to which one should pay heed before buying equity in U.S. airlines. After all, when whales became scarce due to the success of the Captain Ahabs of the nineteenth century, lamp fuel became expensive. That, in turn, created the market incentives for Daniel Plainview and his real-life counterparts from Pennsylvania to Saudi Arabia. The markets may be trying to tell us that it is again time for such a shift.
The simple fact is that the oil for which Ahab was searching existed in only a finite quantity, and that the same is true of Plainview’s sort of oil.
Iâ€™m eager to join an organization that would call itself Stop Legislation Arbitrage Presently. That would have an acronym one could pronounce.