Liberals in Congress are desperate to head off the growing consensus for increased domestic oil production. Trying to convince her fellow Democrats not to cave in and allow oil exploration and production off the coast of California, Sen. Barbara Boxer (D-NY) explained: “This is our ethanol.”
As persuasive as that argument is, liberals are desperate to pass anything that they can use to try and trick the American people into thinking they want to reduce gas prices. One bill that has passed the House and is heading to the floor of the Senate directs the Commodity Futures Trading Corporation (CFTC): “to utilize all its authority, including its emergency powers, to curb immediately the role of excessive speculation in any contract market … that is causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for energy commodities.”
Heritage fellow JD Foster details why this approach is fundamentally flawed:
This legislation would make sense under some circumstances, none of which are present. For example, one would have to distinguish between excessive speculation and non-excessive speculation and between unwarranted changes in prices and warranted changes in price. In both cases, all one can wish the CFTC is “good luck.”
Where the legislation best demonstrates its flawed approach is in the presumption that any and all relevant and “excessive” speculation is occurring in markets within the jurisdiction of the CFTC. Congress should be aware that futures markets are part of the global financial system and that this trading activity can and does occur worldwide. So any limitation on speculative activity the CFTC might attempt to enforce would simply mean the activity would move offshore, helping to build up foreign capital markets to compete more effectively with U.S. markets.
Foster also notes that the Democrats evil “speculator” approach to lowering energy prices has been rejected by a wide consensus of thinkers including Paul Krugman, Robert Samuelson, the editors of The Economist, Sebastian Mallaby, and The New Yorker’s James Surowiecki.
Congress must recognize that speculators play a vital role in the operation of financial markets and that financial markets are now fully global in scope, so efforts to restrict speculation will succeed in the United States only because the activity will shift entirely abroad. It should focus on improving the stability and strength of U.S. markets by, for example, reducing excessive regulation rather than destabilizing the markets with imprecise new regulations that would render U.S. financial markets even less competitive.