22 April 2011

Price gougers and speculators are the new witches

I actually wrote the previous post mentioning the speciousness of gouging/predatory pricing accusations last night but never got around to publishing it. This morning I woke up to this story about Obama and Holder demagoguing high gas prices:
Chicago Sun-Times | Julie Pace | Obama aims to ‘root out’ cause of high gas prices

RENO, Nev. — President Obama said Thursday that the Justice Department will try to “root out” cases of fraud or manipulation in oil markets, even as Attorney General Eric Holder suggested a variety of legal reasons may be behind gasoline’s surge to $4 a gallon.

“We are going to make sure that no one is taking advantage of the American people for their own short-term gain,” Obama said at a town-hall style meeting at a renewable energy plant in Reno. [...]

Obama, decrying such levels as yet another hardship “at a time when things were already pretty tough,” said Holder was forming the Financial Fraud Enforcement Working Group. The task force will focus some of its investigation on “the role of traders and speculators” in the oil-price surge, Obama said. The group will include several Cabinet department officials, federal regulators and the National Association of Attorneys General.

In Washington, Holder said he would press ahead with the investigation, even though he did not cite any current evidence of intentional manipulation of oil and gas prices or fraud.
This makes as much sense as saying that since your children are running fevers you will be launching a preemptive, evidence-less investigation into the thermometer manufacturers to make sure they aren't manipulating temperatures for their own selfish, short-term gains.

And by the way, you also hold the power of life and death over the thermometer industry.  But not big deal, it's just a fact-finding investigation.  You're totally not trying to intimidate or scapegoat anyone.

Holder did generously admit the following though:
“Based upon our work and research to date, it is evident that there are regional differences in gasoline prices, as well as differences in the statutory and other legal tools at the government’s disposal,” Holder said in a memo accompanying a statement announcing the task force. “It is also clear that there are lawful reasons for increases in gas prices, given supply and demand.”
So he has apparently re-discovered some bits of the Arrow-Debreu model regarding commodities in different places needing to be treated independently, and also tacitly acknowledges that on occasion markets may behave the way they do even without sinister Robber Barons pulling all the strings. How gracious of him.

How much previous "work and research" did it take them to figure this out?  Anyone who has taken a road trip could have told him that.  Anyone who has ever had a conversation about gas prices could have told him that.  Anyone who knows that refineries are not uniformly distributed across the country and that it takes effort to transport liquids could have told him that.  Anyone who knows the country is chopped up into different regions in the regulations governing refining and distribution of petroleum products could have told him that.

Matt Welch sums this up well:
Here's your federal energy policy: Do nothing significant to increase domestic supply, create mandates to have XX% of future supply come from magical green leprechauns, then when prices (surprise!) go up, you know what to do: Blame the "speculators".
If you don't get why I find this so absurd and ignorant listen to this EconTalk about price gouging with Mike Munger, and read this very comprehensive Coyote Blog post about oil speculation.

Let's be clear about one other thing: "speculation" just means making a bet about what the price of something will be in the future. When you bought your house, or signed a multi-month lease, or waited to buy a car, or contributed some money to your 401k plan, or sold your extra tickets to a football game, or bought your ham for Easter dinner a week ago, or bought swimsuits at then end of last summer YOU WERE SPECULATING.

Prices are dynamic across time. Buy cheap; sell dear. We all do it. There's nothing malevolent about it. Quite the contrary, it does everyone else a favor by shifting consumption of goods from when they are predicted to be (relatively) scarce to when they are thought to be (relatively) abundant.

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