What's Suddenly Gone Wrong with the Oil Market? Part 2:
Reaction to the Brown-Sarkozy proposal
11 Jul 2009 in Regulatory Economics, Regulatory Policy
Earlier this week, UK Prime Minister Gordon Brown and French President Nicolas Sarkozy proposed the establishment of a global regulatory regime to "stabilize" oil prices. We deconstructed the proposal to show that the Brown-Sarkozy proposal seemed to be aimed at keeping oil prices high, not necessarily stabilizing them:
The potential scope and scale of this proposed "government supervision" appear to be quite large. Brown and Sarkozy are seeking a global regulatory regime that would "reduce damaging speculation" and "serve the interests of orderly and adequate investment in future supplies." The commentary provides no insight concerning what social benefits are obtained by "orderliness," or how much speculation is "damaging." Indeed, Brown and Sarkozy follow a well worn path by criticizing "speculators" for driving prices up (or, in this case, down). Every futures contract has both a willing buyer and a willing seller.
Futures markets serve an important public purpose--they provide price discovery--and, ironically for Brown and Sarkozy's argument, they tend to reduce price volatility. Regulatory restrictions on speculation should be expected to increase uncertainty, and thus exacerbate volatility. But as an analysis of the Brown-Sarkozy commentary shows, price volatility is not the problem they are actually worried about. They are trying to figure out how to use regulation to keep prices high and make it seem as if this is a good thing for consumers.
Early reactions to the proposal suggest it has a long way to go to be persuasive.
Wall Street Journal columnist Liam Denning says "politicians are on the warpath," but Denning seems also to have doubts about what this "war" is really about.
The idea is beguiling and goes back at least as far as John Maynard Keynes' writings. It's also been tried before with commodities like tin, rubber and cocoa. None of those agreements lasted.
It's also been tried in the United States, and at least from the perspective of incumbent producers it's been highly successful. The U.S. Department of Agriculture's Agricutural Marketing Service operates marketing orders and similar programs that regulate the supply of a host of commodities including cotton; dairy; fruit, vegetable, and specialty crops; livestock and seeds; poultry and eggs; and tobacco. Other agricultural commodities are regulated through import quotas, planting restrictions, and similar devices, many of which date from the 1930s. Even the supply of perishable agricultural products is regulated.
"Stabilization" of the market is always the stated justification for these programs, but their practical effects are to keep consumer prices high by limiting supply and preventing competition, such as by new entrants. A set of 10 milk marketing orders covers most of the United States, and more than a dozen fruit, vegetable, and specialty crops are covered. Typically, marketing orders are justified on the ground that "orderly and efficient marketing" is needed.
On June 8, 2009, USDA received a proposal for a national marketing agreement for lettuce, spinach and other leafy greens. Times have changed since 1937, when Congress first gave USDA the authority to "stabilize" agricultural markets. The "leafy greens" proposal doesn't use the traditional language noted above; now, it's all about food safety:
Our interest in pursuing an agreement is based on our belief that such a program would provide a clear and logical framework for signatory handlers to improve the quality of U.S. and imported leafy green products. A national leafy greens marketing agreement would empower industry representatives to engage proactively with USDA, the US Food and Drug Administration (FDA), and others in the development of production and handling practices (best practices, or metrics).
The proponents -- 11 trade associations of firms that produce or market leafy greens -- do admit that their real purpose is to "support the marketability of fresh leafy green vegetables and overall stability of the industry." As required by this 1937 law, USDA's job is to determine whether a marketing order is in the interest of producers, not consumers.
A similar bias appears to be built in to the Brown-Sarkozy proposal to "stabilize" crude oil prices. There is no indication that they are concerned about consumer prices, except that they may be too low to make certain "green" technologies appear to be cost-effective. Denning also notes that Brown and Sarkozy are selective in their opprobrium for "speculators":
Focusing on setting a price range for oil misses a central issue in the market. When housing markets lost touch with "fundamentals," critics rightly pointed to the underlying problem: easy credit. Politicians certainly didn't blame "speculators" -- i.e., homeowners.
Right now, loose monetary policy and quantitative easing persuades many to buy commodities as a hedge against a dollar crisis down the road. Governments are no doubt aware that policies aimed at jump-starting weak economies risk juicing raw materials costs and a bout of stagflation. This latest salvo against oil, another expression of a newfound boldness against "markets," smacks of desperation.
Almonds
Apricots
Avocados
Cherries [Sweet] [Tart]
Citrus [Florida] [Texas]
Cranberries
Dates
Grapes
Hazelnuts
Kiwifruit
Nectarines
Olives
Onions [Idaho-E. Oregon] [S. Texas] [Vidalia] [Walla Walla]
Peaches
Pears [Oregon-Washington]
Pistachios
Plums/Prunes [California] [Washington]
Potatoes [Idaho-E. Oregon] [Washington] [Oregon-California] [Colorado] [Virginia-North Carolina]
Raisins
Spearmint Oil
Tomatoes
Walnuts
