Contradictions of energy policy emerge so spontaneously these days in the US that it’s rare to have the chance to warn of one before it has fully developed and begun gorging itself on the national welfare.
Examples abound:
- Officials assert energy independence as a guiding principle of energy policy yet withdraw federal land from oil and gas exploration and propose special taxation of the dominant, domestically produced energy forms.
- Lawmakers and regulators claim to want to lower the carbon intensity of energy use yet threaten to impose redundant and inevitably obstructionist federal regulation on hydraulic fracturing, a technology that has unlocked vast potential of the hydrocarbon lightest in carbon, natural gas.
- Politicians promise “green jobs” yet refuse to acknowledge how the essential subsidies and other imposed inefficiencies corrode employment in more-productive sectors of the economy.
The list goes on. Contradictions like these arise when politicians push political agendas at the expense of national interests. Indebted to antioil environmentalists and promoters of uneconomic energy, politicians now in power don’t worry about the inefficiencies of manipulating markets. They use appeals to “independence” to do anything they wish, sensible or not, on energy. They want Americans to fear worst-case scenarios about climate change and the political instability of oil exporters—but not to worry about the costly futility of their remedies.
Trading culture
At the center of the upstart contradiction is a trading culture that has contributed in arguable degrees to extreme gyrations in the price of crude oil and to financial collapse in the US. The popular imagination, shaped as it is by media distortion and political opportunism, thus conjures twin scoundrels: “speculators” and Wall Street bankers. In response to one, the Commodity Futures Trading Commission is considering position limits on energy commodities for speculators. In response to the other, lawmakers have begun writing legislation to implement President Barack Obama’s plan to overhaul the financial system. The temptation in both cases will be to overreact, to assume problems result from too little regulation and to respond with too much.
Problems of regulation are nevertheless evident. Otherwise inexplicable oil price extremes recently have coincided with extraordinary movements of investment funds into and out of oil futures positions. More ominously, large maverick trades have influenced pricing, however briefly. In the latest reported instance, unauthorized activity by a PVM Oil Associates Ltd. trader on June 30 elevated futures prices unreasonably for a while.
More broadly, elaborate trading schemes based on obscure financial mechanisms masked credit hyperextension in the US and allowed a serious problem to become a global crisis. The failure of governance became only too obvious when regulators spent the first months of economic decline providing mistaken assurances that the meltdown could be confined to specific markets or was in other ways manageable. Now the few financial institutions that have been able to repay their federal bailout money are reporting big profits and reinstating the aristocratic bonus systems that many observers blame at least in part for the earlier, catastrophic excesses.
Political flammability in both cases raises chances for intrusive governance. In both cases, however, more regulation than before is in order. The trading business has become too sophisticated for its own good. Its lavish rewards for risk-taking too easily obscure systemic exposure to risk. Its lapses have global repercussions. It needs—carefully—to be changed.
Trader’s delight
Until constructive change is in place, though, a system defined by its failures of control should not be entrusted with a new market contrived by politics. Yet Congress is working feverishly to do just that with climate change legislation, which the House has passed and on which the Senate has begun work.
The cap-and-trade system at the core of that effort would be a trader’s delight. If passed, it would be abused—not by all traders but by scofflaws willing to bet the market on next quarter’s bonus. The system in present form can’t prevent that kind of mischief. Until it’s fixed, introduction of a cap-and-trade scheme would be the costliest and most irresponsible contradiction yet.
