Tuesday, June 17, 2008

McCain Briefly Pretends to Understand Economics

Finally John McCain has said something I can support. It is definitely time to begin drilling for oil off the coasts. If China and Cuba can do it, I don't see why we can't. Senator McCain plans to say this in a speech today:

"we have untapped oil reserves of at least 21 billion barrels in the United States. But a broad federal moratorium stands in the way of energy exploration and production. . . . It is time for the federal government to lift these restrictions."

Great to hear him seemingly support market driven solutions to this problem, but sadly, it couldn't last. Lest conservatives actually begin to believe he had a sane grasp on the concepts of economics and the workings of the market, he also plans to say this about oil speculation:

"Investigation is underway to root out this kind of reckless wagering, unrelated to any kind of productive commerce, because it can distort the market, drive prices beyond rational limits, and put the investments and pensions of millions of Americans at risk,"

Every time I try to grab his olive branch, he hits me in the face with the tree. Let's take a look and the Senator's complete ineptitude when it comes to the principles of a free(ish) market. This "reckless wagering" is actually a risk taken by speculators on the future price of oil. Not only is this done perfectly legally with all sorts of other commodities, it helps protect supply. Why do prices go up? High demand or low supply, in this situation a combination of both. When someone speculates on a barrel of oil, they are betting that the price will be higher in the future. They are betting that demand will be higher and/or the supply will be lower. At a future time, they plan on introducing the oil they have purchased back into the market when prices are higher. While this may drive up price now, it drives down price later. Contrary to the Senator's statements, this is absolutely "productive commerce". It doesn't "distort the market", it protects supply by holding reserves until they are most needed. There are no "rational limits" in a free market, there are the laws of supply and demand. They may be harsh, but they work for a reason, and when the government tries to control them, the problem is exacerbated. The good Senator is right to advocate increasing the supply, (as soon as the government even announces that restrictions on drilling will be lifted speculators will begin hedging their bets and selling, thus increasing supply and driving down cost) but punishing speculators will only hurt America in the long run.

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