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Will Oil Speculators Take A Spill?

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Congress tries to pin blame on free marketeers.

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Yikes! Evil oil speculators are to blame for skyrocketing oil prices and Congress (or maybe Inspector Clouseau) will get to the bottom of it - pronto.

This is election year nonsense foisted on folks who are too busy paying the bills and getting the kids off to school to pay much attention to the workings of the futures market.

You expect this kind of flapdoodle from Democrats, who are often hostile to markets. But Republican John McCain, who called for a "thorough and complete investigation of oil speculators," showed a better understanding of the fine art of redundancy than insight into how the market works.

Our beloved elected officials seem to have forgotten that market prices can move up or down. Investors -- oops, I mean evil, nasty, foul speculators -- can lose money either way if they make the wrong bet.

The troglodytes who Congress seeks to unmask as the rapacious rapists of innocent suburban checkbooks can plunk down $10 or so on a $100 bet on oil. Call it, oh, margin buying. But slimy speculators know that if they bet wrong, they're on the hook for the full $100 - not just the small amount they threw on the table. Talk about just punishment.

Some politicians further note that these sniveling speculators don't even take possession of the oil. Well, there are two reasons for this:

1) They don't have big enough storage tanks under their frou-frou canopy beds at their sinfully lavish estates in Greenwich, Connecticut.

2) They sell the contract before it expires to refiners and distributors who -- hold on to your socks -- undertake the delivery of the oil.

Come to think of it, that's why it's called a "futures market."

Oil is a commodity traded worldwide. Might the simple student ask how traders in New York can manipulate prices around the world? If the price goes up next month, refiners might increase current inventories - and that would drive prices down in the short-term.
Maybe the explosion in oil prices has something to do with burgeoning worldwide demand, especially in China and India, and a refusal by politicians to allow exploration offshore as well as in Alaska's Arctic National Wildlife Refuge. There's also increased demand for petrochemicals and electric power. Meanwhile, crude oil shipments are uneven at best from places like Nigeria, Venezuela, Russia and even Mexico. And nothing is ever simple in the Middle East.

However, the current price of oil may make it profitable to develop the shale in the Rocky Mountain states. Some say there's more oil in American shale than under Saudi Arabia's sand. Just don't bet on politicians getting out of the way.

Democratic Representative Maurice Hinchey of New York recently proposed a government takeover of the nation's refineries.

"Should the people of the United States own refineries?" Hinchey said. "Maybe so. Frankly, I think that's a good idea. Then we could control the amount of refined product much more capably that gets out on the market."

The key word here is "control."

Never mind that Exxon Mobil (XOM), Chevron (CVX), Conoco (COP) and BP (BP) know their stuff and most Congressmen have never run anything bigger than a lemonade stand.

It's just a lot simpler to kick those nasty speculators down the stairs, especially during an election year when politicians put their immediate job prospects ahead of the nation's long-term energy needs.

There's only one solution: Inspector Clouseau for president.
No positions in stocks mentioned.
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