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Nixonian Fallacy: Oil Futures and the Folly of Price Controls

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
June 30, 2008
Washington Post

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A few years back, when “subprime” generally referred to beef, economists used to congratulate themselves on their progress since the 1970s. Central banks had learned to tame inflation. Politicians had learned to appreciate the folly of price controls. Thanks to the economics profession, policymakers had grown wiser.

Well, inflation has returned. And politicians are out to control prices again, this time in futures markets.

You see this most clearly with oil prices. Barack Obama worries that “unregulated energy speculators may be distorting the market.” John McCain complains that “while a few reckless speculators are counting their paper profits, most Americans are coming up on the short end.” On Thursday a measure demanding a clampdown on oil trading passed the House 402 to 19.

So it’s time for a quick refresher: Richard Nixon’s early-1970s price controls were a disaster. Administering the controls on energy alone took an estimated 5 million man-hours per year and punished motorists with gas lines. Repeating this experiment by clamping down on oil trading is like burning your hand on a gas stove and then sitting on a barbecue.

Would-be Nixons argue that hedge funds and their ilk are piling into oil futures, driving prices above “reasonable” levels. They note that in 2000, speculators owned just over a third of the “paper oil” traded on the New York Mercantile Exchange but now own more than two-thirds. This buying pressure on paper oil is said to be pushing physical oil up. Stop the speculation, they say, and prices would revert to normal.

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