Rush Limbaugh is Wrong

by Paul R. Hollrah

In his June 27 open-line-Friday rant, our friend Rush Limbaugh unburdened himself at length on the subject of high energy prices.  Most of what he said was true.  He spoke of the hardships that high gasoline prices create for working Americans.  He spoke of how the United States needs to provide as much of our own energy resources as possible.  And he spoke of how Democrats are beating the bushes, looking to demonize someone else, anyone else, for their own culpability.

When Bill Clinton perjured himself before a federal judge and was impeached for his crime, Democrats didn’t blame Clinton for having an Oval Office affair with a young intern and lying about it under oath, they blamed House Republicans and the special prosecutor, Ken Starr. 

When thousands of black people in New Orleans struggled to stay alive on their rooftops, on highway overpasses, and in the Supedome, Democrats didn’t blame an incompetent governor or a corrupt Democrat mayor, they blamed George W. Bush and his FEMA Administrator.

And when the world price of crude oil went to $120 or $125 a barrel and gasoline and diesel fuel prices went to more than $3.00 a gallon, Democrats didn’t blame their radical environmentalist friends, they paraded a panel of oil company executives before the TV cameras, threatening to nationalize the oil industry and hoping that their stage-managed attacks would convince the American people that it was the oil companies who were to blame. 

It didn’t work.  The American people may not know much about energy economics, but they’re not stupid.  They know, intuitively, that the oil companies are highly efficient and highly competitive, and that they bring a quality product to market at a reasonable price while providing secure jobs for their employees and a reasonable return for their investors.

As the oil executives boarded their limos to head for the airport, congressional Democrats were already huddled like trapped rats in corners of the Capitol, trying to figure out who their next scapegoat might be.  Then, voila!  They were struck by an idea.  There is a group of people who are even better targets for demonization than the oil companies.  They work on Wall Street, they earn huge annual salaries, they dress in expensive suits, they fly in private jets, they live on large estates in WestchesterCounty and The Hamptons, and they do all that without ever getting their hands dirty.  They are the speculators… the people who trade in commodities futures.

It was then that Rush, applying basic but faulty conservative logic, got it all wrong.

First he attempted to explain the workings of the commodities futures market in simple layman’s terms… terms that people in Rio Linda or Palm Beach might understand.  To paraphrase, he said that the futures market is a zero-sum game.  When someone buys a futures contract at a certain price and makes a few dollars in the process… someone else loses an equal amount of money.

Then, when he sensed his listeners’ eyes were glazing over, he attempted a sports metaphor.  He explained that, when the odds-makers in Las Vegas give the Pittsburgh Steelers six points over the Oakland Raiders, and the Steelers win by only five points, some people win and some people lose… but it has no effect on the outcome of the game. 

What Rush was trying to get across is that, where commodities are concerned, some people bet that prices will be higher in the future and some people bet that prices will fall.  His theory is that they’re all “side bets” and that they have no impact on prices.

What he suggests is true of almost every commodity… except petroleum.  If weather forecasters predict a long hot summer, with very little rain, those who trade in corn, wheat, or soybean futures will logically bet that the per-bushel prices will be higher in the future because crops will suffer from the drought conditions.  On the other hand, if the rains come and yields are high, prices will fall and those who were betting on high prices will take a beating.

The point is, in essentially every commodity except petroleum, there is a chance that prices in the future will be lower than today because of unforeseen circumstances.  The same is not true of petroleum.  The speculators on Wall Street understand that the petroleum supply curve falls just below the demand curve and that there is almost nothing in the foreseeable future that will cause the supply curve to rise above the demand curve. 

In short, it is almost impossible to lose money in the futures market by betting that oil is going to be more expensive.  With demand guaranteed to exceed supply, speculators are not about to sell at a loss.  Why should they?  It’s never a question of whether they will make money… it’s only a question of how much.

In October 1978, Hillary Clinton, an inexperienced investor with an annual income of $25,000, the wife of the Governor of Arkansas, opened a commodity futures account with a deposit of $1,000.  Her first trade was the short sale of ten live-cattle contracts at a price of 57.55 cents a pound… in other words, a commitment to deliver in December of that year 400,000 pounds of cattle with a market value of $230,200.  One day later, she bought the contracts back at a price of 56.10 cents a pound, pocketing a one-day profit of $5,300 on a $1,000 investment. 

Not even Hillary Clinton could turn $1,000 into $100,000 in ten months selling short in today’s petroleum futures market.  She would lose her panties in no time, and Bill’s as well. 

Rush must have had all of his brains tied behind his back.  And as for the speculators?  Off with their heads.