While Barr’s fundraising is far behind the tens of millions raised by the Ron Paul campaign last fall, how has Bob Barr’s fundraising been relative to other Libertarian Party presidential candidates?

The 1996 Harry Browne Presidential campaign raised $1.4 million.    They began raising money in 1994.     While they raised only $41,000 that first year, in 1995, they raised almost $500,000.   On average, they raised $58,000 each month.

During the year of the 1996 election, they raised $900,000 or $82,000 per month.  Much of this money was raised between August and November.  During the last four months of the campaign, they raised $595,000.  This was  66% of the funds raised in 1996 and 41% of the total funds raised by the campaign.  During the last four months, they averaged $149,000 each month.

During the period of March through July, the 1996 Browne campaign raised $274,000.    The 1996 campaign raised 2.17 times as much in the last 4 months of the campaign as they raised between March and July.

If the Barr campaign raises 66% of its total funds during the last four months of the campaign, the total raised would be about $1.3 million.   (If 41% of the total funds are raised during the that period, it would be just over one million dollars.)   If the ratio of the funds raised in the final four months to those raised during the five months the Barr campaign has operated is the same as that for the 1996 campaign, then the Barr campaign would raise $1.3 million more, for a total of $1.9 million.

The 2000 Browne campaign raised $2.4 million.  They raised money from 1997 through 2000, on average, $53,000 each month.  In 1997, they raised only $79,000.  In 1998, they raised more, $267,000.    In 1999, they raised $550,000. 

And finally, in 2000, the year of the election, the Browne campaign raised $1.5 million, or $140,000 per  month.  Nearly one million of those funds, $933,000, were raised during the last four months of the campaign, from August to November.   That is 60% of the funds raised during the final year and 38% of the total funds raised over the four years.

During the period March through July, the 2000 campaign raised $529,000.   During the last four months of the campaign, the Browne added 1.77 times that amount.

If the Barr campaign raises 60% of its funds during the last four months of the campaign, the total would be $1.5 million.   (If it is 38% of the total, it would be $971,000.)   If the ratio of the amount raised from March through July relative to that of the final four months was the same, the Barr campaign would raise another million dollars, for a total of $1.6 million.

The 2004 Badnarik campaign raised $984,000, or $43,000 each month.   While they began raising money in 2003, only $25,000 was raised that year.  Most of the funds were raised during the last 4 months of the campaign, $834,761, which is 87% of the funds raised in 2004 and 84% of the total funds raised.  The Badnarik campaign raised funds at the rate of $208,000 each month during those last four months.  The ratio of the funds raised in the final four months to those raised from March to July was somewhere between 6.73 and 7.19.

If the Barr campaign raises 87% of its funds in the final four months of the campaign, that would result in a total of $4.6 million.  (If it is 84% of the total, then it would be $3.9 million.)   If the Barr campaign raises 7.19 times as much money in the last four months of the campaign relative to the March through July period, then another $4.3 million would be raised for a total of nearly $5 million.

The figures for June and July showed the Barr campaign raising money at a rate of nearly $200,000 each month.   Can there be slow months?  Perhaps.  The Browne campaign only raised $72,000 in August of 1996, but made up for that by raising almost a quarter of a million dollars in the weeks leading up to the election.   The Browne campaign only raised $92,000 in June of 2000.    The Badnarik campaign, on the other hand, was raising close to $200,000 each month after its very slow start in July, but still, was close to $300,000 in the weeks before the election.

Will the Barr fundraising take off like Paul’s did in the fall of 2007?   We can hope so.  But if history provides any lesson, it is that Barr’s fundraising will improve over the next four months.

However, minor party candidates have the deck stacked against them; they aren’t going to win.  It’s a good idea therefore, to take a step back and have a defined goal.  For some libertarians, it’s been about the message and educating voters.  For others it’s about being the spoiler and tilting the election.  Still others are looking for as many votes as they can get.

For lower offices it make sense to run message-centric campaigns in an effort to educate voters.  However, minor party Presidential candidates often do not get a bully pulpit from which to preach.  In a local race you can achieve education through talking to voters door to door.  However, that sort of strategy just doesn’t work for a Presidential candidate.

Therefore, the real way to get noticed is by raw vote totals.  If you can show millions upon millions of votes, it will move the LP in the right direction.  A couple million votes won’t get us major party status, but it will help us move closer to our goals.

So then, what is the most effective strategy for winning votes?  To many it seems important to target battleground states.  This is one of the most ineffective strategies out there.  Because the general public often sees voting for a third party as a “wasted vote”, they are more likely to hold their nose and vote major party the closer the election is.  The closer the race is, the more likely a voter is to think that their vote for McCain means something.  They may not like McCain, but they think he’s better than Obama, so they’d forgo voting for their closest ideological candidate, Bob Barr, and vote for McCain in an attempt to keep out the greater of two evils.

The more lopsided a race is among the major party candidates the more likely a voter will consider voting for a third party candidate.  If one major party candidate has an extremely large lead, the more it seems like voting for the losing major candidate is ALSO a “wasted vote”.  If Obama is seen as a lock for a certain state, a vote for McCain is a waste.  Therefore, among the two “wasted vote” candidates of McCain and Barr, they will often choose the more ideologically sincere candidate, Mr. Barr.

Case in point:  If you look at Ralph Nader’s vote totals from 2000, he received over 6% of the vote in seven different states.  In those seven states, the average difference between Bush and Gore’s vote totals is around 20%.  In other words, Nader’s best showings came in states in which either Bush or Gore had a commanding lead.

Enter Illinois.  Illinois may be the safest state for the Democrats in 2008.  With the favorite son as the Democratic nominee, there is absolutely no chance McCain could win the state of Illinois.  Therefore, to many of the non-liberals in Illinois, a vote for McCain is a “wasted vote.”  Illinois is one of the only states in the country where Barr and McCain are playing on a nearly even playing field.

Because both Barr and McCain are not seen as in contention to win Illinois, we can compete with McCain on the issues.  On that battle, we can win.  Illinois is the key to a large vote total in November.  Do not let it pass by.

Is a libertarian a type of conservative?     Perhaps.   The modern libertarian movement came out of the conservative movement during the late sixties.   Most of those libertarians were active participants in Barry Goldwater’s 1964 Presidential campaign. 

Arizona Senator Barry Goldwater is generally considered an important conservative politician, whose unsuccessful 1964 campaign laid the groundwork for President Reagan’s 1980 victory.  Goldwater’s conservatism emphasized individual liberty and limited government.  His famous quotation, “Liberty in the defense of liberty is no vice,” appeals to every libertarian.

Further, many of those involved in the founding of the modern libertarian movement were active in Young Americans for Freedom.   Founded by William F. Buckley, this conservative youth organization included a large “libertarian” caucus.   Many local chapters had libertarian majorities, and so, elected libertarian leaders.   Looking back to that era, the “libertarians,” formed one wing of the conservative movement, working with, and competing against, the “traditionalists.”

In 1969, much of the libertarian caucus left the Young Americans for Freedom.   The key issue was libertarian opposition to the draft.   However, there was much more skepticism among the libertarians regarding the Vietnam War.  And, the libertarian caucus was also critical of marijuana prohibition.   After a showdown at the 1969 YAF convention, many of the young libertarians abandoned the Young Americans for Freedom, and abandoned the “conservative” label, leaving it to the traditionalists.  

The trail that they blazed has been periodically followed by a series of waves of betrayed Republicans.   In 1971, Nixon imposed wage and price controls and, soon after, broke the last tie between the dollar and gold.  The Libertarian Party was founded.   Remember the Brady bill?   A flock of Republicans discovered that libertarians really supported the 2nd amendment.   The first President Bush didn’t mean it when he promised “No New Taxes.”   Another wave of new Libertarians.   The second Bush administration, with its out of control spending, failed Iraq war, and theory that President Bush stands above the Constitution is poised to drive away many people who think of themselves as “conservatives,” but who are again seeing how many conservatives aren’t especially interested in limited government or individual liberty.

However, there is more to the story.   During the breakup of YAF, radical libertarian theorist, Murray Rothbard wrote an essay, “Left and Right the Prospects for Liberty.”    While Rothbard’s purpose was to persuade libertarians to work with the new left against the Vietnam War, he reviewed some important intellectual history.  

The libertarian perspective developed in the 17th and 18th centuries as a call for change against the “old regime” in Europe.  Those who defended the status quo of pro-business regulation, an established church, and world empire, were called conservatives.   Those who proposed a vision of a free market economy, personal liberty, and peace, came to be called “liberals.”   The liberal position was well stated by Thomas Jefferson, founder of the Democratic Party, “all men are created equal,” and all individuals have the rights to “life, liberty, and the pursuit of happiness.”  That the word “libertarian” and the word “liberal” both begin with “liber” is no accident.  Libertarian is another word for liberal.

What happened?  During the 19th century, socialism was introduced.   Private property and private enterprise were very important parts of the “old regime.”   Libertarian economists argued that by deregulation, a free market economy, free trade, and free enterprise would transform the economy, increasing total production and real incomes.   While good for everyone, those with the greatest material needs, the poor, would benefit the most.  

Socialists, however, demanded a more rapid eradication of poverty.  They claimed that a new kind of society, where private property and private enterprise were more or less eradicated, would allow a rapid improvement in living standards for the majority.   While the exact plan was usually a bit vague, something like democratic politics was to directly control every aspect of society.  

Many socialists derided the “bourgeois” liberty championed by the libertarians (then called “liberals.”)    Being free from government interference was not enough.  Only with the advent of socialism, would true liberty be possible.  The poor man is free to live under a bridge?   What kind of freedom is that?

Sadly, the vast majority of liberals were persuaded by the socialist critique of the free market.    Most liberals began to champion activist government to defend new “welfare” rights–a right to a job, an education, health care, decent housing and so on.   On another front, the traditional support for freedom of contract and competition was rejected on the grounds that the poor had too little bargaining power.   Government regulation of prices, the quality of goods, wages, and working conditions were all demanded by most liberals.  

A small remnant of liberal thinkers rejected activist government.   They argued that building a welfare state to provide “free” services to much of the population in order to make sure the poor were served would result in poor services for most people.   Further, government regulations of price and quality would largely be counterproductive for the poor.   They continued to maintain that the well being of everyone, including the poor, is best served by a growing economy–the prosperity that results from allowing entrepreneurs to invest and innovate in a free market system.   This small remnant called themselves “classical liberals” to distinguish themselves from the modern, “big government” liberals.

After the disaster of the Great Depression, the numbers of both traditional conservatives and classical liberals were greatly reduced.   Modern liberalism was so dominant, that the conventional wisdom became that all of those who opposed the “progressive” vision of an ever bigger welfare state and more extensive regulation were backwards conservatives.    

The common ground of support for private property rights and enterprise soon resulted in “classical” liberal economists dominating “conservative” proposals in economic policy.    While the practice of many conservative politicians continued to include pro-business special interest policies, the rhetoric was dominated by arguments developed by classical liberal economists like Milton Friedman and F.A. Hayek.   The mainstream media, reflecting their modern liberal bias, always described them as “conservative” economists.

During the 1950’s, a few classical liberals began to realize that modifying the word “liberal” with the term “classical” was not an effective way to distinguish their views from what everyone was simply calling “liberalism.”  So, the term “libertarian” was adopted by many.   A growth spurt of classical liberal thinking, especially among young people influenced by the novels of Ayn Rand, resulted in that “libertarian” caucus in the Young Americans for Freedom. 

Rothbard’s essay, combined with the bad feelings created by the break-up in the Young American’s for Freedom resulted in a libertarian movement that was more than ready to claim a complete break from conservatism.  

Perhaps more influential over the long term was the introduction of the Nolan chart.   David Nolan, who founded the Libertarian Party, proposed replacing the one-dimensional left-right political spectrum with two dimensional spectrum.    His approach was very much tied to the late sixties and early seventies.   The young liberals who helped George McGovern win the Democratic nomination in 1972 were clearly against the draft and the Vietnam War.  But there was also the drug culture and “the summer of love.”   Government policies aimed at promoting traditional moral values were highly unpopular with these liberals.   And, of course, the rhetoric of the conservative movement was dominated by “libertarian” themes on economic policy.  

Nolan described libertarians as favoring economic freedom and personal freedom.   Liberals, of course, were the modern liberals favoring an ever expanding welfare state and anti-business regulation.  But, at least they were in favor of personal freedom, according to Nolan.  Conservatives, then, agreed with libertarians on economic issues.  But the conflict was, as exemplified by the fight at Young Americans for Freedom, over personal liberty.

That, I believe, remains the dominant view among libertarians.   Many conservative Republicans do support individual liberty and limited government on some issues.   But there are many issues where most conservative Republicans support extensive and increasing government intervention.   Many liberal Democrats support individual liberty and limits on government on some issues.     But again, most liberal Democrats support massive and ever increasing government intervention in many areas.

Libertarians, then, are neither left nor right.   They are neither liberal nor conservative.  They favor the political philosophy of America’s founding fathers.   They apply the philosophy of individual liberty and limited government to all issues.

Polling shows that between 10% and 20% of American voters already have no interest in increasing the size of government in any area.   They are ready for smaller government, pretty much across the board.   Many pollsters describe these voters as “libertarian” and contrast them with “conservatives” who are more statisfied with Republican social policies, as well as liberals, who agree with Democratic economic policy.

However, only 2% of American votes describe themselves as “libertarian.”   So 80% to 90% of libertarian voters call themselves something else.   And, we know perfectly well that there are many people who think of themselves as “conservative” Republicans.. even “true” conservative Republicans, who are committed to individual liberty and limited government.

I believe that it is good for Bob Barr to reach out to libertarian voters who still think of themselves as conservatives.    Further, the Barr campaign, like any campaign, should welcome the support of any voter or contributor.   And while a political campaign should focus on the issues and not intellectual history, there is no way to sweep under the rug the long standing differences between the “traditionalists” and the “libertarians.”

While Fannie Mae and Freddie Mac have used the vague promises of government support to borrow at lower interest rates and so funnel more money into home mortgages (and generate profits for the stockholders and high salaries for top management,) these funds are just shifted from other parts of the economy.  This results in less economic productivity, which restrains growth in real incomes.    From the point of view of a libertarian economist, the long run answer is clear, and is summed up well in the title of one of Congressman Barr’s media releases– Bob Barr Says Privatize Fannie Mae and Freddie Mac, End Government Subsidies .    However, a bit of controversy has developed, especially among the Libertarian rank-and-file, regarding Barr’s insistence that government must keep these institutions from failing in the short run.  

Fannie Mae and Freddie Mac borrow short term funds to finance home mortgages.   (They also issue and guarantee mortgage-backed securities.)  They often borrow funds for 90 days and use the money to purchase mortgages that are gradually repaid over 30 years.   When the 90 day loans come due, they must borrow new money to pay off these debts.  What will happen if no one will lend new money?  They will be unable to repay what they owe.  They will default.   They will be bankrupt.   They will be liquidated.  Their assets will be sold off.  And the receipts will be used to make partial payment to those who lent to Fannie Mae and Freddie Mac.   (Those holding securities backed by mortgages in default and guaranteed by a bankrupt Fannie Mae or Freddie Mac would also take partial losses.)

Unfortunately, Fannie Mae and Freddie Mac own 50% of U.S. mortgages.   Selling off the mortgages they hold will depress the current market value of mortgages.  About 50% of the assets of federally-insured banks are mortgages, so this will reduce the current market value of the assets of those banks.   Could this lead to bank failures?  To additional liability for FDIC?     

I believe that it is important for libertarians to support deregulation and privatization, but to do so in a responsible fashion that is carefully planned to minimize the risk of sudden financial catastrophe.    I have three reasons.  

The first is narrow political pragmatism.  A proposal for privatization and deregulation that is never implemented does no good.  Libertarians will never be able to implement any proposal for privatization or deregulation if there is any hint that they have a cavalier attitude regarding a repeat of the Great Depression.  

The second is also political.  No matter what the long term benefits, if Libertarian proposals cause financial disaster in the short run, voters will almost certainly replace Libertarian political leaders with politicians who advocate even more extensive regulation.   The long term benefits will never materialize.

Finally, I believe that it is wrong to privatize and deregulate in a way that causes people to suffer unemployment and bankruptcy if there is an alternative path that is less disruptive.   Change always involves economic dislocation, but creating unnecessary suffering is wrong.

Barr’s general statements regarding the need to avoid collapse in the short run provided the correct note of responsible  reform.  His specific proposal for a limited extension of the Federal line of credit to Fannie Mae and Freddie Mac, with a Congressional statement that this limit will not be further extended, would reduce the risk of default and the chance of a catastrophic scenario.   The institutions could borrow from the government to a greater extent to repay the funds they owe and avoid default.  

However, there are two problems with this approach.   If the extension in the line of credit is insufficient to pay off all of the all of those owed money by Fannie Mae and Freddie Mac, there remains the risk of default, liquidation, depressed mortgage prices, and the spread of losses to the banking system.   Perhaps worse, the reduced risk of default will allow the two institutions to continue to operate as before.    While the bailout bill, including the Treasury providing an unlimited line of credit and being given the ability to directly prop up the prices of shares of stock in the institutions was designed to maintain business as usual, any short run support for the institutions will inevitably reduce the pressure for reform.

Is there an alternative?    There is.   If the institutions are threatened by default, the Office of Federal Housing Enterprise Oversight can place the institutions under conservatorship.   This effectively nationalizes the institutions.    The management and stockholders can be made to pay for the consequences of their risky strategies–as much as they would pay if the institutions defaulted.   

Unfortunately, the national debt would be increased by nearly 50% by a government takeover of Fannie Mae and Freddie Mac.    Worse, direct government control is consistent with an expansion of their activities.   There is no alternative to a commitment to true privatization and deregulation.  

And, of course, that is why we need to elect Bob Barr.  And a Libertarian Congress as well.  

http://digg.com/politics/Bill_of_Rights_Blackout_and_the_Constitutional_Clock

http://www.youtube.com/watch?v=xudP5cYlvhY&feature=user

Barr Bomb Supporters!

You all did a great job participating in the last money bomb. On July 2nd we raised over $40,000 in one day! This was a great success for the Barr campaign and is the kind of help that they need from us again. Right now, millions of dollars just isn’t realistic, it would be great, but we need small victories to help Bob get out on the campaign trail. Your participation encourages other people to join the crew… so it’s imperative that we continue to build! Encourage your friends and family to help give us a voice on November 4th by pledging for the new $100,000 ‘Axe the Tax’ money bomb day on August 5th.

This might seem like a tall task, but if we can get 1,000 pledges to donate $100 we will easily hit our goal. I participated in the Ron Paul money bombs, and worked hard to spread the word then. At first our numbers were small, but as word got out and as videos like the new ‘Time for Liberty’ video came out - the numbers exploded! Right now we just need hard working people to get the word out and help us!

We could also use your help in graphic creation, videos, anything at all. Post it on the blog and we will feature it in our blog!

We have about a week and a half. Lets go out there and earn Bob $100,000!!

- Charlie

“Congress and the president should eliminate agencies and programs that have no constitutional basis or legitimate function.  Pork and corporate welfare alike should be eliminated. 

The U.S. should no longer subsidize the defense of prosperous allies. ”

After cutting the size of government, Bob Barr holds out the promise of fundamental tax reform.   When the campaign began, his website highlighted the so-called “Fair Tax” as a replacement for the income tax.  

The “Fair Tax” is an example of a national retail sales tax, but the name “Fair Tax” is associated with a specific version of such a tax.   The ”Fair Tax” proposal currently before Congress is for a 30% national retail sales tax, which is designed to be “revenue neutral.”   That means that this tax is supposed to raise as much revenue as all existing federal taxes.    (The 30% tax would be 23% of the after-tax sale price.  Advocates prefer to emphasize the lower number.)

When I first read Barr’s proposal, it seemed clear that Barr’s support of the “Fair Tax,” was not an endorsement of the specific “Fair Tax” proposal before Congress in at least one important aspect.   Clearly, Barr was not proposing a “revenue-neutral” national sales tax, because he was also calling for the deep cuts in government spending that many advocates of the “Fair Tax” refuse to consider.     Later, Barr criticized the so-called “prebate” (which amounts to a very low guaranteed national income for every American.) 

This year, federal government outlays ($2.9 trillion) are approximately 30% of personal consumption expenditures ($9.7 trillion.)    Leaving aside complications, these figures suggest that the “revenue neutral” Fair Tax roughly “adds up.”  The problem is that a 30% sales tax is just too high.  

Suppose the Barr administration just rolled back the out-of-control spending by the Bush Administration.   In 2001, spending was $1.8 trillion.   This amount could be raised by a 20% national sales tax.   While substantially lower than 30%, it is still shockingly high.   The huge increases in government spending over the last eight years imply that this involves cutting the budget more than 1/3.   Because of inflation, the real cuts are even larger,   The real size of the government would be cut in half.

If the Barr administration instead cut back federal expenditure to the level of the early Clinton administration, then a 15% national sales tax could replace all existing federal taxes.   This invovles cutting government spending in half to $1.4 trillion.   Because of inflation, that $1.4 trillion wouldn’t buy as much today, so that amounts to a  real cut of  about 66%.    The Federal government would be about 1/3 of its current size.

In my opinion, a 10% national retail sales tax sounds reasonable.   If it replaces all existing federal taxes, that would finance government spending of about $1 trillion.   That was the size of the budget near the end of the Reagan administration.  

However, it does involve cutting federal spending by 2/3.   And, corrected for inflation, that is a cut of about 80%.   The federal government would be about 1/5 of its current size.  A very challenging goal!

Still, it makes for a good slogan.  Cut spending back to where Reagan left it, and we can get rid of the personal income tax, the payroll tax, and all other federal taxes and instead have a low, 10% national sales tax.

My approach is to wait until there is a relevant issue in the news.   Better yet, the newspaper makes a comment on that issue on the editorial page.   Does Bob Barr have a position on that issue?   Look at the campaign website, www.bobbarr2008.com.  The campaign staff is putting out media releases nearly every day.  Actually, it is often more than one a day!

My local paper, the Charleston Post and Courier, favorably commented on the recent proposal by James Baker and Warren Christopher to create a join committee in Congress to consult about going to war.   The campaign has a media release on that very issue:  Follow the Constitution.

So, I sent the following to the Post and Courier: 

In a recent editorial, The Post and Courier praised the proposal of Republican James Baker and Democrat Warren Christopher to create a joint committee of Congress to consult with the President about going to war.    The editorial states that “many scholars” believe that the existing War Powers Resolution is unconstitutional and that a constitutional amendment may be necessary to settle where the war-making power resides. 

However, the U.S. Constitution is clear.  The power to declare war resides in Congress.   If Congress declares war, then the President, as commander in chief, directs the U.S. military.   Congress, however, must vote to fund the war.  And, Congress must approve the peace treaty that ends the war. 

Unfortunately, the U.S. Constitution interferes with the preferred foreign policies of many Democrats and Republicans, just as it does with their preferred domestic policies.   The dominant approach in the twentieth century was too simply ignore those parts of the U.S. Constitution that elected officials found inconvenient.     If the President is to serve as police chief for the world rather than as commander in chief of the U.S. military, then a U.S. Constitution designed by our founders to make empire building difficult gets in the way.    That Democrat politicians wouldn’t bother to amend the Constitution when it hinders their feel-good foreign or domestic policies is no surprise, but big government Republicans have proven no better.

The solution is clear for the American people.  In the aftermath of a failed war of choice in Iraq, choose political leaders who will respect the Constitution.  Republican primary voters had an opportunity to nominate Congressman Ron Paul–a small government, libertarian Republican.   And in November, former Congressman Bob Barr will be the nominee of the Libertarian Party.  Vote for Bob Barr to show that you want  a President who will obey his oath to defend the U.S. Constitution

Will the Post and Courier publish my letter?  Only time will tell.   But nothing will be published if we don’t try.  Let’s see if we can get Bob Barr more exposure.

Politicians have derided speculation as gambling, and there is some truth to their charge.  With the development of modern futures exchanges, speculation has become very much like gambling, but not like a lottery or roulette wheel.  It more like betting on a sporting event.   No one knows the score of the big game when they place their bets, but it isn’t just a matter of chance.   Just like being informed about the teams helps when placing a bet, being informed about likely supply and conditions in the future is the key to speculating on futures contracts.     

The key element of a futures exchange is that speculators who buy a futures contract (the bulls) are betting that the actual price of of the good in the future will be higher than agreed price of the futures contract.  However, for every buyer of a futures contract, there is a seller.  And the speculators who sell the futures contracts (the bears) are betting that the actual price of the good in the future will be lower than the agreed price of the futures contract.   

Always, the “bets” of the speculators for a higher price are exactly balanced by the “bets” of speculators for a lower price.   Why?  Because the price of the futures contract will either rise or fall until there is a buyer for every seller, and creating the balance.   It is ”speculation” that causes both price increases and price decreases on the futures exchanges.

Suppose a December 2008 oil futures contract trades at $140 today.   The buyer of the contract is speculating (betting) that the price of oil in December will be greater than $140.  The seller of the contract is speculating (betting) that the price of oil in December will be lower than $140.  

Consider what will happen in December.  If the actual price of oil is $135 a barrel, then the buyer of the future will pay $5 to the seller for every barrel they contracted at $140.  The seller’s speculation, his bet, paid off.  While the buyer’s speculation, lost.    If, on the other hand, the price of oil is $150 in December, then the seller pays the buyer $10 for every contracted barrel.  The seller lost his “bet” that the price would be below $140.   The buyer won his “bet” because the price turned out to be greater than $140.  

Anyone who has any reason to believe today that the price of oil in December will be higher or lower than $140, has a personal financial incentive to buy or sell a futures contract.  If there is an additional buyer, who has some new reason to believe that the price will be higher than $140 in December, the increased demand for the contracts raises the futures contract  price until there is someone willing to sell.  The new information brought to the market by the buyer raises the price of the December futures contract,

However, speculation can also lower prices.   If someone discovers some reason to expect the price of oil to be lower than $140 in December 2008, that person has a financial incentive to sell futures contracts.    The increased supply of futures contracts will result in a lower price until there are buyers.   This new information that supply and conditions for oil will result in a price less than $140 in December, then results in a lower price of a futures contract.   

People can talk all they want about what will happen to the price of oil in the future.  Talk is cheap.   But to the degree that people are willing to back  their talk with money, “to put their money where their mouth is,” the price of a futures contract in December 2008 reflects the best available information about what the price of oil will be in December 2008. 

This speculation, this “betting”, generates a market forecast for the future price of oil, which then impacts the price of oil today.   This is the element of truth in the charge that “speculation” is “raising” the price of oil (and so, gasoline) today.    The price today always depends on supply and demand, but supply and demand today are greatly influenced by the prices of the future contracts. 

If the price of a December future contract is $140, and the price of oil today is $130, then there is a risk-less profit available for anyone who sells a December future contract for $140 and buys oil today and stores it until December.   As people take advantage of that “hedging” opportunity, the demand for oil rises today.  The increase in the demand for oil today causes a higher price today.  The price of oil today will increase until it is nearly $140.   Today’s price can only be less than the December futures price by the cost of financing the purchase and storage of the oil between today and December.   Because a cheap way to store oil is to leave it in the ground and pump it out later, much of the increase in today’s price will be the result of a decrease in current supply.   

So, the gambling of the speculators determines the price of a December 2008 oil futures contract, and then, the risk-less hedging of oil producers results in today’s price reflecting the price of the futures contract.    However, suppose someone has information that suggests that the price of oil will be lower in December of 2008.  They are motivated to “speculate” or “bet,” by selling contracts, resulting in a lower price for a December 2008 futures contract.  Those oil producers who had been leaving oil in the ground take profits on their futures positions, produce and sell more oil, and the price of oil falls today.   In that scenario, speculation  lowers today’s price of oil. 

So, it is almost always true that when the price of today’s oil goes up,  it is because of speculation in futures contracts about what will be happening to the supply and demand for oil in the future.  But, it is equally true, that when the price of oil goes down today, it is because of speculation.  

If oil producers always produced and sold as much as possible now, producing like there was no tomorrow, then speculation about the future would not influence today’s price of oil and gasoline.   Think about it.  To complain about speculators manipulating today’s price of oil and gas implies an alternative policy of always producing (and therefore, consuming)  Like There is No Tomorrow.  While irresponsible Democrat and Republican politicians often are unable to think beyond the next election, surely, everyone must realize that ignoring the future is terribly irresponsible.  And thankfully, the market economic system creates an incentive system so that profits are created for those who correctly use every scrap of information about the future and also generates personal incentives to act on that information today.

Complaining about speculation raising the price of oil is like shooting the messenger.   Speculators cause increases in the future price of oil when information has become available that creates a reason to believe that less oil should be used today because it will be needed even more in the future.

For example, suppose  John McCain or his allies in the Bush administration launch a preemptive war against Iran.    A nightmare scenario could develop for the world economy.   The Iranians retaliate, closing the Straits of Hormuz at the mouth of the Persian Gulf to oil tankers.   Iranian ballistic missiles might damage port facilities in the western Persian Gulf.   The largely Shia populace of the western Persian gulf region might help their fellow Shiites in Iran against their U.S. allied Sunni rulers by sabotaging oil production.   What might happen to the price of oil?  $200 a barrel? $300 a barrel?  $400 a barrel?     

Those who had purchased oil futures contracts at $140–those who had speculated or “bet” that the price would be greater than $140–would make huge profits at the expense of those who had bet that the price would be less.    Even if the probability of this nightmare scenario is small–that the U.S. starts a new preemptive war and the Iranians respond by greatly disrupting the oil market–it makes it more attractive to buy futures contracts.  Every time one of McCain’s allies in the Bush administration threaten a new preemptive war against Iran, the perhaps small probability of the nightmare scenario rises, prices of oil futures contracts rise, the current price of oil rises, and you pay more at the pump.  

Of course, McCain doesn’t like it when the “speculators” point out that he and his war hawk allies are playing with fire.   He prefers more rosy scenarios.   Threatening war leads the Iranians to back down and do what McCain wants, without there being a war.   Or, U.S. military forces destroy the ability of the Iranians to retaliate.  Perhaps this time our troops will be showered with flowers as they liberate Iran and create a new shining model of democratic capitalism.   

But there are people willing to bet their own money that the nightmare scenario is a real possibility.   The price of oil rises with every threat made by Bush or McCain.   And all of us pay for it at the pump.

Do you want to pay less at the pump?  Elect a candidate for President who rejects preemptive war.   Choose a candidate who will seriously engage in diplomacy with Iran, and who will seek to reduce the tensions between our nations.   Choose Bob Barr in 2008.