Democrats have responded to rising oil prices as one would predict: not by seeking to alleviate the primary cause of price increases (a widening gap between growth in supply versus demand), but by finding a new boogeyman to justify increasing government involvement in and control over markets.

The evil-doer behind the conspiracy to hurt average people at the gas station? Oil speculators!

Obama vows to crack down on oil speculation

U.S. Democratic presidential candidate Barack Obama offered new steps on Sunday to crack down on speculation in oil markets, saying his plan would help rein in runaway fuel costs.

A jump in gasoline prices above $4 a gallon has spurred consumer anger and is a top theme in the race between Obama and his Republican rival in the November election, John McCain, who has proposed more U.S. offshore oil exploration as a way to boost energy supplies.

“I think everyone believes there’s too much speculation in the oil markets,” said New Jersey Gov. Jon Corzine, an Obama ally who announced the proposals in a conference call with reporters. “A lot of the price of oil, I think, people put at the doorstep of speculators bidding up and holding supplies off the market.”

Corzine said Obama’s plan aims to close the so-called Enron loophole, which exempts some energy speculators who trade electronically from U.S. regulation. It takes its name from the now-collapsed energy firm that benefited from the law.

Obama would require U.S. energy futures to trade on regulated exchanges. The campaign also said he backed legislation that would direct the Commodity Futures Trading Commission, the top U.S. futures market regulator, to investigate proposals such as increasing margin requirements in the market.

In addition, the Illinois senator wants to see more transparency and oversight of institutional investors in commodities markets.

“Too much speculation!” cries Corzine. These people are vultures, preying on the misery of average Americans! Or are they? To listen to democrats, you wouldn’t even know speculators served a valuable economic purpose.

Speculators correct false prices in markets, allowing them to function more efficiently. This is not to say that prices are always at the appropriate level in the short run. Irrational exuberance can drive prices to unjustifiable heights, as we’ve seen in both the 90’s tech-bubble and the recent housing-bubble. But both of these bubbles were popped, and price followed with sustained down periods.

Market critics often sight the alleged near-sightedness of capitalism. Speculators incorporate future considerations into the current price of goods. If a war is likely to break out in several oil producing countries, thereby disrupting supply, speculators who buy now, and thus increase current prices, in anticipation of selling when supplies are more scarce, give markets time to react to coming changes and encourage reductions in consumption. This behavior softens the blow of sudden changes in market conditions.

Whether or not the current prices are at the correct (most efficient) level remains to be seen, but central authorities don’t have the capacity to make that determination. People may want lower prices for themselves, but that doesn’t make such prices are the correct ones. Pressuring the market either through price controls or regulation to implement lower prices will result in greater inefficiencies such as shortages. If people really desire such prices, they should argue for increases in supply, not greater regulation or a disruption in the functioning of speculators.