Interesting piece from Marketwatch.comtoday that should interest all of us who wish our government would stumble upon a more sane energy policy--and that isn’t just finding responsible ways to use the abundant natural resources with which the U.S.A. has been readily blessed. A sane policy would also stay out of the way of a market finding the real value of a thing. I’ve said (and continue to believe) that the price of a barrel of oil has been distorted by not only a weak dollar, but also by investors far too willing to grasp any hiccup in production or world politics to justify another increase--and sooner or later that kind of run up will end.

Of course, I’ve been saying the same thing for a few years now and I’ve missed some really wonderful investment opportunities of my own, so what the hell do I know?

Still, this Marketwatch piece caught my attention:

In a recent communication to subscribers, [John Dessauer] discussed the impact on the price of oil of the Commodity Futures Modernization Act, which Congress passed in December 2000. One consequence of that legislation, according to Dessauer, is that “the oil market has been grossly distorted.”

By how much?

Dessauer estimates that if the government rolled back the regulatory changes made in that legislation, oil’s price could fall back all the way to $80 per barrel. That would represent a 40% drop from where crude closed on Tuesday.

Dessauer’s analysis should give pause to investors and traders alike. A market that could fall by that much for reasons having nothing to do with underlying fundamentals is not the kind of market that your Economics 101 textbook had in mind.

A possible comeback to Dessauer’s analysis has to do with the role that arbitrage should be playing in stabilizing the oil market. After all, if oil’s price is even close to being in a bubble, then why wouldn’t arbitrageurs load up their portfolios with huge short positions in crude, poised to realize huge profits if and when oil’s price dropped? At least in theory, their short selling should have already tempered oil’s price rise and made it less vulnerable to the kind of market break Dessauer discusses.

The answer is that arbitrageurs do not play the role in practice that theory says they would. In practice, the arbitrage role is mostly fulfilled by a relatively small number of institutional investors such as hedge funds, which invest other peoples’ money and often are highly leveraged. For both reasons, according to researchers who have studied arbitrageurs’ behavior, they cannot afford to hold onto a short sale if it takes too long for it turn a profit.

As John Maynard Keynes famously once put it, “the market can remain irrational longer than you can remain solvent.”

Of course, the people who are now calling for more regulation to control oil costs will continue to ignore the damage that bad regulations do to commodity pricing in precisely the same way that I’ve heard “deregulation” blamed for California’s energy woes. It wasn’t a lack of regulation that caused California’s rolling blackouts; California’s energy market was distorted by partial deregulation, price caps, bad laws, and unscrupulous companies like Enron taking advantage of a poor set of laws that are misleadingly termed “deregulation.” We get that far without even considering how “deregulated” a state’s energy industry is when building the capacity to produce energy is damned near impossible.

The government sets out, with good intentions, to maintain stable markets; unfortunately, what government sets out to do is often at complete odds with what it accomplishes. All government activity should be viewed with some skepticism.

What I find most frightening right now is not the cost of oil--or, at least, not that alone. I find it frightening that inflation is definitely rising to unacceptable levels, the drag in the economy is starting to impact the unemployment numbers, and our country is in a recession. In a way, it is starting to feel like the late 70’s again. But instead of running away from the malaise of the Carter years and into the Reagan revolution, our nation seems to be diving right back in to Carter, part two.

While McCain may only be the smallest bit better on energy policy than Obama, President BHO will be reaching for heavy regulation, price caps, tax increases, and an anti-business bent that will probably bring us an even greater bump in unemployment and a decrease in new investment.

So, America, are we really hoping to drag out this recession as long as humanly possible? Is the illusion of change really that meaningful to you?

Just curious.

I’m not feeling particularly happy about either choice, but I have a feeling that a congress dominated by Democrats with a passionate progressive spurring change from the White House will be far more effective in bringing about change than the idiot Republicans who pissed away the best opportunity the party has ever had to make meaningful changes to government programs. That is, Democrats are far more likely to get what their leadership has been promising than the Republican faithful got from theirs during the first half of this decade.

I like McCain on a personal level--even when I feel the urge to roll my eyes at much of his straying from the supposed conservative values of the party--but I can’t help but feel insulted by a party that gave us broken promises of fiscal responsibility, smaller government, massive entitlement reform, and, well, conservative government in the ideological and pragmatic senses of the word. I’ll be voting for McCain, but it won’t be motivated by party loyalty; my motivation will be avoiding the worst of what I think would happen with Obama in the White House.

Whoever wins, though, the campaign to change our government (and, more personally, my party of choice) begins as soon as this election is over.