You would not think there was as much in common between the oil industry and the OTC derivatives markets; they look about as similar as oil and water. Oil is the substance upon which this country runs its cars (and trucks, SUVs, RVs, ATVs, speedboats....), heats its homes and runs its factories. Derivatives are complex instruments that are (usually) derived from underlying trading instruments or exchange-traded contracts. Yet both have made the news lately for the same reason - they proved they can be dangerous weapons when in the wrong hands.
The oil leak offshore in the Gulf of Mexico is happening because the oil lobby is one of the most powerful in the US and has spent decades bribing politicians to allow more and more exploration. The mouthpiece of the oil industry, the American Petroleum Institute, is the official pooh-pooher when it comes to subjects such as over-consumption, pollution, global climate change. It spends millions every year saying how safe it is - how good for the economy - to drill, to refine, and to use oil.
The lobbyists for the financial services industry are also extremely powerful. There are reportedly four financial industry lobbyists for each politician in the house and the senate. The U.S. Chamber of Commerce, an anti-regulation group, reported spending $30.9 million on lobbying in the last three months, much of it on financial regulation, with major industrial and other corporations weighing in too, said the Global Association of Risk Professionals in an article. These lobbyists and the line that they feed the politicians ('regulation will kill this business') have helped to keep the lid on financial regulation since Glass-Steagall was abolished in 1999.
So, when you see the oil spill headed for the Gulf coast and wonder 'how can this happen?', picture a herd of lobbyists marshalled to head for Washington, DC (beautiful image courtesy of Larry Tabb) armed with tens of millions of dollars. Picture the heads of these oil companies looking at their bottom line each year, trying to figure out how to make more for their shareholders. (There is really only one way - exploration and development, the rest is pocket change comparatively.) Remember hearing Sarah Palin screeching in her fingernails-on-a-blackboard voice that we need to 'drill, baby, drill.' Think of the pristine coastline of Norway and ask yourself whether that country would allow drilling if it did not have a disaster prevention/recovery plan in place. (It has an exhaustive plan.)
And when you hear anti-derivatives legislation voices raised from Washington (again with the 'regulation will kill this business', yeesh), remember where they are coming from. Wall Street's army of lawyers and lobbyists and even Warren Buffett. Yes, OTC derivatives regulation will cost them money. It will cost them capital. It will shrink profit margins. Boo hoo.
When you hear anti-regulation voices raised in the oil industry, much of the general public used to echo them. After all, who wants to pay $5.00 a gallon for gasoline? Why can't we drill and drill and drill until our oil is all-American, all the time (impossible, but hey why let the facts get in the way of a cause)? In the next couple of days you will see why we can't - when you turn on the TV. There will be birds and beaches and fish covered in oil, and livelihoods lost to the black gold.
Somehow in the pursuit of free markets, the interests of the few became paramount. The ones with the most lobbyists and the most money won, time and again. Because the politicians, who seemingly know nothing about anything, went along with it for their own self-interests (re-election). And now these same politicians are angry. They have been duped. They want blood. And both industries, oil and derivatives, will get their comeuppance in the form of draconian regulation. Free market proponents need to wake up and realize that free isn't always without cost.