Monday, March 12, 2012


Robert Reich, former U.S. secretary of labor, and the author of "Aftershock: The Next Economy and America's Future," has an excellent op-ed article explaining the source of rising gas prices. It's tied to excessive speculation on the oil futures market. Here's a snippet of Reich's article ...


... Demand for oil isn't rising in any event. Oil demand in the United States is down compared with last year at this time. The American economy is showing only the faintest signs of recovery. Meanwhile, global demand is still moderate. Europe's debt crisis hasn't gone away. China's growth continues to slow.

But Wall Street is betting on higher oil prices.

Hedge-fund managers and traders assume that mounting tensions in the Middle East will hobble supplies later this year. They figure unrest in Syria may spill over into other countries. Or Iran will try to carry through on its threats to block the Persian Gulf. Or Israel will try to take out Iran's incipient nuclear facilities, setting off rounds of retaliation.

Wall Street speculators also assume global demand for oil will rise in the coming year as American consumers bounce back to life. They figure Europe's debt crisis will be resolved. And they assume China's central bank will make money more readily available, thereby sparking faster growth in China. These are just expectations, not today's realities. But they're pushing up oil prices just the same, because Wall Street firms and other big financial players now dominate oil trading.

Where there's money to be made, Wall Street will find a way of making it. And when it comes to oil, so much money is at stake that gigantic sums can be made if the bets pay off. Speculators figure they can hedge against bad bets.

Financial speculators historically accounted for about 30 percent of oil contracts, producers and end users for about 70 percent. But today speculators account for 64 percent of all contracts.

Bart Chilton, a commissioner at the Commodity Futures Trading Commission - the federal agency that regulates trading in oil futures, among other commodities - warns that too few financial players control too much of the oil market. This allows them to push oil prices higher and higher - not only on the basis of their expectations about the future but also expectations about how high other speculators will drive the price.

In other words, a relatively few players with very deep pockets are placing huge bets on oil - and you're paying.

Chilton estimates that drivers of small cars like Honda Civics are paying an extra $7.30 every time they fill up - and that money is going into the pockets of Wall Street speculators. Drivers of larger vehicles like the Ford Explorer are paying speculators $10.41 when they fill up.

Funny, but I don't hear Republicans rail against Wall Street speculators. Could this have anything to do with the fact that hedge funds and money managers are bankrolling the GOP as never before?

Wall Street isn't bankrolling Democrats nearly as much this time around because the Street is still smarting from the Dodd-Frank Wall Street reform law pushed by the Democrats, and from President Obama's offhand remark in 2010 calling the denizens of the Street "fat cats."

The Commodity Futures Trading Commission is trying to limit how much speculators can bet in oil futures - a power it was given by Dodd-Frank. It issued a rule in October, but it won't take effect for another year. Meanwhile, Wall Street has gone to court to stop the rule.

The gas wars may come to a screeching halt before too long, anyway. The Street is placing so many bets on rising oil prices that the slightest hint the speculators are wrong - almost any sign of expanding supply or declining demand - is likely to set off a sharp drop in oil prices similar to the record one-day fall on May 5.

But that's small comfort to tens of millions of motorists who are paying through the nose at the gas pump right now. Meanwhile, rising gas prices are wagging the election-year dog.

Just remember what's really causing them.


- Mark

UPDATE (8-06-13): More on the orchestrated speculation here.

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