Speculators and oil prices

It's damn interesting the lengths someone or institution will go to to avoid saying, "Speculators will always take a bad situation and make it so much worse.  They are, after all, the Predator's Predators."

If gasoline was $5 a gallon and you knew that $2.50 was going to finance the necessary alternative infrastructure we are going to need as the easy-to-get oil runs out, bring it on.  But knowing that gasoline will probably hit $5 this summer (with the bulk of the increased prices going to the nastiest of speculators who will contribute less than NOTHING to the social order) is possibly the single greatest reason for laughing neoliberalism out of any discussions by sane adults dealing with real problems.

But hey, even the St. Louis Fed has come to the earth-shattering conclusion that speculators "exacerbate" the price swings in oil.

Oil Prices Spike Exacerbated By Wall Street Speculation, Federal Reserve Study Finds

Zach Carter
03/21/2012

WASHINGTON -- Two economists at the St. Louis Federal Reserve have published findings that indicate that Wall Street speculation is responsible for 15 percent of the increase in oil prices over the past decade, a finding with significant implications for the recent sharp rise in gas prices.

While politicians have little ability to alter the price swings of commodities like oil, regulators have both the authority and policy tools to do so. The Commodity Futures Trading Commission is responsible for overseeing the financial market for oil. The 2010 Wall Street reform bill gave the CFTC new power to limit excessive speculation, but the rule will not go into effect until later this year.

According to St. Louis Fed economists Luciana Juvenal and Ivan Petrella, speculation in oil markets was the second-biggest factor behind the past decade's price run-up, behind increased global demand for oil, which accounted for 40 percent of the increase.

"Speculation was the second-largest contributor to oil prices and accounted for about 15 percent of the rise," the economists wrote. "The effect that speculation had on oil prices over this period coincides closely with the dramatic rise in commodity index trading -- resulting in concerns voiced by policymakers."

Commodity indexes allow speculators to bet on the price of several commodities at once, and have become very popular investment tools for both Wall Street investment companies and pension funds. Between 2004 and 2008, the total volume of trading activity in commodity indexes jumped from $13 billion to about $260 billion, according to research by Michael Masters, founder of Masters Capital Markets and the financial reform nonprofit Better Markets.

Masters and others have noted that speculation can exaggerate price swings otherwise dictated by fundamental supply-and-demand dynamics, and can also force prices to move contrary to supply-and-demand predictions. During 2008, when oil prices soared to their highest level on record, they did so during a period in which global demand was low and global supply was high -- what should have been a recipe for lower prices.

The most recent Fed study concludes that economic fundamentals are still the primary determinant, saying only that speculation can "exacerbate" price swings. more

Over at FDL, David Dayen points out something equally obvious—that governments could quite easily regulate the economically useless (or destructive) behaviors of speculators out of existence.  Ah yes, do government control the moneychangers? or do the moneychangers run governments?

Speculation Responsible for Portion of Oil Price Run-Up, But Administration Looks Elsewhere for Solutions

By: David Dayen March 21, 2012

Economists at the Federal Reserve Bank of St. Louis estimate that Wall Street speculation is now the second-largest contributor to oil prices, accounting for 15% of the increase in oil prices over the last decade – correlating strongly with the expansion of commodity trading and speculation in oil futures. This makes speculation perhaps the most fertile ground for actually reducing gas prices, says Zach Carter.

Unfortunately, lawmakers with a keen interest in stopping oil speculation have judged that the CFTC position limit rule is not strong enough. So if you’re looking for a place for the executive branch to actually have an impact on reducing the price of oil, a stronger and more timely anti-speculation rule would be the place to start, and this is now backed by Federal Reserve research.

So what does the Administration actually plan to do to lower gas prices? Why, cutting regulations and building old-energy infrastructure, of course. There has been no formal announcement, but it is likely that new rules on smog will be delayed out of concern that they will increase gas prices.

The Obama administration, facing political heat over high gasoline prices, may delay new rules that would cut pollution from cars but also could bring higher prices at the pump, environmental and industry leaders said.

The rules would require refiners to make cleaner-burning gasoline and auto makers to build cars that emit fewer smog-forming pollutants. The Environmental Protection Agency was scheduled to roll out the rules before April, but it hasn’t yet submitted them for White House review.
“We expect that timing will begin to slip, perhaps for political considerations” said American Petroleum Institute President Jack Gerard.

This is of a piece with the new directive from regulations czar Cass Sunstein on accounting for the “cumulative” cost of regulations. This is an old pro-business tactic that focuses on the costs of regulations without any consideration of benefits, leading to a skewed view. That perspective is reflected in the potential delay of smog rules, which would reduce pollution and significantly improve public health. more