Betting On The Barrel: Experts Warn Speculation Is Helping Drive Up Oil Prices

by Kendaleth C. VanLue

There are growing indications that Wall Street speculators are driving up the price of crude and Americans are paying for their profits at the pump.

“Americans overpaid $10 billion dollars for gas at the pump in the last month alone,” said Gene Guilford, president of the Independent Connecticut Petroleum Association, speaking at a Democratic Steering and Policy Committee hearing  held on April 4. Guilford estimated that speculation is adding roughly 75 cents per gallon of gas.

The high price of gas is not simply due to supply and demand mechanisms, but instead perceived supply and demand. Currently, a majority of oil trades are made by Wall Street speculators rather than commercial end users of oil. There is increasing evidence that these traders are having a powerful influence on the price of petroleum.

Here are some notable indicators:

So what to do about it?

House Minority Leader Nancy Pelosi (D-CA) recently heard candid testimony from two experts on the issue: Michael Greenberger, a former federal regulator of financial markets, and ICPA’s Gene Guilford.

Representative Edward Markey (D-MA) asked the panelists about policies they would promote to help loosen Wall Street’s grip on the price of gas. Michael Greenberger had three suggestions:

  • Increase funding to the Commodity Futures Trading Commission — which monitors oil trades— paid for by a tax on every dollar crude-oil speculators gamble with in the oil commodities market.
  • Allow the Department of Justice and the FBI to follow through with investigations concerning excessive crude-oil futures trading by Wall Street speculators.
  • Reform the Commodity Index Swap and Synthetic Exchange Rated Fund regulations to protect against rampant speculation practices.

Political opponents continue to claim Obama is to blame for high oil and gasoline prices, even while oil production has skyrocketed under his administration.

The Energy Information Agency reported that U.S. oil production last year hit 5.65 million barrels per day, a 14% increase from 2008. For the first time in 60 years, the U.S. is now a net refined fuel exporter. Even more, U.S. domestic oil consumption has been down by 10 percent since 2008.

However, gas prices continue to climb. In February 2012, the national average for regular grade gasoline was $3.58 a gallon, an 11.5 percent increase compared to February 2011.

30 Responses to Betting On The Barrel: Experts Warn Speculation Is Helping Drive Up Oil Prices

  1. Anne van der Bom says:

    Imagine the outcry if the goverment imposed a 75 cent per gallon gas tax.

    However, the US government is fully accountable to the people of the United States for how this tax is spent.

    The Wall Street tax vanishes in the deep pockets of a wealthy club that answers to no one.

  2. Ken Barrows says:

    Enough with these articles already! If it’s a publicly traded market, there’s speculation. If we so need lower oil prices (we don’t), just say that every oil buyer has to take physical delivery. And jump for joy as stocks soar because of speculators.

  3. clays says:

    “The high price of gas is not simply due to supply and demand mechanisms, but instead perceived supply and demand.”

    Yes. When demand is perceived to increase in the future, speculators buy futures contracts at today’s prices. The price of oil goes up and producers produce more to meet the perceived coming demand.

    If the demand increase doesn’t actually happen, speculators loose money. If it does, production has already increased to meet that demand, and a large sudden price jump is avoided.

    This is how markets are supposed to work. This is not a bad thing.

  4. Steve says:

    I have no love for Wall Street or the financial sector generally, but until such time as our dysfunctional central government imposes a carbon tax, I am altogether baffled as to why this website cares about how or why increased oil prices exist if, as separate studies show, those prices begin to prompt people to buy fuel-efficient vehicles and even drive less miles.

    In fact, the more the climate blogs join the chorus about how we have to keep oil and gasoline prices down, the more it undercuts all other urgings for policies designed to reduce emissions. In other words, the policy-makers reason, “We do not need to be THAT worried about runaway climate change if YOU, the experts in the field, are worried about people being able to afford faraway family vacations this summer….”

    The other thing about the “speculators” — there is usually a winner and a loser on either side of the trade. Someone you don’t care for is short crude futures (about to lose money) as someone else you don’t care for is long and busy bidding the price (maybe getting rich). The only thing that should matter to this blog is the resulting consumption activity and consequential emissions.

    By the way, there will come a day when Big Oil and OPEC will actually keep prices artificially low — relative to actual declining peak oil supplies and world demand dynamics — to keep y’all hooked on the stuff. Are we going to whine about that tactic as well, or celebrate?

    Progressives have soul-searching to do here. We can no longer achieve all our traditional objectives AND save the planet. JMHO.

  5. Paul Magnus says:

    Its a left wing, environmental plot to reduce oil consumption.

    Or, oops, it may be peak oil about to go over the edge…. (didn’t anyone notice how close this was).

  6. Leif says:

    As long as one of the most profitable endeavors that one can invest in, (just shy of funding lobbyists), is based on the ability to freely pollute the commons to profit the individual, can anyone be surprised that business folks pollute the commons? Its legal go for it! Stop the profiting from the pollution of the commons. CARBON TAX NOW!

  7. Gestur says:

    Damn straight, Steve.

  8. Rabid Doomsayer says:

    You know what. Investing in oil futures could be a good idea, I cannot see how the price of oil can go down at all from today’s levels. Supply pressures on price are significant.

    The only way prices can go down is if the world’s economy crashes so bad that the last GFC will like a tiny bump. Maybe I won’t buy futures.

    Better that the price of gas slowly increases giving people time to adapt. The price jumping a few dollars a gal all at once would shock the economy. Yet those prices did not harm Europe, finances got Europe.

  9. Dan says:

    I am still waiting for a good explanation of how speculation is driving up oil prices. “Perceived supply and demand” won’t cut it— it is well known that the vast majority of futures contracts are settled before delivery. Futures may be a good way to hedge risk, but they don’t seem to be creating excess demand.

  10. clays says:

    ThinkProgress is schizophrenic. Higher oil prices are good, because of the reasons you mentions, unless it hurts Obama’s re-election chances. Then high prices are bad.

  11. with the doves says:

    You said it better than I could.

    Despite these articles, I’m still convinced that the underlying reason for the high price of oil is the rising demand coupled with basically static supply. The evidence cited here is not really compelling.

  12. with the doves says:

    whoops – the above was supposed to be a response to Steve.

  13. Publius says:

    You are absolutely correct. This is all about monetary policy…unless of course you are conspiracy theorist and blame it all on “speculators.” What these speculators are doing is making a lot of money off of the fiscal and monetary profligacy of our elected representatives and Federal Reserve know-it-alls. They’ve devalued the dollar, therefore anyonw with any brains and… going to try and front run the run-up in prices of things that consumers MUST buy…like energy products, and agricultural products, etc.

  14. wili says:

    Yep, prices famously reached about $150/barrel in ’08, and while they briefly crashed down with the economic crash that ensued, they have averaged about $100 since. This compared to the historic range of about $20 that lasted till the run up that started in about 1998.

    I have yet to see an explanation how speculation alone could keep prices of this vast, global commodity this high for this long (four years, now).

    As others have said, the price of ffs is far too low, both for its intrinsic energy value (a gallon of oil is worth, what, 300 days of human labor? And once we use it, it never comes back.), and more so because of their cost to the environment–they are planet destroyers, quite literally.

    We need to start describing them as death fuels. As that ideas sinks in, perhaps we will start to turn away from their addictive power.

  15. TarSandLandia says:

    High gas prices may give impetus to consumers to drive less or to buy more fuel efficient cars. Great. However, they also lend themselves to political misrepresentation, giving ample and welcome ammunition to the drill everywhere crowd. As they love to pontificate — If only there weren’t protected areas, if only there weren’t so many regulations blah blah blah, we would all enjoy the nirvana of low fuel prices. To the extent that fuel prices (and arguably a misunderstanding or misrepresentation of why they are as high as they are) give political cover to building pipelines from here to eternity, to deep water drilling, to drilling in the Arctic, to fracking every square inch of North America, to strip mining the boreal forest, I don’t find coverage of the issue at Climate Progress at all contrary to the mandate.

  16. Ken Barrows says:

    And the speculators were very ineffectual from 1986-2002.

  17. Michael Springs says:

    Either you people are on crack or you work on Wall Street! It has to be one or the other, in my opinion.

    You need some facts?…… Here’s a good link.

    I guess I’m the only one remembering watching CNBC, CNN, and FOX along with a couple of dozen news organizations stating repeatedley that there is no speculation in the oil futures markets. Only to be followed up by an analyst from Goldman Sachs predicting $200 a barrel oil in Late 2008, 09 and 10.

    Just to watch Ali Velshi eat his words in 2010 after a congressional report came out that confirmed that their was massive speculation.

    The market is rigged and we all know it, down from every investor to every broker.

    The system is rigged, and the only thing this article lacks is the simple admission that the people have grown wise to the game, “so why can’t our government figure it out”?

  18. Steve says:

    Well, thanks, with the doves. We tend to agree often. I wish I could get the government to keep down the price of cigarettes, alcohol, and junk food along with gasoline…

  19. Steve says:

    Since this is now a Regulate Wall Street blog (which, don’t get me wrong, is a good idea… the financial sector regulation, that is, not the dual purpose blog), are we talking about speculation or manipulation???? The further out the time frame, and the more price is potentially dictated by intervening events (peak oil and possible Middle East hostilities, especially in Iran), then there is and always has been an element of “speculation” in market activity. Concerted, manipulative trading is different. Is there evidence of that? Speculation is not illegal; manipulative trading can be.

    When you bet on the outcome of the Apple antitrust lawsuit by going short or long, you are speculating. Trust me.

    But, if the hedge fund speculators push gasoline consistently over $5.00 a gallon in Southern California, it will do more to reduce CO2 in the atmosphere than will all the stalled-out bills in Congress. Push people, scare people to make the energy efficient investments and they are unlikely to ever go back. Give them comfort of mind that Uncle Sam will keep life pleasant and affordable, and they will drive around in their fancy SUVs and pickups, air conditioning blasting, until the earth freezes over (inverted pun intended).

    Cheers, brothers and sisters.

  20. Steve says:

    Excellent point. Keynesian economics, fiat currency, and deficit spending. “Great” progressive ideas; not good for the planet. Will feel-good politics or will Nature and Physics win in the long run????

  21. Steve says:

    The intended sarcasm, of course, is not directed at you, with the doves, but at the collective inability of others to recognize that the “business as usual” that they scorn includes front-and-center the cheap gasoline that they want so desperately now to protect.

  22. Steve says:

    I appreciate your political and environmental concerns here, but you need to think this through.

    Keeping domestic gasoline prices down will not persuade drillers not to drill — they have a huge international market slurping for their wares. Force the conversion to more efficient use of oil and gasoline and make inroads into the addiction.

    Besides, you cannot credibly argue the world is on the verge of climate catastrophe and, at the same time, postpone forced emission reductions because you prefer a carbon tax over a market-based solution. When you do that you open yourself up to the charge that is really is about politics, not about physics.

  23. Anne van der Bom says:

    I see many people expressnig the belief that high oil prices are good. They are not. They are a sign that demand is strong and alternatives and/or energy efficiency are insufficiently developed. Another consequence is that tar sands, deep see and arctic drilling are profitable.

    I’d rather see an oil price of $ 10 per barrel. That would mean nobody wants the stuff.

  24. Mulga Mumblebrain says:

    And when it all goes bust, the grifter speculators get given a few trillion to soothe their feelings, the public gets the bill, to be paid for by savage social regression, and the ‘speculators’ go right back to gambling with the loot handed over by their former (and future)colleagues, temporarily running things in central banks and Treasury Departments. This, in my opinion, is not ‘a market’, but a racket.

  25. Mulga Mumblebrain says:

    Peak ‘Easy’ oil was some time ago.

  26. Mulga Mumblebrain says:

    Neo-liberalism got Europe, then its even uglier sister, ‘disaster capitalism’, moved in to finish the job.

  27. Mulga Mumblebrain says:

    The ‘speculators’ (ie the parasites), operate in the perverted ‘market’ of neo-liberal capitalism. There the laws of supply and demand have been distorted by the weight of money power. The speculators being big banks, wealth funds, hedge fund etc, ie the rich, can push markets their way, in a manner not open to the 99.99%. And, if the chicanery, connivance and malfeasance runs too wildly amok, and you get yet another speculative, unproductive and ultimately destructive asset bubble detonating, why these ‘Masters of the Omniverse’ run blubbering to their friends in central banks and Tresury Departments, and their political assets in Government, in whom they have invested so much money, and they get bailed out, to launch a new bubble with public money. The sucker public get the bill.

  28. Publius says:

    Michael – do you understand why firms, individuals, Wall Steeters, Hedge Funds are “speculating?” They are engaging in Futures transactions in commodities in REACTION to U.S. Monetary policy. The policy of our Federal government is to keep short-term interest rates near the zero-bound with the expressed intent that this will somehow stimulate investment spending (they are wrong), allow underwater homeowners time to refi, and prop up securitized debt that is sitting on the books of large banks. Add to that the fact that we have a CPI ~ 3.00%, which gives saver NEGATIVE real yields. That is primarily why Oil prices are sky high. It’s the expressed policy of Obama, Congress and the Federal reserve that draws speculators into the market. It’s a response to poor monetary and fiscal policy, not some nefarious plot to destroy the world.

  29. Publius says:

    That being said Michael, the system is definitely rigged in the sense that Wall Street firms have waaaay too much influence with politicians which absolutely has a detrimental impact to your average American citizen. Just look at the cabinet positions and advisers to Obama, Bush and Clinton: half of them came from Goldman Sachs or Citi group.