Crude Profiteering: An Overview Of The Price Of Unregulated Oil Speculators

This post was edited and condensed from today’s Progress Report, the daily ThinkProgress newsletter. Subscribe here.

While there are several causes that contribute to rise in oil prices, many experts point to Wall Street speculation: hedge funds, investors, and big banks trying making money by betting on the price fluctuation of oil and other commodities, often with exotic financial instruments. Unregulated speculation can artificially inflate the price of oil beyond the price that natural supply and demand forces would set, as the market is swamped by traders who don’t care about the financial well-being of oil producers and consumers. If matters get out of hand, speculatory excess can even destroy the entire market, as happened when mortgage derivatives overwhelmed the long-term stability of the housing market. Lesser amounts of this kind of vulture capitalism can precipitate economic decline and suffering when too many people can no longer afford food and energy.

Experts concluded in 2008 that that year’s spike in oil and other commodity prices couldn’t possibly be explained by supply and demand forces, and that speculation must have played a role. “[T]here is substantial evidence that the large amount of speculation in the current market has significantly increased prices,” a House Homeland Security Committee report on oil prices from 2008 concluded.

The same appears to be true today. Speculation on energy futures, including oil, is at an all-time high, jumping 64 percent even since 2008. Speculation was blamed by both Republicans and Democrats three years ago for oil prices, and even with conservatives’ tea party embrace of Wall Street today, several Republican congressmen, and conservative leaders have acknowledged that speculation is a driver of oil prices.

Recognizing the problem of oil speculation, Congress gave the government new powers to protect consumers and help ensure market stability with the Dodd-Frank Wall Street reform law passed last year. The law gives the CFTC the ability to limit “excessive speculation” by limiting the bets speculators can make. The law expanded the CFTC’s authority to regulate the entire market for the first time. While futures — bets on the future prices of commodities like oil and wheat — were regulated before the law passed, traders could choose to instead purchase “look-alike” futures that were not subject to regulation. Dodd-Frank changes this by allowing the CFTC to “impose a uniform set of rules across exchanges and the over-the-counter market, replacing a patchwork of inconsistent restrictions for different venues and commodities.” Curbing regulation could help make these markets more stable and transparent, and help bring down the cost of oil.

But the CFTC has so far failed to take up this responsibility and write the rules that would rein in oil speculators. The agency missed a January deadline to file new rules because of opposition from the commission’s Republican members and one of its Democrats, CFTC commissioner Michael Dunn. The agency’s chairman, Gary Gensler — a Democrat and former Goldman Sachs banker — has taken a lead in advocating strong new rules on speculation, but the Republican commissioners have been foot dragging to defend Wall Street’s profits, making Dunn the swing vote. Dunn has said he does not have enough information to sign off on new rules, despite the fact that the agency has received hundreds of public comments and held at least 75 meetings with experts, stakeholders, and the public on the matter.

Dunn’s term is ending this summer, giving President Obama an opportunity to appoint someone who is willing to follow the law and rein in speculation.

The CFTC faces another threat from Republicans on a different front. H.R.1, the House Republican approved spending plan for the remainder of 2011, includes a nearly one-third cut in the CFTC’s budget. Such a draconian cut would require the CFTC to lay off more than 30 percent of its staff. Moreover, House “Republicans are threatening repercussions for regulators that ignore their concerns.”

“We’d have to have significant curtailment of our staff and resources,” CFTC Chairman Gensler said. “We would not be able to police…or ensure transparent markets in futures or swaps.”

The Republican effort to take cops off the oil trade beat would allow speculators to continue to drive up prices, ensuring even bigger profits for oil companies and Wall Street bankers.

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