Obama's Crackdown on Oil Speculators Isn't Enough to Lower Gas Prices

Last Updated Apr 23, 2011 12:57 AM EDT

President Obama is clearly eager to avoid the fate of a previous Democratic occupant of the White House -- Jimmy Carter. When gas prices soared in 1979 amid a deep economic recession, the former Georgia peanut farmer's approval ratings plunged to well below 30 percent. Further weakened by the Iranian hostage crisis, he got crushed at the polls the following year by Ronald Reagan.

The moral of the story? When prices at the pump spike, do something. According to Commodity Trading Futures Commissioner Bart Chilton and Sen. Maria Cantwell, D-Wash., rampant oil trading speculation is costing the average Honda Civic driver an additional $8.35 to fill up the tank. Drivers of the Ford F150, a popular pick-up, are paying an extra $16.69.

Obama is addressing the nearly one dollar hike in gas prices from a year ago by ordering the Justice Department and other government regulators to examine to what extent illegal oil sector speculation might be driving the increase. Attorney General Eric Holder said in a statement:

Rapidly rising gasoline prices are pinching the pockets of consumers across the country. We will be vigilant in monitoring the oil and gas markets for any wrongdoing so that consumers can be confident they are not paying higher prices as a result of illegal activity. If illegal conduct is responsible for increasing gas prices, state and federal authorities should take swift action.

Feds threaten speculators with jail
Action like putting traders busted for manipulating oil and gas prices behind bars, according to at least one member of the federal task force formed to conduct the probe.

We'll see about that. Commodities speculation is of course perfectly legal, and it will be no easy task for the feds to identify abuses. You also have to wonder whether an administration that has shown considerable deference to the financial industry will be willing to rigorously investigate the big banks, hedge funds other institutional investors that dominate oil trading.

For instance, note that the feds appear to be targeting outright cases of collusion, fraud or other blatant wrongdoing. But for consumers, the broader question is whether excessive speculation -- legal or not -- is pushing up gas prices. There's ample evidence that it is, with trading in oil futures at a record high.

What do we mean by excess speculation? In general, a tide of investor bets that disrupts a market sufficiently to short-circuit the basic forces of supply and demand. When that happens, rising volatility can force companies that invest in oil in order to, say, hedge against future rising oil prices to abandon the market. That makes the sector even more vulnerable to sudden swings.

Gassed: With oil shocks come recessions
As statistician Nate Silver recently pointed out, high gas prices don't necessarily spell a president's doom. The U.S. is also less dependent on oil today than it was in the 1970s, reducing the impact of price hikes. But obviously such oil "shocks" can knock the economy off track. In fact, they're linked to every major U.S. and worldwide economic recession over the last 30 years, New York University economist Nouriel Roubini said in a 2004 paper, including:
  • 1974-75: Global recession triggered by the tripling of the price of oil following the Yom Kippur war in Israel and the following oil embargo
  • 1980-81: Global recession sparked by a spike in the price of oil following the Iranian revolution in 1979
  • 1990-91: U.S. recession partly caused by the spike in the price of oil following the Iraqi invasion of Kuwait in the summer of 1990
  • 2001-04: Global recession partly caused by the sharp increase in the price of oil in 2000 following the California energy crisis and rising tensions in the Middle East
Fight over commodities rules could end in Supreme Court
The government's commitment to investigating oil speculation is welcome. It is, after all, a crime under the FTC's Petroleum Market Manipulation Rule to manipulate wholesale oil markets.

But if the White House is serious about helping American consumers and businesses, it also will work to clear the logjam on new energy trading limits. The Commodity Futures Trading Commission is now three months late in implementing rules authorized under the Dodd-Frank financial reform law aimed at capping investors' commodity holdings.

The hold-up? Lobbying. Financial firms including Barclays Capital (BCS), Goldman Sachs (GS) and Morgan Stanley (MS), joined by trade groups such as the International Swaps and Derivatives Association and energy companies, are pushing the CFTC to withdraw its plan to impose "position limits" on commodities trading. The fight may soon head to the U.S. Supreme Court.

Adopting and enforcing those rules would almost certainly do more to curb gas prices than locking up speculators (although there's no reason you can't do both). The government needs to stop such market manipulation now. If it doesn't, the economic and political costs are unlikely to be peanuts.

Image from Wikimedia Commons
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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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