Higher Gas Prices: Blame Speculators?

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Published April 05, 2012

| FOXBusiness

It all started earlier this year when presidential hopeful Newt Gingrich promised voters that if elected to the White House, he would make sure gas prices dropped to $2.50 a gallon. 

OK, so maybe it happened before the former speaker of the House made his bold promise. In fact, it happens every year around this time: speculators -- both illegal and legal -- get blamed for rising oil prices, which are then passed onto consumers at the gas pump.

Speculators, either single individuals or companies, are looking to gain from price fluctuations in commodities markets without an intent to actually purchase a physical product. Buying and selling by these market participants, critics say, has exacerbated volatility in the commodities markets.

“The traditional role of speculators has been to allow a transfer of risk to those who want to get rid of the financial risk to those who will accept it,” explained Branko Terzic, executive director of Deloitte Center for Energy Solutions. “They need to do that because the producers in the market -- whether a farmer or oil company -- have to make large capital investments, and they like the certainty of the price where they can lock in the price today for a future sell.” He added that speculators accept that price risk to facilitate the producers being able to fund their operations and their continuing developments.

With the national average of regular gas currently at $3.94 a gallon, according to AAA, Americans for Financial Reform held a conference call on Thursday discussing the impact of Wall Street speculation on fuel prices, and called on lawmakers and regulators to take action to stop “excessive speculation.”

“If the market is telling the whole truth that prices are going up, well that means today’s prices are going up as well because people will continue to hold oil and are likely to say, ‘You are going to have to pay me more if I am going to part with it,’” said Wallace Turbeville, senior fellow at Demos and former Goldman Sachs (GS) executive on the call.

Mark Cooper, director of research at the Consumer Federation of America, said consumers are paying 75 cents too much for the price of gasoline per gallon because of excessive speculation.  

At a committee hearing about energy prices on Wednesday, Speaker of the House Nancy Pelosi said, “Experts have been clear, Wall Street speculators are artificially driving up the price at the pump and causing pain to millions of American consumers.  We'll hear more about that from our expert witnesses and from our colleagues.”

But other experts argue that the finger pointing at speculators happens every year around this time, ignoring fundamentals and the simple economics of supply and demand.

“The key to understanding energy markets is they have very strong seasonal cycles," explained Darin Newsom, senior commodities analyst at DTN. “We see end-user interest increase at this time, as more commercial users get involved we see more money being returned.”

Experts also question why natural gas prices, which speculators also operate heavily in, haven't increased. “Why is it that speculators can drive the price of oil up, but not the price of natural gas, it is at all-time lows,” asked Terzic.

The Commodity Futures Trading Commission is tasked with protecting consumers against unfair, deceptive, or fraudulent trading practices, including oil price manipulation. However, regulators have had a hard time creating new rules to curb these practices.

In the wake of the financial crisis, where oil prices topped $140 a barrel, the 2010 Dodd-Frank Financial Reform law required the CFTC to establish rules to stop speculation in the oil markets.

The CFTC finalized new rules, including curbs on the number of commodities contracts trading firms can have, in October, but they have not gone into effect.

Terzic, who also served as chairman of Wisconsin’s Gaming Commission, warned rule-making is very complicated, and that it takes a long time for regulatory agencies to create and fully research the potential impacts of any enforcement.

“It takes a long time to do an internal study and reach an internal consensus on deciding exactly how to do it and if it would be clearly understood, how it will work, how it would be administered and who would have to follow it. It’s a complicated set of issues on many levels."

Earlier this week, Democratic Sen. Bill Nelson wrote a letter to President Obama urging him not to reappoint CFTC Chairman Gary Gensler unless he institutes trading curbs to reduce speculation and reduce fuel prices.

“Middlemen are bidding up the price of oil and flipping futures contracts for a quick profit, much like speculators who bought and resold condominiums during the real estate bubble," wrote the Florida senator.

Gas prices have become a common theme on the political stage, with Republican presidential hopefuls laying out plans to combat rising gas prices. In a news conference last month, President Obama asked Attorney General Holder to "reconstitute" a year-old task force to probe speculation in the oil markets.

University of Maryland School of Law professor and former director of trading and markets at the Commodity Futures Trading Commission, Michael Greenberger said on the call that the president’s original announcement of the task force last year sent oil prices dropping to $75 a barrel from $110 in six months.

“If there is a real investigation just the appearance of it will cause these cockroaches to scatter because the light will be turned on,” Greenberger told lawmakers on Wednesday. “They don't want to go to jail.  And if they think they're not going to go to jail, they're going to keep damaging the American economy.”

Oil and gas prices often dominate headlines and are scrutinized more than other commodities like wheat or corn because it is the only commodity consumers buy directly, Terzic explained.

“It is the only thing where you see the price every time you use it, and therefore it becomes a bellwether for a lot of things in the economy.”

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http://www.foxbusiness.com/markets/2012/04/05/higher-gas-prices-blame-speculators/