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:
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.
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.
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.
(By the way, liberals, it’s not worth bragging that the number of regulations have gone down under President Obama. Unless you believe that the nation under the Bush Administration featured the oppressive hand of government regulating everything in our lives.)
Furthermore, the President plans to travel to Cushing, Oklahoma, which if you believe primary results he may be less-liked than anywhere in the country, to personally announce a fast-tracking of the southern half of the Keystone XL pipeline.
President Barack Obama plans to announce in Cushing, Oklahoma, on Thursday that his administration will expedite the permit for the southern half of the Keystone XL pipeline, a source familiar with the president’s announcement told CNN [...]
Late last month, TransCanada, the company behind the Keystone XL Pipeline, announced it would move forward with the process to build the southern half of the pipeline, which would begin in Cushing – the president’s third stop on his two-day energy tour. The White House praised the move.
Senior administration officials would not confirm the president’s plan to unveil the effort to cut red tape for the project, though one senior administration official acknowledged the need to deal with the glut of oil in Cushing, where oil from the Midwest hits a bottleneck as it is transported to the Gulf of Mexico.
The Midwest glut of oil caused by the Cushing bottleneck, incidentally, has kept prices artificially low for gas in the Midwest, and alleviating that glut will actually increase those prices, as the oil pushes out to the world market. [For affected Americans, the relatively small decrease in global prices from increased supply will not balance out the increase in price of that oil for the Midwest; just think about the impact of the same amount of oil on a narrow belt of one country versus the entire world.] So this is a plan that will raise gas prices in the Midwest, a hotly contested area in the fall elections.
This will not help bring additional tar sands to market, as the Cushing to Texas pipeline doesn’t include the upper part of the Keystone XL project that connects to Canada. But it does continue the build-out of old energy infrastructure at a time when new energy solutions are needed. The solution to reducing gas prices in relative terms are available to the executive branch, but they’re taking a different approach.





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Interesting how many wars we’d promulgated in the last 60 years over oil, or in the case of Afghanistan transportation of oil, as a national security issue. Yet Wall Street trashing the economy because of speculation (throw in electricity as well) is unsolvable by any President or Congress. Is more evidence of the United Incorporated States needed?
A pipeline to nowhere. Brilliant.
God damn it, when will Democrats say enough is enough?! Ever? Never? Don’t Democrats actually care about ANYTHING anymore?
CFTC has authority now to increase margin requirements on “essential” commodities and could declare national defense priorities as reason behind a new rule that with certain “essential” commodities (ie oil) that anyone with a market interest in same would have to actually take “delivery” of said product. Speculators would fall all over themselves as they raced for the door knocking off at least 30% of current price of WTC.
But what would (will) really kick the Wall St boys in the ass is an administation announcement that they will be on the other side of the trade (the short side) by releasing 10 million barrells per week from the SPR and continuing that exact approach as long as nescessary but at least through the end of the year. We have 727 MILLION barrels in SPR and 10 million release per week immediately puts 1.6 BILLION per week into federal coffers (at $4 per gallon with roughly 40 gallons per barrel) or on to year end basis of roughly 50 BILLION into debt reduction (or better yet electric car subsidy) counting 30 weeks left in year (assuming anouncements happen the week going into Memorial Day weekend-the start of summer driving season!!)
The REPUGS will go crazy, the public will love it, Obama will look like he cares about the common man, and re-election will be all but certain. Better yet if price per gallon craters (as it will) the big O adds a 50 cent per gallon tax with proceeds directed exclusively at electric car subsidy which creates jobs (actually a whole new industry that sorely could use some subsidy to jumpstart it!), continues to lower need for gas, cuts into oil company profits -oh dear!- and drives REPUGS certifiablu insane—–all good things.
Not only will it happen but it will happen week of May 20th -May 26th to have maximum effectiveness. By the way the Brits will be doing same at same time. JMHO.
President headed to southern NM to talk about domestic production. How tiresome it is, I can’t take it.
What the hell is wrong with Obama and his crew?
I’m 64. This is probably about the 10th time that speculators have done this.
With the last time this happened, under Bush, they looked at the problem and came up with the same conclusion.
Let’s see. We can’t control OPEC, who truly does set the world price. Obama won’t go after the oil companies, who are essentially another monopoly. Then we have the speculators.
What a better way to get the American public to support him in his re-election bid!!
As the immortal Pogo said, “We have met the enemy and he is us.”
The problem is that the real Democratic party went by the wayside with the election of Clinton. Obama is just carrying on the tradition of destroying the Democratic party. Hell, Ronald Regan was a better Democrat than what we have now!
Oh, how I wish this idea got more attention. The same goes for many commodities, food being one of them. Why do we let the rich profit on the starvation of the poor? What does that say about the human race, really? Those are rhetorical questions.
This is so tired. If Iraq was over oil wouldn’t we have it instead of the chinese? Get off the talking points. You’re worse than a dittohead.
Was a George C Scott film years ago called “The Formula” that stated that years ago. Basic premise of the movie was that the “Arabs are Us” (ie what use to be called the Seven Sisters). The Germans had synthetic fuel in the 40′s and we had very efficient electric cars in the 70′s both of which have been stymied until after Big Oil has sucked every dollar out of us when suddenly the next big thing (controlled by them) will appear at the door.
Nothing would make me happier than a true GM (Government Motors)heavily subsidized by at least an extra $1 per gallon tax on fuel (price to public reduced by heavy manipulation of supply by use of SPR) creating a whole new industry that eliminates dependence on oil in less than 5 years. It can happen if powers that be would allow it….
Someone needs to hold a teach in on oil hedging for you fogies. Speculation plays an important role in maintaining a functional economy. Blaming Wall Street is so 2009. get over it.
For the love of ….
People, every bet that the price of oil will rise is met by a bet that the price will fall. All the speculation nets out to zero.
Try again.
You are correct speculators play an important role in a market and you need them for liquidity. BUT traditionally the oil markets, and for that matter most commodity markets, had about a 10 percent speculators, to 90 percent end users. The ratio today is about 60 percent speculators to 40 percent end users. It has been as high as 88 percent speculators to 12 percent end users.
Speculators used to have caps on the amount of futures contracts they could hold at any one time, until the Commodity Futures Act for 2001 was passed. Funny how that coincided with the continuous run up in prices.
Increase margin requirements to 30 or 40 percent, limit speculators to 15 percent of the market, and watch oil plummet 30 or 40 percent in a week.
Using the term “speculators” distances us from the truth of how the markets are working against regular people. Speculators are rich people who have money lying around to buy up resources to resell at a higher price. This is yet another upward redistribution of wealth, and it is unacceptable.
Correct McDonald. How about this from none other than GS:
If there were no speculation in oil futures on commodities exchange, the price of a barrel of oil might be as low as $74.61– not more than the present price of $108.00 a barrel.
But, there is plenty of speculation as the possibility of strife in Iran, one of the globe’s largest crude oil producers, pushes up the price of oil futures, which in turn impact the price of buying crude oil in the open market. As of February 23, 2012 “managed money” held positions in NYMEX crude oil contracts equivalent to 233.9 million barrels of oil– the equivalent of about one year’s crude oil supply from Iran to Western European nations like France, Belgium, Greece, Italy and Spain.
As Goldman Sachs believes that each million barrels of speculation in the oil futures market adds about 10 cents to the price of a barrel of oil, this means that in theory the speculative premium in oil prices due to speculation is as much as $23.39 a barrel in the price of NYMEX crude oil.
In turn oil analysts believe that every $10 rise in the price of crude oil translates into a 24 cent rise in the price of gasoline at the pump.
From “Common Dreams”;
On Tuesday,” according to reporting by McClatchy’s Kevin G. Hall, “Oil [prices] rose past $106 a barrel and gasoline averaged $3.57 a gallon — thanks again in no small part to rampant financial speculation on top of fears of supply disruptions.”
Hall’s report highlights the fact that despite rising prices at US gas pumps, demand in the US was so low it has “become a net exporter of gasoline, unable to consume all that it generates.”
This fact contradicts the familar refrain from GOP politicians and operatives who claim that a ‘Drill Everywhere’ agenda would solve US energy woes or lead to lower prices for consumers.
Hall acknowledges that the “ostensible reason” for the climb in prices is accurately ascribed to increased tensions and fears about a “military confrontation with Iran,” but writes that the deeper cause is that financial speculators are “piling into the market, torquing the Iranian fear factor into ever-higher prices.” He continues:
… oil’s price shot up because it trades in financial markets, where Wall Street firms and other big financial players dominate the trading of oil, even though they have no intention of ever taking possession of the oil whose contracts they are trading. [...]
And he quotes Fadel Gheit, a 30-year veteran of energy markets and an analyst at Oppenheimer & Co., who is convinced “oil prices are inflated” due to speculation, saying:
The U.S. average gasoline price rose half a cent overnight 3.570 a gallon, according to AAA’s daily survey of fuel retailers, conducted by Oil Price Information Service. In California, the average price was $4.042, up about a penny overnight. (Getty Images)
“Speculation is now part of the DNA of oil prices. You cannot separate the two anymore. There is no demarcation.”
So how much has speculation inflated prices? Hall writes:
Defining what percentage of today’s high oil and gasoline prices is due to excessive speculation, driven by Iran fears, is something of a guessing game.
“I put the Iran security premium at about $8 to $10 (a barrel) at this point, which still puts crude at about $90 or $95,” said John Kilduff, a veteran energy analyst at AgainCapital in New York.
Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it’s almost the reverse.
The fear premium is the froth above what prices would be absent fears of a supply disruption — somewhere in the $80 to $85 range for a barrel of crude oil. It means that even with the extra cost put on oil from Iran fears, prices are at least another $10 higher than what demand fundamentals would dictate.
Why? Financial speculators.
What should the price of oil be if left to conventional supply and demand market fundamentals? Canada’s the largest supplier of imported oil to the United States, which now actually produces more than half of the oil it consumes. Production and delivery costs for a barrel of oil from Canada are about $75 a barrel. The market-fundamentals cost for a barrel of oil is in that ballpark; above that, speculation sets the prices.
“It’s as simple as that,” said Gheit, who has testified before Congress and called for regulatory limits on speculation in commodities markets.
Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it’s almost the reverse.Because speculators dominate the market, writes Hall, their predictions of higher oil prices — which were rampant on Tuesday — can make their “prophecies self-fulfilling.”
“These people are not there to be heroes. They are there to make money. It’s our fault because we are allowing them to do that,” said Gheit. “Obviously these people are very strong, and the financial lobby is the strongest of any single lobby. I’ve been in this business 30 years, and I can tell you I think this is smoke and mirrors.”
Read more here: http://www.mcclatchydc.com/2012/02/21/139521/once-again-speculators-behind.html#storylink=cpy***
That speculators have a huge impact on oil and gasoline prices is not news to anyone paying attention to the subject over the years, but it is an aspect that most media outlets rarely mention — even when spiking gasoline prices dominate the news cycle. And legislatively, efforts to bring damaging speculative practices under control have continually stalled in Congress.
“President Barack Obama plans to announce in Cushing, Oklahoma, on Thursday that his administration will expedite the permit for the southern half of the Keystone XL pipeline”
National Security demands we get oil out of the country so as to increase prices.
Wonder if the above line will be in the speech or in the media reports.
Dude. The “functional economy” of which you speak is a mechnism for enrichment of the elites.
No, it won’t be mentioned. In fact, I have come to despair of reality even entering our political discourse any longer. It’s just like living under Bush all over again.
I’m with you, must a little younger…61.
Tell you where I’m puzzled..I understand how the price of gas goes UP. What I don’t understand is how it goes DOWN. Somebody care to ‘splain?
I agree, I’m having one of those “Fool me once, for shame,I’m a fool, fool me twice you’re the fool, no, that’s not right…….”
‘zactly.
papau @ #17
another plus is the planned closure of the Pennsylvania refineries so that 40% of the domestic supply to the northeastern states will be eliminated. this will definitely increase global competition and drive down prices. . . /s
we are sooo effed!
http://blog.usw.org/?p=14457
the above is a good read about the refinery closures.
Had to fill my fuel oil tank today. Sure that will be a cool 1300. Nice to know the extra cost will go to the pockets what broke us.
What a long strange winter it’s been.
The Obama Administration gives fuel to the rise in oil prices and assists in enriching the Oiligarchs and the speculators by maintaining a bellicose foreign policy.
Your comment is beyond tired. Did the invasion and occupation of Iraq result in a substantial increase in oil prices thereby further enriching Big Oil? When oil supplies are disrupted, profits skyrocket. Comment again after you take a course in or two in economics. Your posts are naive and trollish, and the “fogies” here exhibit a degree of intellectual comprehension that you can only aspire to.
You must not have a 1000 gallon tank, thats for 250 +/- gallons , No?
Everyone here needs to face up to the fact that the U.S. has little power to set crude oil prices. Yes, speculation is a problem, but the overall conundrum is that oil is a finite resource, most of the easy-to-pump fields have been discovered and are being depleted and there is no way possible to increase production, anywhere, by any significant amount. The population is in complete denial, not just in the U.S., but apparently, worldwide. As an aside, the U.S. can produce only half as much oil as it uses each day, at the present (decreased) rate of consumption. And, the XL pipeline has little to do with oil production in the U.S. XL has to do with shipping CANADIAN oil to foreign markets, which only lessens the worldwide overall production decline, and in no way stops it.
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Your figures are a bit off. The SPR is full with 727 million barrels, however, last summer 30 million barrels were released (along with another 30 million barrels, worldwide) in an effort to hold prices down, leaving 696 million barrels. Price went down for about two weeks, but then went right back to above where they were before the release, and we’re talking 60 million barrels onto the world market. Why do you think another release would have different results?
Well it would be 10 million barrels for 30 weeks or 300 million barrels and do believe the supply was replinished to capacity. Either way we still would have at worst 400 million barrels left in SPR at end of year. Main emphasis would be to point out there is another side to the trade but supply would be released only domestically and it would effect price of West texas Crude in a big way. WTC is already priced separately from Brent. Gov could also cause price run by stating that gas released from supply would go for no more than x price puting pricing pressure on. Main point would be to show that price is not hitched to supply/demand but actually to speculation. As more dollars chase commodities the price goes up. To have maximum effect would change margin requirements and also make spec. actually take delivery. Katie bar the door the specs (ie lemmings) would race over the cliff as soon as possible once realization hit that there was now a solid “other side to the trade”. Was not that long ago that they were talking about $5 per barrel. Huge revenue to gov from these sales which i say should be earmarked to alternative energy (ie electric car subsidy). Hec if price per gallon craters enough (it would) toss an additional 50 cent tax on the now $2.50 or so gas with 100% going to electric car subsidy which would have wonderfull effect of reducing demand even more. How about that $29k Chevy Volt on sale thru subsidy for around 5k. Think that would stimulate demand? You bet it would. Notice how Repugs only want the gov. not to pick winners and losers when they are not in position to enforce it? What the hell do you think oil subsidies are for massively profitable companies? Time the gov. puts money into the correct companies that actually solve energy problems instead of enhance them.
Speculation is a problem that extends far beyond oil. More urgent is the problem of speculation of food crops. The issue here is, IMO, that investors who don’t do any real work are making a profit on the commodities marketat the expense of everyone else.
No, it was 60 million barrels, total–and the U.S. provided half. This was June of 2011 and a result of the revolt in Libya. There was talk of another release in July, but it never happened. I would expect another release if the situation with Iran deteriorates, but only if.
http://www.theglobeandmail.com/globe-investor/markets/markets-blog/oil-is-back/article2080384/
And I agree with you yellowsnapdragon. The commodities market does have a reason–to keep prices stable–but when it is under regulated investors can control the prices and drive them higher.
So Reddog whats your point? 1/2 of 60 million is 30 million. 727 minus 30 million is 697 million (700 million). If we used 300 million by end of this year (10 million a week times 30 weeks) we would still have 397 million (400 million) barrels in reserve. Exactly what I said. And do believe we release and even can tell you when (the week going into Memorial Day Weekend!). Do believe a US SPR release will coincide with a British gov. release in harmony. Also see that Sanders is pushing for crackdown on speculation thru Congress.
I f**king absof**kinglutely agree with you. This really pisses me off that Obama was just responding to inconvenient protesters political pressure when he delayed the XL decision with his eventual intent to okay the XL pipeline to destruction of the Midwest environment for the US. Much as I hate it and it’ll most likely make be barf when I do it, I think I’ll vote for a Republican in 2012, I’m not sure it could get much worse, for women, maybe, and that really makes me sad that I’d be hurting women voting Repub. Obama is far worse as he pretends to be for you, but he is for himself and his political brethren whether Dem or Repub. We have no real leaders to help us out here, and it’s becoming clearer all the time, with HR347 signed into law 3/8/12, that the only solution is to pull a ‘storm the Bastille’ operation, and a full out French revolution ‘off with their heads’ approach situation.
Then there is this: http://progressive.org/permanent_war_economy.html
Added to what you said is this Obama executive order for permanent war economy: http://progressive.org/permanent_war_economy.html
And then add the effects of the Bluedogs, the New Democratic Coaltion and the DLC and the Democratic brand is completely poisoned and why people say there is no diffeernce in the two parties. Progressives are the only true Democrats that haven’t sold out yet, though the 399-3 vote in the House on HR347 makes me wonder what the hell is going on; along with the Senate voting overwhelmingly on the Senate version of HR347, just tells me we’re screwed, as we have nobody on our side if the Progressives join with the assholes in Congress.
You’re an obvious Wall street exec, right? It is not speculation per se that is the problem as supply and demand needs the tactic, but what speculation is going on is to shave bucks off the top and give it to people who are just TAKING WHAT IS NOT THEIRS TO TAKE THROUGH THEIR MANIPULATION OF THE PROCESS. Speculation has a place for the ones who make the products and the ones who use the product, but the investors are screwing with the system to benefit themselves. Agricultural speculation is for the benefit of the growers and the ones who create products from what is grown, but investors scoop money off the top and artificially inflate the price and skim it off the top for them only.
If it netted zero, investors would not invest in it. It does not ‘even’ out as you claim. Oil isn’t the only commodity that is hurting folks and raising commodity prices on consumers, there is also food.
We get screwed from oil companies in a few of ways.
They get us at the pump,
then they speculate on the prices at the pump and the prices rise,
then they foul up our environment,
then they lay off people while claiming the exact opposite that the taxpayer subsidies they get go to raising employment, while the actual number of those employed with them has gone down steadily the whole time they’ve gotten subsidies, for the last ten years
and then, of course, they get taxpayer subsidies while they rake in the profits and have forever been extremely profitable.
Just another day in the United State of the BigOilCorporations.
“Fascism should more appropriately be called corporatism, as it is the merger of the corporation and the state.”_Benito Nussolini
So you have seen this:
http://progressive.org/permanent_war_economy.html
Thank you very much, as that is how I see it. This whole economy pampers and coddles the very rich investor class, the reason is beyond me. Why is someone who has extra money more important than someone who doesn’t have much left over and has to really struggle to save any money? Especially now when it seems that due to increased profits being the only goal and main reason for CEOs and corporations to do what they do, that non-empathetic psychopaths, some are also politicians, are at the top of the heap making all the decisions and they care little for how those decisions affect real people, nor do they even consider the consequences.