The Wall Street Surcharge On Your Gas Tank How much are you paying to fuel Wall Street oil speculators? A new, very timely St. Louis Federal Reserve research paper, Speculation in the Oil Market finds 15% of oil price increases are due to speculation and is the second most powerful mover of prices beyond actual physical demand. Demand itself accounts for 40% of the total oil price increase. Increasing the supply of oil was not the top driver of price decreases according to researchers. Oil production not correlated to price decreases is backed up by an Associated Press analysis. The past decade has seen a surge in the financialization of commoditiesthat is, the creation and trading of financial instruments indexed to commodity prices. According to estimates (Masters, 200, assets allocated to commodity index trading rose from $13 billion in 2004 to $260 billion in March 2008. Many policymakers and economists have observed that this rapid and unprecedented growth in commodity index trading coincided with a boom in commodity prices; some have extended that observation into a conclusion that speculation by financial tradersand not supply and demanddrove the recent bubble in commodities. While some are dismissing speculation as the result of economists Juvenal and Petrella's work, think about it for a second. Fifteen percent of $100 dollars a barrel oil is $15 dollars. Taking a low correlation of Brent crude, a dollar increase per barrel is roughly equivalent to a 0.33¢ increase in the price of gas, or alternatively a $33/barrel price increase is correlated, roughly to a $1 per gallon gas increase. Looking at 15% of $123 oil, we have a $18.5 speculator surcharge per barrel. Roughly 50-60¢ was added to the cost of each gallon of gasoline just due to speculation. That's significant! The Brent crude oil price, which is the European oil benchmark and the West Texas Intermediate, or U.S. oil price, have diverged recently, but both over the long term are highly correlated to gas prices (the blue line, scale at the right above). There are actually many factors affecting gas prices, beyond the price of crude oil. James Hamilton has another great post explaining the differences across the States. James Hamilton also points to the futility of releasing the strategic oil reserve. I see no evidence that last year's SPR release accomplished anything, and would not expect the outcome of another release this year to be very different. Considering demand is the primary driver of gas prices, the fact gas demand has decreased implies a 15% speculator surcharge on a gallon of gas might be too low estimate. Yet in spite of these statistics, many note the CFTC won't and can't stop speculation until the end of the year. A group of Senators have introduced a bill in the Senate, all crafted to stop oil speculation right now: A group of senators Wednesday introduced a bill to make federal regulators invoke emergency powers to rein in speculators responsible for rapidly-rising gasoline prices. The legislation would set a 14-day deadline for the Commodity Futures Trading Commission to implement rules to stop excessive speculation by Wall Street traders in oil futures markets. The bill by Sen. Bernie Sanders (I-Vt.) is cosponsored by Sens. Richard Blumenthal (D-Conn.), Sherrod Brown (D-Ohio), Ben Cardin (D-Md.), Al Franken (D-Minn.), Amy Klobuchar (D-Minn.) and Bill Nelson (D-Fla.). With all of the blame game goin' on, oil price spikes are correlated to recessions, so why play around and allow this key critical commodity to become so volatile? Even using the St. Louis Fed's much lower percentage estimate of oil speculation, it still significantly raises gas prices. As it is, the few players in oil speculation are going to court to stop CFTC regulations. Wouldn't it be better to simply remove speculation from the energy demand and supply equation? http://www.economicpopulist.org/content/wall-street-surcharge-your-gas-tank
I have been amused by the sheer hypocrisy of the Republicans, who have called on President Obama to bring gas prices down. This is a laudable goal and one for which I would support the Republicans, if it wasn't for the fact that they also want the President to get tough (implying a military option) on Iran's nuclear program. The fact that any such military strike would spike the price of crude oil, and thus the price of gasoline, is apparently beside the point.
My stepmother is a stock broker and is licensed in all 50 states as an expert in IRS regulation, economics, and related matters. She tells me that if speculators do put the scare into people and are responsible for a fair amount of the price fluctuations we experience, but not all of them.
Yes, speculators do have an effect, but so do all the democrat taxes on gasoline..... Theyre gonna save the world from Global Warming by making you poor.... Awesome Plan, huh?? PS 4 years ago there was a plan before Nancy's congress that would force speculators to take physical possession of all the oil the purchased, before they could resell it..... That alone would have driven 95% of all speculators outta the speculation business....
They smooth out the spikes. They can't cause ups and downs. It doesn't make sense that individuals can buy up oil and hold up the prices when, as they are so very greedy, it would be more profitable to undersell their speculative competitors. The only way it would work is if there is only one small group controlling the flow of oil, in which case, the profits being so high, one has to wonder who is preventing others from entering the market? The one organization with that power is the government. So, as usual, if you want to blame high prices on speculators or inflation, the real culprit is your government. I'd be more curious to hear from the Democrats as to why high gas prices are a bad thing, given that we all need to get off our "addiction" to oil. High prices can only lead to more research into alternative fuels, right? Thus, speculators ought to be heroes among Democrats, if it's true that they are causing prices to go up.
haha, you don't know jack about real life. Inflation, speculators, turmoil in the ME and non-drilling policies GREATLY increase the costs of gasoline. And also, I don't even know many Democrats other than Democrats that work for the government, that would want to increase gas prices, unless they're rich and don't see the immediate economic destruction that higher energy costs cause. Your arguments are based too much on attempted but improperly implemented axiomatic reasoning and too little on actually doing research to acquire relevant information about what you say.
They certainly drive up the price of oil, but are they wrong to do so? It's a speculation that the price of crude will be higher tomorrow than it is today and there's basically no reason to believe that it won't. We're never going to break our dependence on carbon, it's the most efficient fuel known to man and why we continue to use it despite there being other alternatives, it's still the cheapest and most efficient. But like every other good, it's not limitless and global demand is constantly on the rise. It's not all S&D, there are a huge amount of variables that affect the price of a barrel of crude, including turmoil in the ME, but it's certainly a component.
Rising energy costs (generalizing from gas costs) will catch an economy on fire and eventually kill it.
I'm not so sure, I certainly agree that for a period of time there will be extreme turmoil, but I have faith in the human species, we've proven time and again to be the most adaptable on the planet. Couple that with the fact that there are already substitutes (imperfect) and I have a great amount of faith that price will hit a break point where the market will decide that oil is no longer economically viable.
I don't want to live in that period of time. It's being forced on me by greedy selfish people. And also the most evil species on the planet. That will mark the end of the human race, or so I hope..after I'm gone, of course. I don't want the economy that imposes itself on me, to "have" to cut off my legs in order to save me from gangrene.
Well, you don't really get a say in that unfortunately. My point is, we'll be just fine. Different, but fine. Well... we're also the only species that are sentient and thus the only species capable of "evil". I disagree with the alarmism though, mankind has a lot more to fear from despeciation than we do from having to find a new carbon fuel source. It's an emergent creature, it's outside of all of our control and as such doesn't impose anything on anyone, it only reacts to the decisions of the billions of actors within it.
But it's not out of peoples' control. It's entirely within the control of evil greedy (*)(*)(*)(*)(*)..and the ball less people who think they can't fight said evil greedy (*)(*)(*)(*)(*). And about alarmism, it's not "alarmism" when you aren't trying to create alarm. I simply want the pathetic annoying human race to die out, after I'm gone of course.
Well, don't get your hopes up. We live in virtually every climate and continue to survive despite being greedy, selfish, stupid and self destructive.
Let me make a small correction: some individuals are greedy and/or selfish and/or stupid and/or self destructive.
I don't disagree with the others; that's your strawman since I never suggested that inflation, turmoil and lack of exploitation of oil resources doesn't raise costs. How do speculators raise the cost? I hear the political rhetoric all the time, but I'd like a logical, objective breakdown of how individual human beings, purchasing commodities on the market, can raise the cost of those commodities. I'd also like an explanation as to why they don't lower the costs, and, given that speculators are always around, prices during the last few years were cheap. If you mention "greed", then I'll assume that your objectivity is lost. Democrats are frequently calling for tax hikes as a social engineering policy. They get higher prices, which drives people to public transportation and alternative fuels, and they get more money for pet projects and to pass to their friends in alternative fuels research. This from someone who posts a poll asking if speculators raise the price of gasoline but offers nothing either way to support the poll. Of course, the question is left begging: so what if speculation leads to a rise in the current cost of oil? Why is that a bad thing? If they prevent spiking, where people experience much higher, and very sudden, increases, then one could argue the benefit of speculation versus the implication that it is damaging because consumers complain and therefore bans and controls are called for. Your OP and the article by Margot make the claim that speculation does lead to a rise in prices, but it never refutes that the prices might have gone up anyway, at a later time, or in a different manner.
Greed gets a bad name. Even if the goal is amoral, the end result is productive and beneficial to the rest of society. Speculators predict high futures based on market conditions, yes they're opinion raises the price of a barrel, the better question is... are they wrong? Republicans and democrats alike have lobbied for various 'pet projects' and some (not all or most) have positive side effects or externalities. I think there are certain cases where subsidies are a good idea especially regarding energy, but that's a special case. I don't disagree with your overall appraisal, I mainly just wanted to try and strip away the stigma that greed has gotten.
