By Teresa Welsh |
Today's high oil and gasoline prices are partly due to the threat of skyrocketing oil prices should a Persian Gulf supply disruption occur. This fear leads commercial oil users to buy higher-priced contracts to lock in a price. In turn, Wall Street speculators exploit these fears by bidding up prices. President Barack Obama's plan to crack down on such speculators, however, could reduce oil prices.
High oil prices produce high gasoline prices. The Energy Information Administration estimates that the crude oil price is 72 percent of the cost of a gallon of gas. Wall Street speculators inflate these oil prices. McClatchy Newspapers reported on April 4 that:
Financial speculators such as investment banks and hedge funds account for at least 65 percent of [oil] contracts...more than twice their traditional share...The speculators bid up contract prices, sending oil and gasoline prices higher and reaping huge profits.
This is not the first time Wall Street speculators boosted oil prices. The Federal Reserve Bank of St. Louis found that "financial speculative demand shocks" contributed to record 2008 prices.
At a 2011 Senate Finance Committee hearing, ExxonMobil CEO Rex Tillerson acknowledged oil prices were higher than supply and demand dictated. He said oil should sell "in the $60 to $70 range," rather than $98 per barrel that day.
The 2010 Wall Street reform law strengthened enforcement against speculators. The president's new plan would go further. Because the ballooning number of oil trades dwarfs the Commodity Futures Trading Commission's oversight staff, the president proposes significantly increasing "enforcement staff for oil futures market trading." The plan would also raise penalties for market manipulation.
The plan could also require speculators to put more money behind their trades to "prevent excessive speculation or manipulation." These and other measures in it would help rid the oil market of "froth [where] asset prices become detached from their underlying intrinsic values." This too should reduce oil and gasoline prices.
But while the CFTC needs more cops, the House-passed Republican fiscal year 2013 budget slashes enforcement. And Republican presidential hopeful Mitt Romney would eliminate existing rules, allowing Wall Street speculators and Big Oil companies to earn gigantic profits paid for by the middle class due to higher gas prices.
President Obama's plan would stop speculators from driving up oil and gasoline prices to make a quick profit. Congress must pass it to help ease pain at the pump.
About Daniel J. Weiss Senior Fellow and Director of Climate Strategy for the Center for American Progress Action Fund
Andrew Holland Senior Fellow for Energy and Climate at the American Security Project
Edward J. Markey U.S. Representative