ENERGY
Crude Profits
The cost of filling up a gas tank has
shot up in recent weeks as oil trades at unusually high prices for this time of year. Oil prices have come down slightly since
hitting a high
of $106.95 a barrel two weeks ago -- the highest price for a barrel
since the record 2008 oil price hike -- but early trading today has
already
pushed prices back up. The spike in the cost of oil this early in the year
poses a serious threat to the fragile economic recovery, with experts saying that prolonged high gas prices could
cripple economic growth at a critical time. Some economists
are even warning that high oil prices could cost the economy
up to 600,000 jobs. "[S]ustained rises in the prices of oil or other commodities would represent a
threat [to] both to economic growth and to overall price stability, particularly if they were
to cause inflation expectations to become less well anchored," Fed
Chairman Ben Bernanke warned Congress earlier this month. A new CNN poll of
experts shows that "economists are
most fearful of one major headwind [to recovery]: oil prices." So what's causing this spike in prices?
One
factor
is Wall Street speculation. The government has new powers created by the
Dodd-Frank Wall Street reform law to deal with this problem, but as part of
their war on consumer protection regulation, Republicans have so far
prevented this from happening.
WHAT'S BEHIND OIL PRICES:
While there are several causes that contribute to rise in oil prices, many
experts
point to Wall Street speculation:
hedge funds, investors, and big banks trying to make money by betting
on the price fluctuation of oil and other commodities. Speculation in
and of itself isn't a bad thing -- in fact, it's necessary in moderation
with
proper regulation to help end users like airlines hedge against price
fluctuation -- but excessive speculation, especially when it is based on
fear
about inherently unknown future events, can artificially inflate the
price of
oil beyond the price that natural supply and demand forces would set.
Experts concluded in 2008 that that year's spike in oil and other commodity prices couldn't possibly be
explained by supply and demand forces, and that speculation must have played
a role. "[T]here is substantial evidence that the large amount of
speculation in the current market has
significantly increased prices,"
a House Homeland Security Committee report on oil prices from 2008
concluded. The same appears to be true today. While many blame high oil
prices on the crisis in Libya, the
country accounts for
only 2 percent of the world's output. More importantly, Saudi Arabia has
vowed to make up for any shortfall
in global supply by increasing its own production. So supply issues are
not likely having a significant impact on prices. And despite
conservatives' scapegoating, President Obama's policies are
clearly not to blame
either. Meanwhile, a commissioner of the Commodity Futures Trading
Commission (CFTC) -- the government agency charged with policing
commodity speculation -- said earlier this month that speculation on
energy futures, including oil,
is at an all-time high, jumping 64 percent
even since 2008. Speculation was blamed by both Republicans and Democrats
three years ago for oil prices, and even with conservatives' tea party
embrace of Wall Street today,
several Republican congressmen, and
conservative leaders have acknowledged that speculation is a driver of oil prices.
A SOLUTION:
Recognizing the problem of oil speculation, Congress gave the government new
powers to protect consumers and help ensure market stability with the
Dodd-Frank Wall Street reform law passed last year. The law gives the CFTC
the ability to limit "excessive speculation" by limiting the bets
speculators can make. The law expanded the CFTC's authority to regulate
the entire market
for the first time.
While futures -- bets on the future prices of commodities like oil and
wheat -- were regulated before the law passed, traders could choose to
instead purchase "look-alike" futures that were not subject to
regulation. Dodd-Frank changes this by allowing the CFTC to "impose a
uniform set of rules across exchanges and the
over-the-counter market,
replacing a patchwork of inconsistent restrictions
for different venues and commodities." Curbing regulation could help
make these markets more stable and transparent, and help bring down the
cost of oil.
DEFENDING WALL STREET:
But the CFTC has so far failed to take up this responsibility and write the
rules that would rein in oil speculators. The agency
missed a January deadline
to file new rules because of opposition from the commission's
Republican members and one of its Democrats, CFTC commissioner Michael
Dunn. The agency's chairman, Gary Gensler -- a
Democrat and former Goldman Sachs banker -- has taken a lead in
advocating
strong new rules on speculation, but the Republican commissioners have
been
foot dragging to defend Wall Street's profits, making Dunn the swing vote. Dunn
has said
he does not have enough information to sign off on new rules, despite
the fact that the agency has received hundreds of public comments and
held
at least 75 meetings with
experts, stakeholders, and the public on the matter. But Dunn's term is
ending this summer, giving President Obama
an opportunity to appoint someone who
is
willing to follow the law and rein in speculation. But the CFTC faces
another threat from Republicans on a different front. H.R.1, the House
Republican approved spending plan for the remainder
of 2011, includes a nearly
one-third cut in the CFTC's budget. Such a draconian cut would require the CFTC to
lay off more than 30 percent of its staff. Moreover, House "Republicans are
threatening
repercussions
for regulators that ignore their concerns." "We'd have to have
significant curtailment of our staff and resources," CFTC Chairman
Gensler said. "
We would not be able to police…or
ensure transparent markets in futures or swaps." The Republican effort
to take cops off the oil trade beat would allow speculators to continue
to drive up prices,
ensuring even bigger profits for oil companies.
