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Wednesday, September 10, 2008

Drill the Speculators: Investors Drive Oil Prices

Earlier this summer, I noted Senator Obama's proposal to rein in oil prices by closing the "Enron Loophole," a treat for speculators brought to you by Senator McCain's campaign co-chair Phil Gramm. At the time the Bush Administration (in the form of Energy Secretary Samuel W. Bodman III) said, "There is no evidence that we can find that speculators are driving futures prices."


Speculation by large investors — and not supply and demand for oil — were a primary reason for the surge in oil prices during the first half of the year and the more recent price declines, an independent study concluded Wednesday....

"We have clear evidence the fund flow pushed prices up and the fund flow pushed prices down," said Michael Masters of Masters Capital Management, calling the amount of money moving into oil futures markets by large institutional investors in the early part of the year "way off the scale."

..."These large financial players have become the primary source of the dramatic and damaging volatility seen in oil prices," concluded the report [emphasis mine, reporting by H. Josef Hebert, "Study Links Oil Prices to Investor Speculation," AP via Yahoo News, 2008.09.10].

Obama advocates restoring sensible regulation to the commodities futures market. McCain, taking his economic cues from Gramm, has sought to protect the Enron Loophole.

I know "Drill baby drill!" sounds a lot more macho than simply changing a rule or two, but let's take a conservative approach: instead of expending all sorts of energy punching more holes in the earth and causing more environmental damage, how about first we try a solution that requires just a couple votes in Congress and a stroke of the President's pen?


  1. Excellent idea. Weren't speculators at least partly responsible for the events leading to the Great Depression of the 1930s?

  2. Once again horrible idea, legislatively trying to control speculation removes one of the primary functions of speculation to regulate prices. You remove that and you just end up making price changes a constant string of nasty spikes. Speculation should be used as a guide and its telling us we need to deal with either the supply or the demand in a serious way.

  3. Speculation? Regulate prices? Like when a hurricane passes over Jamaica on a westward track and goes from Category 2 to Category 1, oil prices drop within hours?

    That doesn't seem like regulation to me. I think it's more like insanity.

    But of course we can have too much regulation, as well as too little.

    Heavy-handed government regulation of oil prices could cause shortages such as those we had in the 1970s. At least there are no gas lines now.

    Letting speculators drive prices with no restraint is, in my opinion, foolish and dangerous.

  4. High gas prices may have been a good thing to jump start alternative energy sources.

    Just because you regulate investors in the major US exchanges does not mean they cannot go to foreign markets and do the same thing.

  5. Anon 11:57,

    I agree with you completely on both points there.

    I think government should play a limited role in oil market regulation. The particulars will have to be worked out by whatever administration we get for the next four years, hopefully before end users like you and me get hurt too much.

    Alas, pain is sometimes the only stimulus that actually brings results. I suspect we'll have to endure a lot more pain before anything substantive happens with alternative energy in the U.S. Look at the health-care mess!

  6. Stan, you're such a sensible moderate!

    Stan's right: limited regulation is the key. We don't want to control every minute detail of the market -- then we wouldn't have a market. But the Phil Gramm-Grover Norquist-Enron approach of total deregulation isn't working out that well, is it? The solution, as is so often the case, is in the middle.

  7. ...oops is right! Speculation does drive oil and therefore gas prices one way or the other. Funny thing is, the speculators are speculating that the democrates (majority party in the senate) will keep on doing what they are doing and continue to not let the problem be solved, in part or whole. Speculators are speculating on common sense continuing to be absent from Pelosie's activity, Barack's activity, etc... I thought a guy that attended an ivy league school (oops, dropped out) or lives at his mothers house, yes you, would have been able to put the "speculators" issue into proper context! -Steve in Omaha.

  8. So speculators think Obama is going to win in November? That does my heart good!

    Mom's house -- Oh! Silly me! And I've been sending mortgage checks to the bank! Thanks for straightening me out on ownership of my house, Steve. I'll call the bank and ask for a refund right away. ;-)

  9. Hi Steve...whoever you are...

    I'm Cory's wife, and the last time I checked, I wasn't living at my mother-in-law's house. Wait, let me take a look in case I missed something...nope, it's our house, which we had built ourselves. And we have the mortgage to prove it!

    Just clarifying--not that it has anything to do with Cory's original argument, of course.

  10. Speaking of that original argument, "Steve in Omaha" doesn't know much about me, but he appears to know even less about oil speculators. Anyone have evidence that oil speculators think the Democrats are going to win the White House and hold Congress for the foreseeable future? I'm not saying they don't; I'm just saying Steve hasn't offered any proof they have, just his wishes to support his worldview. News clipping? Congressional testimony? Anything, Steve?

  11. I didn't say complete deregulation. To quote a great man, "Trust but verify" The key isn't to reign in investors. Speculators have done nothing wrong in driving up the price of oil. They rightly recognize that the current trajectory of the world is leading to shrinking resources and greater demand. If it wasn't for the current damage to our economy that they are contributing to, we wouldn't be focused on finding any solutions until it was far to late. What regulation should be for is preventing market manipulation. ie insider trading, or using spam to inflate a stock to dump them at a profit. Price capping never has worked. I've toyed with ideas on how to prevent "irrational exuberance" but demonizing either the oil companies or the regular people investing in them is just knee-jerk progressivism.
    Also, even completely eliminating the speculative part of the price of oil would only knock it down to somewhere in the 80s. Supply and demand alone explain the rest of the increase.


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