The Atlantic magazine recently offered a guide to the factors that go into determining the pump price of gas. It was a clear and persuasive exposition that, in part, dismissed the role of speculation as a possible, if marginal, factor.
That may be accurate. Then again, maybe not. Either way it would be good to know more about the role speculators do play in determining the pump price of gas.
McClatchy Newspapers reported May 24 that the Commodity Futures Trading Commission has charged a group of speculators with unlawfully manipulating oil trading on the New York Mercantile Exchange in the early months of 2008. They are thought to have made some $50 million in profit.
According to the piece in The Atlantic, the factors that determine pump price are - in diminishing order of importance - supply and demand, the situation in the Middle East, the value of the dollar, speculation, the effect of summer, and the level of U.S. production. (Those who advocate easing restriction on drilling to lower prices, including President Obama, should note where U.S. production placed.)
Supply and demand alone accounts for more than half the influence. But while speculation may exert a small affect overall, there are times and situations when small inputs can effect large changes. The CFTC alleges that three companies and two executives conspired to buy up large quantities of oil so that, McClatchy says, They were dominating and controlling supply, even though they were not commercial users of oil.
That helped drive up the price of oil futures by signaling that oil was in short supply and would remain so for some time. The speculators then bet that the price would fall, which it did - dramatically.
Did these guys cause the record prices of that year? Not exclusively, of course, but it is hard to imagine their influence was helpful. Worse, a McClatchy investigation also showed that end-users of oil historically made up 70 percent of the oil futures market, whereas today financial speculators comprise about 70 percent of the market.
Regardless of their total influence on prices, having that market dominated by speculators is an unhealthy development. Their interests cannot be identical to the long-term interests of a healthy economy. The very nature of speculation is to target quick, short-term profits.
There is no doubt that supply and demand are still the biggest factors in gas prices. But there is also no question that market forces are only part of the equation. Given that the full scope of speculators influence is unknown, its extent should be investigated.
The price of oil is too central to the American economy and too inherently volatile to allow speculators to manipulate it. It is bad enough that we continue to enrich bad actors overseas, we do not need to reward fast-buck artists here at home.