Editorial: Real problem with gas prices is oil speculators
"Trading Places," the characters played by Eddie Murphy and Dan Aykroyd destroy the stability of the orange commodities market over a $1 bet.
By speculating on the relative success or failure of the coming orange crop, the two Wall Street traders drive the price up and down in a single day, bankrupting the two Wall Street villains who also were trying to corner the market.
In a case of life imitating art, today's oil market isn't far from the fantasy of that movie.
While we American gas guzzlers received a relative reprieve this week as prices fell below $4 for a gallon of gas, today's oil market is driven more by speculators than by the actual push and pull between producers and consumers that is the very basis of the free market.
The good news for those of us feeling lighter in the wallet after our daily commutes is that there is a relatively simple solution to the problem.
The bad news is that most of our politicians would rather fight straw men than solve actual problems.
The natural reaction of Washington politicians when gas prices rise is to blame the president or blame the oil companies. Both make easy targets. So, here in Missouri, we have Sen. Claire McCaskill, a Democrat, calling for oil subsidies to be cut and oil refinery profits to be investigated. And Sen. Roy Blunt, a Republican, repeats the "drill, baby, drill" mantra from 2008 when prices last topped $4, and he blames President Barack Obama for the lack of drilling.
The president, also searching for demons, says he'll appoint a commission to investigate fraud and manipulation in the markets.
Wrong, wrong, wrong.
The real culprit is Wall Street. That was the case in 2008, when the price of gas topped $4 in the U.S. for the first time. And it's the case again today.
Sen. Maria Cantwell, D-Wash., has it right. She and 16 other senators, including Republican Susan Collins of Maine, wrote a letter to the Commodities Futures Trade Commission asking that the federal agency do its job.
The trade commission exists to help bring stability to the commodities markets. The market allows producers, such as farmers, and consumers, such as grocers, to hedge their bets on future pricing of farm goods, precious metals and oil. The pressure from those who produce the goods and those who consume them, working against each other to find the proper price point, determines a fair market for goods.
But since the early part of the last decade, when the federal government quietly allowed the nation's biggest banks, like Goldman Sachs and Morgan Stanley, to begin selling financial products that were, in effect, gambles that the price of oil would continue to rise, the market has skewed away from stability. Today, speculators control about 70 percent of the market, whereas for most of the last century that number was 30 percent or less. That means that the companies actually producing the oil and the consumers using it have little to do with the overall price.
So while supply and demand haven't fundamentally changed in the past year, the price of a gallon of gasoline has skyrocketed, and then dropped, and spiked again. The reason is pure, unadulterated gambling by Wall Street financiers.
Exxon CEO Rex Tillerson made that clear last week when he told Ms. Cantwell in a hearing that if not for the speculators, the price of a barrel of oil today would be between $60 and $70, not the $98 it was at the time. For consumers, that means we'd be paying closer to $2.50 per gallon, as compared to the $3.76 it cost per gallon on Tuesday in much of St. Louis County.
Ms. Cantwell and the other right-thinking senators have asked the Commodities Futures Trade Commission to act to reduce the excessive speculation in the market.
"While there has been little change in the balance of the world's oil supply and demand since 2008, oil prices have jumped around from $147 per barrel, to $31, to $86, to around $104 today," the senators wrote last week. "Just last week, WTI crude oil plunged 8.6 percent in one day, the largest drop ever in absolute terms, which according to multiple media outlets corresponded with a rapid withdrawal of positions by oil market speculators."
The commission not only has the authority to reduce the affect of oil speculators on the free market, but it also is required to do so under the Dodd-Frank Wall Street reform legislation signed by President Barack Obama last year. The rules would require commodities purchasers to have more skin in the game, thus reducing the incentive for speculators to enter the market relatively cheaply with an intent simply to turn a quick profit.
In layman's terms, the gamblers would be forced to "ante up" or put a meaningful down payment on their bets, rather than effectively signing a slip with their bookie. They also would be limited from placing too many bets on one game. In other words, one deep-pocketed oil speculator could not, through the weight of his highly leveraged bets, change the odds for everybody else. These simple acts, already allowed under law, would return the oil market to the relative stability it sustained before the past six years.
We don't understand why Ms. McCaskill and Mr. Blunt (or Illinois senators Mark Kirk, a Republican, and Dick Durbin, a Democrat) wouldn't sign on to such a letter, unless, of course, they are unwilling to provoke the Wall Street financiers who fund their campaign coffers.
Providing stability to the oil commodities market that helps consumers would be the one thing that could immediately bring some relief at the pump. It protects the farmers, the oil companies, utilities and other big businesses that depend on the stability of the commodities market. And it frees up investment from the speculators and big banks that will have to go elsewhere.
"This is a no-lose proposition," University of Maryland law professor Michael Greenberger, a former director of the CFTC's trading division, told us. "The only thing you're stopping is gambling."