CNN (Bernie Sanders): Wall Street greed fueling high gas prices

[alexey]

http://www.cnn.com/2012/02/28/opinion/sanders-gas-speculation/index.html

(CNN) -- Gas prices approaching $4 a gallon on average are causing severe economic pain for millions of Americans. Pump prices spiked 5% in the past month alone. Crude oil prices stood at $108 on Friday, up from only double digits at the beginning of the month.

What's the cause? Forget what you may have read about the laws of supply and demand. Oil and gas prices have almost nothing to do with economic fundamentals. According to the Energy Information Administration, the supply of oil and gasoline is higher today than it was three years ago, when the national average for a gallon of gasoline was just $1.90. Meanwhile, the demand for oil in the U.S. is at its lowest level since April of 1997.

Is Big Oil to blame? Sure. Partly. Big oil companies have been gouging consumers for years. They have made almost $1 trillion in profits over the past decade, in part thanks to ridiculous federal subsidies and tax loopholes. I have proposed legislation to end those pointless giveaways to some of the biggest and most profitable corporations in the history of the world.

But there's another reason for the wild rise in gas prices. The culprit is Wall Street. Speculators are raking in profits by gambling in the loosely regulated commodity markets for gas and oil.

A decade ago, speculators controlled only about 30% of the oil futures market. Today, Wall Street speculators control nearly 80% of this market. Many of those people buying and selling oil in the commodity markets will never use a drop of this oil. They are not airlines or trucking companies who will use the fuel in the future. The only function of the speculators in this process is to make as much money as they can, as quickly as they can.

I've seen the raw documents that prove the role of speculators. Commodity Futures Trading Commission records showed that in the summer of 2008, when gas prices spiked to more than $4 a gallon, speculators overwhelmingly controlled the crude oil futures market. The commission, which supposedly represents the interests of the American people, had kept the information hidden from the public for nearly three years. That alone is an outrage. The American people had a right to know exactly who caused gas prices to skyrocket in 2008 and who is causing them to spike today.

Even those inside the oil industry have admitted that speculation is driving up the price of gasoline. The CEO of Exxon-Mobil, Rex Tillerson, told a Senate hearing last year that speculation was driving up the price of a barrel of oil by as much as 40%. The general counsel of Delta Airlines, Ben Hirst, and the experts at Goldman Sachs also said excessive speculation is causing oil prices to spike by up to 40%. Even Saudi Arabia, the largest exporter of oil in the world, told the Bush administration back in 2008, during the last major spike in oil prices, that speculation was responsible for about $40 of a barrel of oil.

Just last week, Commissioner Bart Chilton, one of the only Commodity Futures Trading Commission members looking out for consumers, calculated how much extra drivers are being charged as a result of Wall Street speculation. If you drive a relatively fuel-efficient vehicle such as a Honda Civic, you pay an extra $7.30 every time you fill your tank. For larger vehicles, such as a Ford F150, drivers pay an extra $14.56 for each fill-up. That works out to more than $750 a year going directly from your wallet or pocketbook to the Wall Street speculators.

So as speculators gamble, millions of Americans are paying what amounts to a "speculators tax" to feed Wall Street's greed. People who live in rural areas like my home state of Vermont are hit harder than most because they buy gas to drive long distances to their jobs.

It doesn't have to work this way. The current spike in oil and gasoline prices was avoidable. Under the Wall Street reform act that Congress passed in 2010, the Commodity Futures Trading Commission was ordered to impose strict limits on the amount of oil that Wall Street speculators could trade in the energy futures market. The regulators dragged their feet.

Finally, after months and months of law-breaking delays, the commission in October adopted a rule. It was a weak version of a proposal that might have put meaningful limits on the number of futures and swaps contracts a single trader could hold. Even the watered-down regulation adopted by the industry-friendly commission was challenged in court. The Financial Markets Association and the International Swaps and Derivatives Association wanted free rein to continue unregulated gambling in the oil markets.

So today, Wall Street once again is laughing all the way to the bank. Once again, federal regulators should move aggressively to end excessive oil speculation. We must do everything we can to lower gas prices so that they reflect the fundamentals of supply and demand and bring needed relief to the American people.

The time for real action is now.

[Corcaigh]

If the title was ...

"Wall Street greed fueling high house prices" would homeowners be concerned?

"Wall Street greed fueling high stock prices" would folks with investments in the S&P or Dow be concerned?

[Destino]

Perhaps someone on this forum can help us all out by answering this: What would be the downside of simply banning oil speculation completely? (for those that do not plan on using most of what they are buying)

[MattFancy]

The problem is there isn't much we can do about it. Its not like people are going to stop driving. That's what sucks about it.

[Corcaigh]

Perhaps someone on this forum can help us all out by answering this: What would be the downside of simply banning oil speculation completely? (for those that do not plan on using most of what they are buying)

How would you enforce this? Buyers would have to go straight to the refiners? No wholesalers?

Increasing supply so that there is less fear of scarcity would seem to be an option too.

[pjfootballer]

I could have told Bernie what drives ANYTHING in this country and he could have saved some ink- GREED!

Problem with taking away their subsidies and loopholes is, if they do that, they pass along what they lost to the consumer to make up for it. Either way, we get screwed. I hate the stock market. Caused the great depression and every other "recession" we've had. And I love how the slightest wave or ripple in the Middle East has them gouging us every time.

[HOF44]

How would you enforce this? Buyers would have to go straight to the refiners? No wholesalers?

Increasing supply so that there is less fear of scarcity would seem to be an option too.

Maybe make the speculators actually take delivery of the oil. The problem with the way futures are run now is that an "individual" with enough capital can effect the market to their advantage regardless of the realities of the real oil market.

[Corcaigh]

Maybe make the speculators actually take delivery of the oil. The problem with the way futures are run now is that an "individual" with enough capital can effect the market to their advantage regardless of the realities of the real oil market.

Even if delivery isn't practical, you could require payment of a deposit of X% of the purchase.

[Destino]

How would you enforce this? Buyers would have to go straight to the refiners? No wholesalers?

Increasing supply so that there is less fear of scarcity would seem to be an option too.

When I wrote "using most of what they are buying" I meant to include businesses like wholesalers that tend to add value. Allow me to rephrase: If we forced out the financial services sector that interacts with oil commodity entirely to turn a profit by moving the paper what would be the downside?

[techboy]

Speculation is vastly overrated in terms of driving oil prices. James Hamilton, an economics professor at UC San Diego, focuses on oil prices, and wrote this in 2008, during the last big spike when everybody was blaming speculators:

I do believe that speculation has been another factor that contributed to recent high oil prices. However, a key element of the bubble story is that there needs to be a very limited response of quantity demanded to the price increases, which the most recent data persuade me is no longer the case. Some of the estimates I've been hearing of the size of the contribution speculation is currently making to the price are therefore difficult to defend. Here I explain why, essentially elaborating on Paul Krugman's theme.

Yes, that Krugman (Nobel Prize winner, uberliberal, etc.). Here's what he wrote:

One of the things I find puzzling about the whole oil market discussion is how complicated people seem to make it. They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the world’s oil production: consume it, or store it.

and

Now it’s true that oil supply responds very little to price, and that empirical estimates of the short-run price elasticity of demand, like this one, suggest that it’s low — say -.06. But even so, the math of a sustained, large bubble quickly becomes daunting. Say the demand elasticity is -.06, and that you believe that the current price is 40% above the level at which end-use demand equals supply. Then you have to believe that 2 million barrels a day is disappearing into secret hoards somewhere — secret, because it’s not showing up in the OECD inventory data. That’s a lot of oil. And bear in mind that people have been claiming that there’s an oil bubble for years.

So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going.

And, here's something from 2011 from Dr. Hamilton again:

Every day, futures prices can and do move in response to how many people want to buy or sell the contracts. As I explained in a recent study in Brookings Papers on Economic Activity, inventory arbitrage forces the spot price to move along with the futures price. But as I also explained there, this does not mean that sentiment or speculation alone can put the price of oil at any arbitrary value. Ultimately, the critical question is whether the spot price is one at which the physical quantity produced is equal to the physical quantity consumed. Whether today's price indeed accomplishes this was the focus of my discussion of these events last weekend.

It's easy to use speculators as scapegoats, but I don't think it makes good economic policy, especially when you're talking about the kind of heavy handed intervention in the markets that can have all manner of unpleasant side effects. Just ask Nixon about his price controls.

Incidentally, Factors in the recent oil price increases is Dr. Hamilton's take two days ago on what is actually pushing prices up.

[Predicto]

Problem with taking away their subsidies and loopholes is, if they do that, they pass along what they lost to the consumer to make up for it.

Not really. In general, sellers charge what they can get for their product. They don't "pass along" costs. Econ 101.

[Commander PK]

Greed is destroying this country not just raising gas prices. We have a country full of "Daffy Ducks"

[twa]

Not really. In general, sellers charge what they can get for their product. They don't "pass along" costs. Econ 101.

#1/=#2

we do pass along costs or don't last long...we also pass along the best markup possible

[Predicto]

#1/=#2

we do pass along costs or don't last long...we also pass along the best markup possible

You only pass along costs in the sense that you have to exceed those costs or go out of business.

Nevertheless, the price charged for a product is not based on cost. It is based on what you can sell the product for.

If a company's costs are 8 dollars per unit, and the market will pay 15 dollars per unit, the company will charge 15 per unit.

If taxes are cut and a company's costs go down to 6 dollars per unit, and the market will pay 15 dollars per unit, the company will charge 15 per unit. Profits will increase.

If taxes go up and the company's costs are now 10 dollars per unit, and the market will pay the company 15 dollars per unit, the company will charge 15 per unit. Profits will be less.

The idea that cmpanies directly "pass on" their costs is one of the biggest fallacies in economic discussion.

[Hubbs]

I'm no big fan of Wall Street, but this is pure crap. There's a minor flaw in Bernie's reasoning:

What's the cause? Forget what you may have read about the laws of supply and demand. Oil and gas prices have almost nothing to do with economic fundamentals. According to the Energy Information Administration, the supply of oil and gasoline is higher today than it was three years ago, when the national average for a gallon of gasoline was just $1.90. Meanwhile, the demand for oil in the U.S. is at its lowest level since April of 1997.

Oh! Well, seeing as the rest of the world doesn't use oil, I can see how the only possible answer here is speculators. Because if the rest of the world used oil, demand would probably be going up rather quickly, what with all of those rapidly-growing developing countries.

Apparently Bernie hasn't noticed that whole "China" thing. Or this thing, for that matter:

[Willy Wonka]

When gas prices are down, people are usually silent. When they go up, oh, well it must be "Wall Street greed!" I guess supply and demand doesn't mean a whole lot to people these days. To take it a step further, the long term trend for most prices all across the board is up. Why? Central Banks creating money out of nothing. That's why. The supply of oil and many other things would have to increase a heck of lot in order to combat the constant increase in the money supply that is pressuring all prices up.

[PeterMP]

When gas prices are down, people are usually silent. When they go up, oh, well it must be "Wall Street greed!" I guess supply and demand doesn't mean a whole lot to people these days. To take it a step further, the long term trend for most prices all across the board is up. Why? Central Banks creating money out of nothing. That's why. The supply of oil and many other things would have to increase a heck of lot in order to combat the constant increase in the money supply that is pressuring all prices up.

Funny, how the "extra" money from printing shows up in prices, but not in middle and lower class incomes.

It was asked earlier in this thread, and I won't even be as strict. What would be the problem with requiring people that are buying oil futures to show that they have some capacity to take delivery of it?

[Willy Wonka]

Funny, how the "extra" money from printing shows up in prices, but not in middle and lower class incomes.

Of course it doesn't show up in middle or lower class incomes; those people usually aren't close friends with politicians and central bankers.

[Ignatius J.]

Let me play devil's advocate for a second. First point, didn't anyone find it curious that Mr. Sanders claimed that this couldn't possibly be supply and demand related and then faild to mention anything in his article about global demand? He points out there is more supply and that US demand is down, but then he can't even quite finish his argument. Now, he might be right, but I find it interesting that this politician with all of his staff obviously pushing an agenda can't find any data to back up his point. It does seem telling doesn't it?

Second point, what good is speculation? I think you first need to think about the role of the speculators. They are doing one of two things. Either A they are buying and selling immediately in which case they buy as much as they sell and thus have no effect on market prices, or they buy and hold. Buying and holding seems like it would be a good thing since it forces us to save more oil for later when we are going to have more demand for oil and less supply. This would be a classic speculator play, they look at the market and see that middle east countries are dumping cheap oil onto the markets in the hope that they will get lots of money to spend to keep their people down. Looking at the cheap oil, a speculator could say, this is silly, oil should be more expensive because it;s in limited supply and in a few years, people are going to want it. Therefore, by buying up some now, we will all have more oil to use in the future. The speculator has thus increased the efficiency of the system since it forces us to conserve a precious resource and allocate it more intelligently.

Now is that definitely what is going on here? I don't know enough to say one way or the other. Just saying there is possibly a competing narrative.

[zoony]

Incidentally, Factors in the recent oil price increases is Dr. Hamilton's take two days ago on what is actually pushing prices up.

Sort of a terrible article. All he really did was show it has nothing to do with Fed monetary policy. But he doesn't site any factors other than a vague reference to an Iran war.

Okay, so prices are going up because of fears surrounding an Iran war despite adequate supply. How is that not speculation again?

[deejaydana]

CNN is just not that credible of a news source any more for me. Blaming Wall Street for gas prices moving up is a claim I expect any college freshman to make.

[pjfootballer]

Not really. In general, sellers charge what they can get for their product. They don't "pass along" costs. Econ 101.

Never took Econ 101. I was a Comm/Journalism major. But you figure whatever they lose, they would want to make it up somewhere. I figured the consumer would take the brunt of it.

---------- Post added February-29th-2012 at 08:13 AM ----------

Good one Painkiller. Love that cartoon.

[twa]

Never took Econ 101. .

neither did California, or maybe they just have a different version.

[techboy]

Sort of a terrible article.

I'd say that's more an example of terrible reading, since the article you're quoting never claimed that speculation isn't a factor. The analysis of the role of speculation was found in his earlier piece, as well as that of Krugman.

Further, there's speculation and speculation. Driving prices up in anticipation of a future crisis is, as noted by Ignatius J., probably a smart (and even necessary) market reaction.

The kind of speculation Congressman Sanders is talking about is people colluding to drive up prices just for the sake of driving up prices, piling into a bubble with the idea of not being the "greater fool", which is pretty much what people were alleging in 2008, and what the first two pieces by Krugman and Hamilton were puncturing.

I threw the last piece in at the end because it's tangentially relevant, not because I thought (or Professor Hamilton wrote) that it directly addressed the issue of speculation.

Fundamentals, speculation, and oil prices is a more recent piece from mid 2011 that directly addresses the issue, though, and he concludes:

Granted, if supply and demand are relatively insensitive to price over the short run (so that both curves above are very steep), the price could be off for some time before there is much evidence of inventories piling up or being drawn down. In this respect, it is conceivable to me that speculation could have some real effects. But the conditions under which a theory of commodity financialization could essentially ignore fundamentals-- namely, the assumption of a very low price elasticity of demand-- are precisely the conditions under which a fundamentals-based interpretation would say that what we have just experienced makes perfect sense.

Although I remain open to evidence on a possible short-run contribution speculation may have had, one aspect of the debate over this issue worries me. The plots above of oil production over time in my mind highlight what has been a significant economic challenge over the last few years and very possibly an even bigger challenge in the years ahead. I would like to see more consensus on what seems to me to be a very clear statement of fact, which is, stagnating global production is by far the most important reason for a rising price of oil

[China]

Came across this: Five Myths About the High Price of Gasoline

Thought I'd throw it out there for your consideration.