Congress out to limit oil speculation to curb gas prices

Monday, March 5th, 2012 By

Barrels

Congress is urging rules be put in place to limit oil speculation and curb runaway gas prices. Photo Credit: Trevor MacInnis/Wikimedia Commons/CC-BY-SA

Gas prices are going up, and a lot of people are not happy about it. A growing body of lawmakers is pushing for oil speculation to be restricted in order to ensure price stability and fewer wild swings in gas prices.

Already supposed to be in place

In 2010, according to CNN, a portion of the Dodd-Frank Act mandated the Commodity Futures Trading Commission set new rules on oil speculation to ensure more stable prices. Investors and traders are opposed to any such intervention and are suing to block them. No new rules have been enacted despite the CFTC being mandated to have done so by January 2011.

Gas prices are currently on the upswing and prices are feared to hit $5 per gallon by summer. In response, according to the Los Angeles Times, a group of 70 lawmakers in the United States Congress sent a letter to the CFTC, asking them to enact the “position limits,” or the maximum allotted number of futures or options contracts an investor can hold for a commodity that were supposed to have been implemented already.

One can only speculate

Oil speculation, or trading on crude oil futures, is thought to be among the most potent factors influencing the price of crude oil, which makes up the bulk of gas prices. The actual effect of speculation is a point of contention.

In 2011, according to the Washington Post, a paper by the Federal Reserve Bank of St. Louis examined the oil price run up from 2004 to 2008, when oil prices went from $31.61 per barrel to $137.11, according to HowStuffWorks.

[A lot of people had to get cash advances to handle the shock back then.]

The St. Louis Fed also observed that in the same period, investment in oil future strategies, or investments in betting on commodities markets by investment firms, increased from $13 billion in 2004 to $260 billion in 2008; in other words, the amount of money invested in gaming the market increased 20 fold. The St. Louis Fed estimated up to 20 percent of those price increases were due to speculation. According to ABC, even CFTC Chairman Bart Chilton agrees.

However, according to USA Today, an inter-agency federal investigation couldn’t prove oil speculation was to blame for gas and crude oil price swings in 2008.

Still looks guilty

Something appears rotten in the state of Wall Street. According to a Businessweek article by Ed Wallace from 2008, the supply of oil wasn’t an issue at the height of prices in 2008. Quite the opposite, in fact; refineries were turning crude oil away. There was plenty of oil available, until people started driving fewer miles worldwide.

Currently, the CFTC, according to ABC, is waiting until later this year to issue new rules on crude oil future trading in order to collate sufficient data. Assuming that limiting crude oil speculation will keep prices lower, it may be a bleak summer for gas prices, as speculators are likely to take a parting shot in before they get reined in.

Sources

CNN

Los Angeles Times

Washington Post

ABC: http://abcnews.go.com/Business/gas-prices-spiked-speculators-senators-claim/story?id=15847114#.T1U7amWP-_0

USA Today: http://www.usatoday.com/money/economy/story/2012-03-03/rising-gas-prices-obama-administration/53323822/1

HowStuffWorks: http://money.howstuffworks.com/oil-speculation-raise-gas-price.htm

Businessweek: http://www.businessweek.com/lifestyle/content/jun2008/bw20080626_022098.htm

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