CAN OIL SPECULATION BE STOPPED? Beyond the jobs crisis, the biggest threat to economic recovery is arguably the price of oil. A rise in oil and commodities prices will almost certainly constrain demand at exactly the moment it is most needed. Recently, oil traded at $104.42 a barrel, up 7 percent in one week.
As we know, oil prices can skyrocket with little warning. In the summer of 2008, oil hit $147 a barrel and gasoline went above $4 a gallon; airfares shot through the roof, and food prices climbed as well. Remember also that for about six weeks during the 2008 presidential campaign, all anyone talked about was the price of gas. John McCain and Hillary Clinton went so far as to advocate for a temporary repeal of the gas tax. And lest we forget, it was in this panic that the catchphrase “drill, baby, drill” was born.
So in addition to being concerned about the impact of rising oil prices on the recovery, the White House should also be worried that when the price of gas spikes, the country’s politics go haywire. As FiveThirtyEight’s Nate Silver recently showed, high gas prices are correlated with poor incumbent-party performance in presidential elections.
You might think there’s not a whole lot the president can do about the price of oil. After all, global and seasonal increases in demand, combined with instability in the Middle East, seem to be pushing the price of oil up—and all are outside the White House’s control.
But that’s not the whole story. After the 2008 price explosion, observers from George Soros to former Commodity Futures Trading Commission (CFTC) staffer Michael Greenberger concluded that supply-and-demand fundamentals couldn’t account for the sharp rise in prices. In the first six months of 2008, US economic output was declining while global supply was increasing. And even if supply and demand were, over the long run, pushing the price of oil up, that alone couldn’t explain the massive market volatility. Oil cost $65 per barrel in June 2007, $147 a year later, down to $30 in December 2008 and back up to $72 in June 2009.
The culprits, they concluded, were Wall Street speculators. Commodities markets essentially involve two kinds of participants: “end users” like farmers and airlines that use commodities markets as a form of insurance against price fluctuations, and speculators like hedge funds, investors and big banks that bet on those same fluctuations. In the past decade, the role of end users in the crude oil futures market has shrunk, while the role of speculators has ballooned.
Wall Street banks say there’s nothing to see here, but it’s almost impossible to make sense of 2008’s massive commodity price spike without concluding that the speculators played an outsize role. The question now is, Is it happening all over again? “The most conservative thing that can be said right now [is that] this would be no time to dismiss the role that speculation plays,” says Greenberger. “A moderate statement is that speculation is creating volatility that is aggravating the uncertainty in the market.” A host of businesses and organizations from Virgin’s Richard Branson to Oxfam all make the same case.