2012-03-08 "Wall Street speculation blamed for gas price spike" by David R. Baker from "San Francisco Chronicle"
Public anger over high gasoline prices is turning to a familiar target - Wall Street.
The role of speculative investors in this year's price spike has come under increasing scrutiny in recent weeks, nowhere more so than in Washington.
Nearly 70 members of Congress wrote a stern letter Monday to a federal commission that regulates the country's main market for crude oil, demanding that the commission crack down on speculation. President Obama, his energy policies under attack from Republicans, ordered a fresh look at speculation's role in the market on Tuesday.
"This is just another example, in my view, of Wall Street playing the casino," said Rep. Jackie Speier, D-Hillsborough, who signed the letter to the Commodity Futures Trading Commission. "Everyone should be outraged that every time they're filling up their tank, they're paying a premium because of speculation."
How big is that premium? One of the trading commission's five members estimated last month that speculative investors were adding 56 cents to the price of each gallon of gas. As a result, Honda Civic drivers pay an additional $7.39 per fill-up, said Commissioner Bart Chilton. Owners of the Ford F150 pickup pay an extra $14.56.
Speculative investors include hedge funds and investment banks that buy contracts for the future delivery of oil but never intend to take possession of the fuel itself. They buy and sell strictly as a financial investment, and their presence in the market has swelled.
Not everyone agrees that the speculative premium exists.
A longtime debate -
The role of big-money investors in the oil markets has been hotly debated for years. Some analysts still argue that speculation has little provable effect on prices for oil and gasoline. The current price run-up, they say, has been driven primarily by the threat of war with Iran and the world's limited spare capacity to pump more oil in case of an emergency.
"The fact is that there really are logistic challenges for Europe to replace Iran as a source of oil, and those challenges are going to translate into a higher price," said James Hamilton, an economist at UC San Diego who has studied past oil-price spikes.
Congress in 2010 ordered the Commodity Futures Trading Commission to place new limits on the number of contracts each speculator could hold, tucking the requirement into the sweeping Dodd-Frank financial reform act. The limits would cover not just contracts traded on the New York Mercantile Exchange but those traded on electronic exchanges as well.
Those limits were supposed to be in place by Jan. 17, 2011. The commission finally approved the limits in October on a 3-2 vote, but two Wall Street trade associations promptly sued to block the regulation. In addition, the commission can't enforce the limits until other, related elements of Dodd-Frank are in place.
Moved too slowly -
That makes some members of Congress livid. Had the commission moved faster, they argue, the limits could have been enacted by now and may have restrained the run-up in gasoline prices.
"That's the point: if they had done their job a year and two months ago, we could have prevented excessive speculation in the market," said Sen. Bernard Sanders of Vermont, who signed Monday's letter to the commission. "I can't tell you exactly what it would mean in terms of how much prices would go down, but they would go down."
Again, not everyone agrees. One of the two commissioners who voted against the limits in October said she didn't believe they would control prices, and she worried that the commission would be blamed when lower prices failed to materialize.
"Over the last four years, many have argued for position limits with such fervor and zeal, believing them to be a panacea for everything," said Commissioner Jill Sommers, in prepared comments before the vote.
Role has grown -
Even many critics concede that speculative investors play an important role, adding liquidity to the markets for energy commodities. But they used to be a minor part of those markets, which also include such players as airlines, utilities and other companies that use large amounts of fuel.
Ten years ago, speculative investors held about 20 percent of the open contracts on the U.S. oil futures market, according to a 2009 study from Rice University's Baker Institute for Public Policy. Last month, they held 47 percent of the oil futures contracts on the New York Mercantile Exchange, according to an update the trading commission issued Wednesday.
While some still debate the influence of speculators, a number of researchers have concluded that they played a part in pushing oil prices to record highs in the past decade.
A study last year by an economist with the Federal Reserve Bank in St. Louis concluded that speculation accounted for 15 percent of the increase in oil prices between 2004 and 2008, when oil hit its historic peak above $145 per barrel.
Some believe the effect was even larger. WikiLeaks released a U.S. diplomatic cable last year that quoted Saudi Arabia's representative to OPEC's board of governors telling a Florida congressman that speculation "represented approximately $40 of the overall oil price when it was at its height."