Gas Price Speculation

What Is Speculation?
Wildly fluctuating oil prices have been blamed by independent researchers and Commodity Futures Trading Commission staffers on Wall Street speculators. Oil cost $65 per barrel in June 2007, $147 in June 2008, $30 in December 2008, $72 in June 2009, and $97 in May 2011. The sharp volatility is explained by the outsized role of speculators like hedge funds, investors, and banks that bet on the fluctuation of oil prices, consequentially shrinking the role of oil end users like airlines that use commodities as a form of insurance. Speculators corner producers and buyers out of the market by stockpiling oil contracts and investing in long futures trades. Crude oil futures have surged 22 percent in 2011 while gasoline has risen 34 percent, with both contracts reaching their highest levels since 2008.

Background
In June 2008, billionaire businessman George Soros attacked the financial speculation inflating commodity prices as "intellectually unsound, potentially destabilizing and distinctly harmful in its economic consequences." Legislators, economists, and other investors joined Soros in tracing the origins of the 2008 commodity bubble to the increased role speculation played in commodities markets. Many speculators bought oil in the spot market and then sold it in the futures market, knowing the future price would net them a high profit. This strategy pushed up oil prices by putting enormous quantities of oil into storage, thereby reducing the supply available to consumers. By July of 2008, when oil prices shot above $140 per barrel, Democratic senators had introduced "The Stop Excessive Energy Speculation Act of 2008," which targeted oil speculation and sought to prevent large-scale investment banks from using exchange-traded futures. Excessive speculation ultimately created higher prices and artificial markets not by bound by basic economic principles

Academic Studies

 * R.S. Eckaus, "The Oil Price Really Is a Speculative Bubble," MIT Center for Energy and Environmental Policy Research. June 13, 2008.
 * Mohsin S. Khan, "The 2008 Oil Price 'Bubble,'" Peterson Institute for International Economics. August 2009.
 * Michael Masters & Adam K. White, "The 2008 Commodities Bubble: Assessing the Damage to the United States and its Citizens," February 4, 2009.
 * Kenneth B. Medlock & Amy Myers Jaffe, "Who Is In The Oil Futures Market And How Has It Changed?" Baker Institute. August 26, 2009.
 * Staff Report Prepared by the Permanent Subcommittee on Investigations of the United States Senate Committee on Homeland Security and Governmental Affairs, "The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat," June 27, 2006.

Articles

 * Michael Frankfurter, "The Mysterious Case of the Commodity Conundrum, Securitization of Commodities and Systemic Concerns," Market Oracle, April 2008.
 * "Part 1"
 * "Part 2"
 * "Part 3"
 * Tyson Slocum, “Hot Profits And Global Warming: Financial Firm and Oil Company," Testimony from U.S. House of Representatives Committee on Transportation and Infrastructure, Subcommittee. May 6, 2008.
 * Ed Wallace, "There Is No Gas Shortage," Bloomberg Businessweek, April 1, 2008.

Articles

 * Democratic Senators Send Letter to CFTC Chairman Arguing that Speculation is Hurting the American Consumer
 * Silla Brush, "Energy Speculation Highest On Record, CFTC's Chilton Says," Bloomberg, March 15, 2011.
 * Christopher Hayes, "Will Federal Regulators Crack Down on Oil Speculation?", The Nation, March 8, 2011.

Position Limits
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act granted new authority to the Commodity Futures Trading Commission, enabling the agency to set position limits in energy markets.

Americans For Financial Reform Letters
Americans for Financial Reform is a coalition of more than 250 national, state and local consumer, labor, investor, civil rights, community, small business, and  senior citizen organizations that have come together to spearhead a campaign for Wall Street targetted reform. Listed below are some of the letters written by their staff to members of government arguing for improved regulation of securitization markets.


 * March 29, 2011: "Asks Commodity Futures Trading Commission to impose position limits that would restrict and contain speculation"
 * April 5, 2011: "Urges Congress to grant full funding to the CFTC and SEC so that the agencies have the tools to properly implement the Dodd-Frank Act"