Is Oil Speculation Responsible for High Gas Prices?

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The story has been told many times, but the lessons have still not been learned. The lack of effective prudential regulation of financial and commodity markets leads to excessive speculation, bubbles and bursts that disrupt the economy and cost consumers hundreds of billions of dollars. Too much money chasing too few goods in the commodity markets has contributed to the price spiral, amping up volume, increasing volatility and adding to risk. In the past two and a half years, the speculation in oil alone has cost the economy about $285 billion. If we add in similar effects on natural gas, then the total reaches half a trillion dollars. This places a huge burden and household budgets. Average annual household expenditures on gasoline alone have increased by $1200. For households in rural areas, the increase has been over $1500 per year. 

With such huge stakes foe consumers, it is encouraging to see that Congress is actively seeking to restore prudential regulation to the commodity futures markets and disappointing to see a group of Op-ed page economic columnists outraged by the fact that Congress understands that some markets can fail sometimes and that prudential regulation can do some good I emphasize restore prudential regulation because one thing the Op-ed economists never acknowledge is that the financial instruments, trading practices, and loopholes that are the target of the current policy debate did not exist or were rarely utilized just a decade ago. Commodity futures markets performed their important functions of smoothing the operation of physical markets for three quarters of a century without the contrivances that have opened the door to excessive speculation in the past decade. Bad policy and lax oversight created the conditions for the speculative bubble; good policy and effective oversight can burst the bubble, restoring these markets to their proper role in society