Is Oil Speculation Responsible for High Gas Prices?

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Congress can take two broad actions to provide relief: providing incentives to households to give them better access to alternatives to our dependence on oil, and restoring transparency to the futures markets where energy prices are set. The former option is of course the best long-term investment, as providing incentives to help families afford the purchase of super fuel efficient hybrid or alternative fuel vehicles, solar panel installation, energy efficient improvements to the home and greater access to mass transit would all empower households to avoid the brunt of high energy prices.

But the second option—restoring transparency to the futures markets where energy prices are actually set—is also important. Stronger regulations over energy trading markets would reduce the level of speculation and limit the ability of commodity traders to engage in anti-competitive behavior that is contributing the record high prices Americans face.

Public Citizen recommends three specific reforms to rein in speculators and help ensure that energy traders do not engage in anti-competitive behavior:

1. Requiring investment banks, hedge funds and other market participants to provide more information to the government will provide regulators and policymakers with the data necessary to quickly determine the exact cause of price swings. Subjecting all energy traders - including foreign-based exchanges - to submit Large Trader Reports that discloses key information of a trader’s activities is critical to ensure that a market is adequately transparent.

2. Raising margin requirements so market participants will have to put up more of their own capital in order to trade energy contracts will help. Currently, margin requirements are too low, which encourages speculators to more easily enter the market by borrowing, or leveraging, against their positions.

3. Impose legally-binding firewalls to limit energy traders from speculating on information gleaned from the company’s energy infrastructure affiliates or other such insider information. For example, the Wall Street investment bank Goldman Sachs has quietly become one of the biggest owners of oil storage and pipelines in North America, as owning such assets gives the company's energy traders an "insider's peek" into crude oil information that gives them a huge information advantage.

Reining in speculators will not return us to the days of $1.50 gasoline. But restoring regulatory sanity to energy markets will stop the price-gouging by powerful financial entities and bring some measure of price relief for Americans.