Is Oil Speculation Responsible for High Gas Prices?

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In order to have a complete explanation, we must also offer a theory of how speculators profits by driving prices up. The Op-ed economists are fond of pointing out that if every commodity transaction matches a buyer and a seller, then winners cancel out the losers no matter how high the price (and ignoring the fact that the public that consumes the product pays the higher price). 

Traders can profit from a rising price in a variety of ways. As long as there is more new money coming in that is willing to bid the price up, the old money in the market benefits by staying long.  Given the entry of a series of new pots of money – first banks, then hedge funds, then pension funds, then index funds – this upward spiral is sustainable and profitable. 

It also is easier to ensure the flow when you are “advising” the new money what to do and hyping the market with reports about how high the prices will go. And traders can engage in wash trades (being on both sides) to push the price up. 

As account values rise, excess margins and special miscellaneous accounts allow the trader to take money out or leverage more trading, to keep the upward spiral going.

Traders and exchanges benefit from transaction fees that grow with value. The higher the volume and the price, the more they make. 

The fact that longs must equal the shorts glosses over the different interests of different kinds of traders. Speculators can be net long (and therefore benefit from constantly rolling over contracts at higher prices) in markets that the regulator cannot see (over the counter) or through affiliates in regulated markets that are not well tracked. 

Two recent pieces of analysis presented to the Energy and Commerce Committee by energy economists provide data that ties our account together. Above we identified periods of trading by policy changes that affected trading behavior, primarily by attracting different kinds of players and trading strategies into the market. The upper part of the following Exhibit shows a categorization of the periods that parallels ours which sees three broad structures – traditional, fundamentals (demand an supply) and financial. The lower part shows the correlation between open market positions and price, showing. We have argued that the fundamentals period began in 2002 and data in the exhibit supports that view. The basic point is that “financialization” has added to the underlying price increase based on fundamentals.