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Rising Gas Prices -- Who is to Blame?

The national gas price average is $2.51 for July 28, 2009, far less than the $3.96 it was one year ago to this date, but still high enough to make you groan as you wait for a seemingly-endless long time for that click of the pump, letting you know your tank is full. And, just like every other time gas prices increase to uncomfortable levels, people are passing the buck to oil speculators. From the Wall Street Journal:

The Commodity Futures Trading Commission plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices — a reversal of an earlier CFTC position that augurs intensifying scrutiny on investors.

In a contentious report last year, the main U.S. futures-market regulator pinned oil-price swings primarily on supply and demand. But that analysis was based on “deeply flawed data,” Bart Chilton, one of four CFTC commissioners, said in an interview Monday.

The CFTC’s new review, due to be released in August, adds fuel to a growing debate over financial investors who bet on the direction of commodities prices by buying contracts tied to indexes. These speculators have invested hundreds of billions of dollars in contracts that were once dominated by producers and consumers who sought to hedge against oil-market volatility.

The review also reflects shifting political winds. Under Chairman Gary Gensler, appointed by President Barack Obama, the CFTC is departing from the more hands-off approach it took under its previous head, a George W. Bush appointee. The agency is widely expected to adopt new rules to limit the amount of investments in commodities by big institutions betting on their direction purely for financial gain.

Are speculators really to blame? Heritage energy analyst Ben Lieberman asks,

If speculators were capable of profiting by driving prices ever higher, why would they allow themselves to be caught holding the bag in a free fall? Clearly, the drop in prices is strong evidence that the market is not so easily manipulated. And it suggests that efforts to punish oil companies and investors—either through price controls, windfall profits taxes, or trading restrictions—are not really solutions. Instead, they are noisy diversions from what really needs to be done, such as expanding domestic oil supplies.

In a previous post, regulatory analyst James Gattuso points to a study released by the Federal Reserve that finds no correlation between speculation and the price of any commodity. And a third Heritage analyst, tax expert J.D. Foster chimes in, saying, “Speculators accept risk that somebody else doesn’t want. And speculators are rewarded for accepting risk if they prove right, and they lose money if they get it wrong.”

George Mason economist Don Boudreaux, in response to a recent radio interview with Maryland law professor Michael Greenberger, writes on his blog:

Mr. Greenberger repeatedly objected to persons investing in oil futures “passively” - as he said, “with no interest in actively controlling these assets, just hoping to make a buck when their prices rise.” Ummm…. Does Mr. Greenberger own stocks only in companies that he actively manages? If not, why is it okay for him passively (and speculatively!) to buy, say, a few dozen shares of Microsoft “hoping to make a buck when their prices rise” but not okay for other persons to speculate in oil for the very same reason?

Second, Mr. Greenberger presumes that all speculators speculate long and that doing so is a sure thing. Neither presumption is valid. It’s just as easy to speculate short as it is to speculate long. And if speculation were as risklessly profitable as Mr. Greenberger presumes it to be, then high gasoline prices would pose no problem because everyone and their grandmothers would be raking in riches by speculating in oil markets.

If Congress passes cap and trade legislation, gas prices will return to $4-per-gallon, and then we will have something and someone to blame.


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