One of few clear-cut ways to decrease gas prices is to reel in Wall Street speculation. Wall Street speculation drives up oil prices because it distorts the perception of oil supply. In response to increasing tensions in the Middle East, Wall Street speculators are hoarding crude oil contracts, expecting that they will increase in price when (or if) the oil supply is disrupted and can be sold at a later time for profit. In response, the price of oil per barrel shoots up because of a perceived decrease in supply, hence the high gas prices now.
The thing is that we have the tools to limit speculation but they are not being used. Speculation causes significant economic havoc and is supposed to be limited, particularly for commodities like oil, under the Dodd-Frank law passed in the wake of the last financial crisis. Last October, the Commodities Futures Trading Commission (CFTC) voted to adopt rules to impose limits on the amount of futures and swap contracts that commoidities traders can hold. Yet, though the rules have been passed, the CFTC has yet to enforce them. A recent letter sent by 71 Democratic lawmakers and one independent to the CFTC called out the agency's lack of enforcing the limits on speculation, even though Dodd-Frank required it do so no later than Janury 17, 2011. The letter opens with:
We are writing to urge you to immediately enact strong position limits to eliminate excessive oil speculation as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As you know, the Dodd-Frank Act mandated that your agency promulgate and enforce such limits no later than January 17, 2011. We are disappointed that, more than a year later, the Commission has not fulfilled this important regulatory duty.
As Senator Bernie Sanders said, “All that we’re asking and the president should be asking is that the commission obeys the law. That’s not a radical request.”
Despite denials from Wall Street, speculation is playing a big role in increasing gas prices. Demand for gas has decreased and, as the graph below shows, domestic oil production has significant increased. So, in theory, gas prices should be falling since demand has decreased and supply has increased through domestic production. Except market manipulation is distorting the supply demand relationship and gas prices are increasing because of it.
Source: Climate Progress
While the Dodd-Frank regulations may not go as far as progressives want, one sign that they would be effective is that two financial industry interest groups are suing to stop the regulations from taking effect. Not surprisingly, one of the groups, the Securities Industry and Financial Markets Association has a former congressman in its senior leadership, further highlighting the need to stop the revolving door between ex-lawmakers and lobbying organizations.
With gas prices continuing to increase, it’s time that the Administration step up and walk the walk on limiting speculation. Limiting speculation can actually have an immediate effect on gas prices. In the long term, in addition to limiting speculation, the formula remains the same: ratchet back war-mongering with Iran and invest in renewables.