Wall Street speculators cause high price of fuel

Republican presidential candidates and congressman are again criticizing President Obama, this time blaming the commander in chief for skyrocketing gas prices. Once again, the Republican Party is not only incorrect for thinking Obama has caused increasing gas prices; they can find the perpetrator of high gas prices by looking in the mirror.

The Republican Party has nothing to criticize Obama about. Yet, in a crucial election year they blame Obama for rising oil prices. Speaker of the House of Representatives John Boehner (R-Ohio) said, “American families and small businesses continue to struggle, and they’re especially feeling the impact of rising gas prices, which have doubled under President Obama.”

How is this Obama’s fault? The Republican Party is always preaching the mantra of free markets and short-term self-interest. Free markets and self-interest are the causes of high gas prices. Why aren’t Republicans blaming themselves?

Financial derivatives allow investors to make speculative bets on simple commodity futures contracts to more complicated financial instruments such as credit default swaps. Oil futures contracts are just another type of financial derivative, but they are the cause of skyrocketing gas prices, not President Obama.

The main purpose of oil futures, just like any other financial derivative, is to spread financial risk and uncertainty. Companies that need cheap fuel to stay financially solvent (e.g. airline companies) can use oil futures to hedge against the risk of future high gas prices. This is the proper use of financial derivatives. But the simple fact is that stock and commodity exchanges are institutions dominated by financial speculators, not hedgers or investors.

Speculators invest money in financial instruments, but their goal is not to invest long-term. Their goal is to make quick profits off short-term fluctuations in price. Oil speculators are no different. According to a report from the St. Louis Federal Reserve, oil speculators increase gas prices by at least 15 percent.

Speculators are not investors; they are professional gamblers. They have turned the New York Stock Exchange into a mega-casino. This view isn’t new; John Maynard Keynes thought the same thing during the 1930s when he described the failings of the NYSE by writing, “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

There are solutions to stop speculation in oil futures trading. The Commodity Futures Trading Commission has written position limit rules that would regulate how much traders could buy in oil futures. This would reduce excessive speculation in oil futures that drive up the price of gas by 15 percent.

This rule hasn’t gone into effect yet because industry groups such as the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association filed a lawsuit in December to stop the rule from being fully implemented.

Republicans are correct about one thing: the price of oil is not about to drop soon. With fear and uncertainty surrounding the situation in the Middle East regarding Iran’s nuclear program, oil speculators are going to bid the price of oil futures up until financial speculators are taxed or regulated better.

To lower gas prices, the Republican Party would have to violate its own rhetoric on free markets and regulate oil futures. Obama has been more than willing to initiate policies that would lower gas prices at the pump for everyday Americans, contrary to what Republicans have been stating recently.

Congressional Democrats during Obama’s first term proposed a financial transactions tax on financial derivatives. This money could have been used to fund existing social programs and fund a public works project. More specifically, a financial transactions tax on oil futures would reduce excessive speculation in the oil market, causing a drop in gas prices at the pump for cash-strapped Americans.

Obama has even gone as far to help Americans with the high price of gas by calling for the repeal of tax breaks for oil and gas companies that amount to an estimated $4 billion annually. Republicans for the most part oppose this effort and instead call for the president to drill for more oil here at home.

Drilling for oil at home won’t reduce gas prices by a meaningful amount. According to the Earth Policy Institute, “The U.S. Department of Energy projects that opening the Arctic National Wildlife Refuge and Outer Continental Shelf would reduce the price of gasoline by at most six cents — and this would not be seen for at least another decade.”

I know the Republican Party will play the blame game against President Obama until election day on Nov. 6. That won’t solve our country’s problems or reduce the price of gas for Americans. If Republicans truly care about gas prices, they will work on solutions that actually reduce the price of gasoline, instead of blaming Obama aimlessly.

2 Comments

  • yes,you,did
    March 15, 2012 | Permalink |

    This is what you wanted and voted for.

    The 0bama Administration wants oil prices to go up and equal prices in Europe to protect the environment. You can’t have cheap fuel and protect the environment. Gasoline in Europe is $8 a gallon. 0bama’s Energy Secretary Steven Chu, “somehow we have to figure out how to boost the price of gasoline to the levels in Europe.”

  • David
    March 15, 2012 | Permalink |

    Apparently you don’t remember the last Presidential campaign season very well. Gas prices spiked, and the Democrats blamed the Republican party and President Bush for it. This gas price blame game has been going on since at least the 1970′s, by my memory, when candidate Carter blamed President Ford. Candidate Reagan took his turn blaming President Carter and so on and on. It’s President Obama’s turn to be blamed this campaign season just as he blamed Bush 4 years ago.

    It’s never going to be fixed, because neither the Democrats nor Republicans REALLY want to solve the problem. It means too much money. And for all your supporting of President Obama and your obvious love of his performance, he is just as much about the money as the Republican candidates. Don’t fool yourself into believing otherwise. He did set records for campaing contributions.

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