Who's to blame for rising oil prices? Speculators
Many blame Middle East turmoil or a weak dollar for rising oil prices, but they provide only a partial explanation. The chief culprit is speculation in oil markets. Fortunately, it can be stemmed with several regulatory steps.
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Tens of billions of dollars have been placed in US energy commodity markets in the past few years. That money is earmarked to buy oil futures contracts, and it fuels speculation. The pattern is: We’re betting on oil more and more.Skip to next paragraph
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What can we do about rising oil prices? News flash to Congress and global leaders: A smarter American and global energy policy would certainly help. But such policies will take time to implement.
Steps to stem speculation
Meanwhile, we must take measures to stem speculation. The Commodity Futures Trading Commission (CFTC) is mandated by the US Congress to ensure that oil prices reflect supply and demand rather than excessive speculation. There are several additional steps that the CFTC should now take:
• Place limits on the number of contracts that traders can hold. The CFTC has been considering such a move, but has so far equivocated, perhaps due to differences among its board members or pressure from some on Wall Street.
• Consider limiting the amount of margin debt that traders can assume. Now, traders can go into serious debt to buy oil futures, and that encourages higher-risk betting.
• Test various regulation solutions by gathering data to see which works best to curb speculation. This testing approach may produce results that will convince those wary of regulation to give it a try, whereas a more rigid approach may not.
Beyond these measures taken by the CFTC, we should also educate the public. Many of us essentially boost speculation by investing in commodities via our investment and retirement funds. American and global leaders should make investors more aware of that, but they hardly ever do.
Regulation is better than the alternative
Of course, tinkering with free markets is complicated. For example, if we only regulate the New York Mercantile Exchange, traders may place some bets on the InterContinental Exchange in London – another global oil market. Ideally, international markets should be coordinated. Regulations would be designed to have universal application across all commodity exchanges.
That’s possible to accomplish, though certainly not easy. Regulators can be encouraged by the recent calls for more global financial regulation, not simply piecemeal reforms within individual countries and exchanges.
I prefer free-market capitalism, but the alternative of not taking action in this case is worse than the downsides of regulating oil markets. Global oil price shocks have historically either contributed to or caused economic recessions. Even if we can dodge an oil-price shock this time around, which is possible, doing so will become even harder as global oil demand rises faster than oil supply in the future – a likely scenario.
It’s time to think about long-term changes to curb speculation-driven oil prices and the impact such prices have on the economy. And it’s time to start taking action now. Hopefully, the CFTC, and a new team that President Obama has just created to explore speculation, will reach this conclusion soon.
Steve A. Yetiv is a professor of political science and international studies at Old Dominion University. He is the author of “Crude Awakenings,” “The Absence of Grand Strategy,” and the recently released “Explaining Foreign Policy.”