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Are speculators to blame for rising gas prices?

TBO.com The Tampa Tribune
Published:   |   Updated: March 20, 2013 at 12:39 PM

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Q: I hear it's just speculators bidding on the price of gas that's driving up the price. It's crazy. Why does the government allow that? Why doesn't someone step in and take over?

- Carla, Tampa

A: Someone might step in, if some politicians get their way. Currently there are two general kinds of speculators.

On one side are companies like airlines or railroads. They buy lots of fuel over time, and don't want to gamble that oil and fuel prices will roller-coaster up or down with each passing season or political upheaval in the Middle East.

So they buy themselves some stability by going on commodities markets and purchasing a futures contract for a specific amount of fuel at a given price. Food companies do the same with corn, wheat or pork bellies.

The other type of speculator is far different. They don't intend to actually use fuel. They merely want to bet prices will go up or down.

These so-called "non-physical" investors will buy contracts for oil or fuel at a certain price, and make profits if they bet in the right direction.

In theory, they help keep the commodities market flowing, as all their buying and selling means there are more contracts around when "physical" investors really do need to buy fuel contracts.

However, with skyrocketing prices at the pump, many politicians are pointing the finger at speculators, and claiming they intentionally inflate the price of oil and take advantage of each passing crisis, while everyone else pays higher gas prices at the pump.

Recently, Florida's Senator Bill Nelson and President Obama made a point of this.

Nelson drew on data from the Commodity Futures Trading Commission that showed a rush of "non-physical" speculators entering the market as prices rose this spring.

When the price of oil was at about $85 per barrel in January, there were about 220,000 contracts betting oil prices would rise. And as more speculators bought more contracts, prices did rise to $105 per barrel in late March. The price of gasoline, in turn, rose from about $3.04 per gallon for regular unleaded in January to about $3.82 nationally last week.

So how can politicians reign in those speculators? One approach is to make trades more expensive.

Normal investors can buy a stock with just 50 percent money down. But current rules allow an oil speculator to spend only $6 in cash to buy $100 worth of oil futures, Nelson said, multiplying their potential risk and profit, especially during a crisis when prices are changing.

Dada from the commodities commission showed that since protests began in Egypt in late January, speculators increased their betting on future oil prices by more than 35 percent, while actual investors like airlines decreased their contract holdings.

"That's a key piece of evidence that points the finger right at these condo-flippers of the commodities market," Nelson said. "At the end of the day, the big loser is America's economy."

Nelson wants the commission to use new powers they have to change the percent of margin investors must put up to buy a contract, and the five-person board of the commission is currently deliberating those rules.

It's a complex deliberation.

The commission regulates everything from oil futures to several trillion-dollars worth of highly exotic financial contracts like credit swaps – the kinds of contracts that pushed financial giant AIG into a government bailout.

There's also the question of how to handle investment funds that channel their futures trades through subsidiaries in places like the Cayman Islands that are not subject to U.S. regulation.

And there's a question of whether so called "end-users" like airlines would follow the same margin rules as non-physical "speculators" and whether rules could backfire and push prices higher.

The commission recently decided to take another month of public comment before moving forward on potential new rules.

Republican Rep. Frank Lucas of Oklahoma, chairman of the House Agriculture Committee, which oversees the CFTC, told The Wall Street Journal that move wasn't enough.

"To expect that market participants can comment on dozens of complex regulations and their cumulative impact on the marketplace meaningfully in 30 days is consistent with the process we've seen at the CFTC, a bare minimum and check-the-box approach," he told the Journal. "We owe more diligence to the economy."

- Richard Mullins

Submit your question here or visit our Gas Prices page and retail writer Richard Mullins will get you the answer.

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