Why oil futures speculation is cleaning our clock

By John Toth

It’s time to continue writing a column I started in 2008 called: “I can’t believe how expensive gas is getting.”

Do you remember why gas prices shot past $4 per gallon in 2008? Hurricane Ike coming through the area didn’t really affect the price. In fact, in the fall, the price started plunging.

What caused this rapid fluctuation? Not supply and demand. Were that the case, we would have had to experience drastic shortages and gluts in a short period of time.

What drove gas prices up in 2008 and what is driving them up now is speculation – betting on how much oil will cost later. Betting that it will go higher drives the spot market up daily, delivering a nice profit. Then others jump in the betting game, and the price goes even higher.

In 2008, this betting game helped us plunge into recession. Today, as we try to make our way towards recovery, it’s most likely going to slow our progress. When oil increases, everything else follows. It’s not like sugar futures. You can live without sugar, but not without oil.

So, these relatively few people who are gambling with oil instead of poker chips are now going to determine again how the whole world fares economically. Record profits are going to be posted again by oil companies as a greater percentage of our income is being spent for fuel and less on restaurants, movies, vacations, and so on.

Few of us prosper; many of us sacrifice.

In 2008, the oil futures runaway speculation didn’t have a specific reason, but if something does happen in the world that speculators can blame, like a civil war in Libya, that’s even better.

Libya produces 2 percent of the world’s oil, and the Saudies already said they were willing to make up the loss if needed, although right now there is a glut of oil in the market.

One way to attempt to constrain these volatile bubbles is for the Commodities Futures Trading Commission to impose “position limits,” essentially limits on the size of the bets that speculators can make.

The New Deal–era Commodities Exchange Act gives the CFTC power to curb “excessive speculation,” and the just-passed Dodd-Frank bill explicitly calls for the CFTC to promulgate position limits.

However, the position limits described by the CFTC are so loose that they would likely affect only a handful of major traders. So, we’ll most likely continue to line the pockets of a few gamblers placing sure bets and winning daily. You and I are losing daily, and we’re not even betting.

OPEC is producing at levels not seen since the early 1970s — and that doesn’t even include Iraq, which is struggling to achieve pre-Gulf War production levels, but will soon be there. Furthermore, global production still outpaces consumption, even accounting for China’s economic growth rates.

There is nothing in the equation that says oil should cost what it costs today. Nothing! With one exception — speculation.