National report says speculation added 83 cents per gallon of gas

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- Photo courtesy of Dave Kane, Maryknoll

A group in New York called for CFTC implementation of the position limitations in the Dodd-Frank Act on June 28; they were equally concerned about food commodity speculation increasing prices, so they met by the Irish Hunger Memorial in front of the New York Mercantile Exchange. Calls for action were also held in Boston, San Francisco, Baltimore, Chicago, Cleveland, Minneapolis, and other cities.

By Cynthia Price
Legal News

National groups, concerned that provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act are being ignored ,staged calls for action in several large cities around the United States.

Their protests centered around the release of a report by Robert Pollin and James Heintz of the University of Massachusetts, Amerst, and American for Financial Reform (AFR), a coalition of more than 250 national and state organizations.

Based on conservative methodology, the report says that speculation has driven up the price of gas from $3.13, the price which would be predicted following “long-run trends,” to the price current at the time of the report, $3.97 — over which it peaked before coming down in the very recent past.

The report, which can be found at http://www.peri.umass.edu (by clicking on the title or the “download” link), is from Amherst’s Political Economy Research Institute.

Pollin and Heintz projected price based on the long-run trends using a standard statistical technique and comparing it to projected figures from the U.S. Energy Information Energy.

However, the base figures used by the authors are higher than the CEO of Exxon-Mobil recently testified he thought they were. At his predicted rate of a speculation-induced 40 percent increase per barrel of oil (and a true production price of $60-70 a barrel, with which Middle Eastern oil producers agree), gas prices would be $2.56 to $2.77 per gallon. This means the discrepancy might be even wider than the report indicates.

Some members of the AFR coalition are equally as concerned about the effects of speculation on food prices, particularly globally. There have been “food riots” reported in some countries, and though the factors behind steep food cost increases are complex, advocates think speculation is an important factor.

Leading the charge in the “food fight” against speculation are the Maryknoll Office for Global Concerns and WHY Hunger of New York, an organization founded by singer Harry Chapin in 1975.
David Kane, Associate for Latin America and Economic Justice at Maryknoll, says, “Even without anything else, just the increase in costs of oil would drive up food prices, because our food production and distribution are so heavily dependent on fossil fuels. That alone would have real effects.”

However, though Kane acknowledges that such price increases are felt less in the United States, he adds, “The same dynamics are driving up food commodities. A lot of the investments are now being made by broad fund investors, sort of like mutual funds, so it’s happening on a much larger scale.”

How does this work? The market for commodities is basically divided into the spot market, sometimes called the physical market, where people buy usable commodities for immediate sale, and the futures market, where people buy such things for future delivery. If purchasers think that the price of a commodity may go up in the future, they are able to purchase large contracts at current prices. As of right now this capability also applies to speculators and investors. However, if either through compeition or design the futures prices are inflated, when it comes time for a purchase on the spot market, the price is still set in relation to what the futures contracts sell for, regardless of supply and demand constraints.

According to Jacques Schillaci, a securities attorney in New York City, “Speculators drive up prices by making the market think that there is more demand for a commodity than there actually is in the consumer market.”

This process is greatly aggravated by the increase in speculation over the recent past, which Schillaci theorizes is, “at base, mostly about people wanting to hedge their invesments.” Investing in something that has intrinsic value such as gold, silver, corn, or oil is now perceived as less risky than investing in currencies or in the stock market.

There is also big money to be made. The report estimates that the price discrepancy “...translates into a speculation premium of over $1 billion for May [2011] alone.”

The AFR says, “About a decade ago, Wall Street speculators controlled less than 30% of the oil futures market. Today, Wall Street speculators control more than 70% of the market, even though many of them will never use a drop of this oil.”

Recognizing the lack of regulation on such activity, the Dodd-Frank Act mandated that the Commodity Futures Trading Commission (CFTC), referred to below as “the Commission,” impose position limits. The statute, Section 737, reads in part:

“(2) ESTABLISHMENT OF LIMITATIONS... the Commission shall by rule, regulation, or order establish limits on the amount of positions, as appropriate, other than bona fide hedge positions, that may be held by any person with respect to contracts of sale for future delivery or with respect to options on the contracts or commodities traded on... For agricultural commodities, the limits required...shall be established within 270 days after the date of the enactment of this paragraph.” The deadline was set at Jan. 17, 2011.

Though individuals as divergent as journalists writing on public-interest site Pro Publica and Ben Bernanke, chair of the Federal Reserve System, agree that more regulation as provided by Dodd-Frank is necessary, the CFTC, working with the Securities Exchange Commission has stated it will not implement the position limitations until the end of the year.

The AFR coalition is demanding that the CFTC move that deadline back and establish the limits right away.

The recently-introduced Sanders-Blumenthal End Excessive Oil Speculation Now Act, would mandate immediate controls.