Today’s front page of the Seattle Times featured the most persuasive case I’ve yet read for the role of speculation in higher oil prices. It was reported by McClatchy’s Kevin G. Hall out of the fine former Knight Ridder Washington bureau, so it deserves attention. That said, some skepticism is in order to counter American magical thinking that we have a God-given right to cheap gasoline.
The traders and trading systems dubbed as “speculators” are essential to ensuring the efficient flow of commodities. Did you fill up today to drive 100 miles around the metro area? Thank a speculator, along with that oil company reaping obscene high profits. It’s also true that oil trading was one of the areas largely and infamously excluded by the deregulation of commodities trading in 2000, pushed through by then Sen. Phil Gramm and signed by President Clinton. There’s plenty of wiggle room for our financialized economy to run up big profits thanks to good ole Commodity Futures Modernization Act (the pair also teamed up to deregulate banking, and you see where this got us).
But it’s unclear how much speculation is actually behind today’s current higher oil prices. “Speculation!” was hurled as the blame behind a similar spike in the 2000s, but investigations failed to produce a clear connection. Instead, supply and demand were the big factors, particularly as the developing world radically ramped up its appetite for petroleum.
That demand is back after the Great Recession, even if American demand is relatively muted. China, still growing fast, is a huge oil user, yet it has few oil reserves in-country. In addition, the Iranian nuclear tensions are no mere kerfuffle. Many serious observers believe Israel will strike against Iranian nuclear facilities this spring, before they can be put deep underground and an Iranian bomb becomes a reality. If this happens, the potential disruption to supply from the Persian Gulf could be catastrophic. A futures contract needs a buyer and a seller, and the Iranian crisis is creating a persuasive case for relatively higher oil.
Commodity trading needs re-regulation. Transaction taxes would help dampen excessive and risky speculation, too. But that won’t change our higher-cost energy future, which is mostly a result of fundamentals, real things, and not the Wall Street Boyz. It’s not 1970, and we can’t drill or dream our way back.
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Today’s Econ Haiku:
Corporate tax cuts
How do you reduce zero?
Election year math