WASHINGTON — Financial speculators are gambling on oil the same way they gambled on the housing market a few years ago — a frightening prospect for the fragile economy, a Democratic congressional committee was told Wednesday.
“It is similar to the gambling Wall Street did on whether or not people would pay their subprime [below-market rate] mortgages in the mortgage meltdown,” said Michael Greenberger, a law professor at the University of Maryland and a former federal regulator of financial markets. “Now they are betting on the upward direction of the price of oil.”
The housing industry collapse helped trigger the deep recession that began in late 2007 and whose effects are still felt today.
The economy is slowly recovering, Greenberger said, but it could come to a halt unless oil prices come down. Gene Guilford, president of the Independent Connecticut Petroleum Association, told lawmakers that the recent oil price run-up has cost consumers an additional $10 billion a month since mid-December.
The House of Representatives’ Democratic Steering and Policy Committee, which consists of party leaders, called the hearing to spotlight Democratic efforts to promote lower oil and gasoline prices. No Republicans were present.
Today’s routine $4-and-higher prices for a gallon of gasoline have nothing to do with conventional supply-and-demand forces, Greenberger said. He formerly directed regulation of market trading in futures contracts and derivatives for the Commodities Futures Trading Commission.
“It is excessive speculation, which is a fancy word for saying that gamblers wearing Wall Street suits have taken these markets over,” he said.
Financial speculators such as investment banks and hedge funds account for at least 65 percent of purchases of contracts for future oil deliveries, more than twice their traditional share, while buyers who intend to actually take delivery of the oil and use it, such as airlines, make up only about one-third of demand. The speculators bid up contract prices, sending oil and gasoline prices higher and reaping them huge profits. The bidding is stoked by fear of possible violence in oil-producing countries, notably Iran.
Congress has tried to pressure the Commodity Futures Trading Commission to put limits on how many contracts anyone can buy, but financial interests have stymied CFTC efforts in federal court.
Greenberger suggested several remedies, including a strong Justice Department probe. He said the threat of a serious investigation can be enough to intimidate speculators.
“If there is a real investigation, just the appearance of it will cause these cockroaches to scatter,” he said, “because the light will be turned on.”
Kevin G. Hall of the Washington bureau contributed to this report.
(c)2012 the McClatchy Washington Bureau
If it was the Republicans fault 4 years ago why isn’t it Boybama’s fault now. He campaigned against the Republicans using high prices at the pump. Hopefully it will defeat him back to Chicago.
Nixon, then Ford were Presidents during the 1974 gas crisis. Nobody blamed them because it was the Arab world who decided to teach the US a lesson. Bush’s connection to big oil runs back into the early 1900’s. If you expected him to do anything to the oil companies, it would be like a family feud. Do some research on Bush I’s father and grandfather. Haliburton, KBR, and other familiar names come into play. It goes back to the Dresser Company, who invented the dresser coupling, which is still in use today. It’s just kind of hard to buck the “family.”
Hey flat head…….
“Boy”bama? That’s pretty weak!
Come out of the darkie ages please!
No President is at “fault” for fuel prices. And the Republican candidates and wannabes wouldn’t be able to do anyhing about prices even though they claim otherwise. Get over it.
This just in: Earth revolves around sun.
The President directly has very little to do with gasoline prices. The only weapon he has is the strategic oil reserve, which can be used to moderate prices. However, in the context of the middle east, this is not a wise thing to do. We would simply have to buy the oil back at a yet higher price to replace the reserve. This would be necessary to guarantee oil for the country.
Opening the reserve has been done before, and it had little effect. If you read the article, it is the speculators, who have large amounts of money to “play the market” to the hilt. They have great sway in the courts because of their immense combined wealth. There is no shortage, and demand is still comparatively weak. So what strange, invisible market force is causing this? It’s not supply and demand, it speculators hedging their bets with large amounts of money.
As the article said, only the threat of an investigation might cool their jets, and have them dump the oil and reduce the cost.
I don’t care who gets elected in the next election, unless our legislators are ready to tackle this sort of thing with legislation, it isn’t going to change. However, this isn’t going to change, because who do you think bankrolls all these elected officials? The very people who contribute to their campaigns. Not too many dogs will bite the hand that feeds them.
When vast amounts of wealth are controlled by a few people, this is what happens. I don’t see an end to it in my lifetime.
If speculators were required to actually take possession of the gas and oil contracts they are buying, then I’m certain things would change dramatically. Think about it! If you buy a future contract on say $100,000 of unleaded or heating oil, that would mean you’d have to “take” it, literally. Yep, build a tank farm, all of the insurance and permits necessary to hold that much product, then hire a security company to defend and guard your investment. Consider the transportation costs (both in and out) , the hazmat regulations that go with holding such a volatile commodity, pollution from leakage and vapor depletion, maintenance and upkeep….and then hope that your investment gains a buck rather than losing one.
As it is, no actual possession is required, none of the above infrastructure–only money (in excess of $140bn currently) and an electronic chit. No real risk, only gains with higher prices for all. Gasoline and oil commodities are being bought by investment houses and banks that DO NOT EVEN USE the products.
But you/we have to!
Thank you Mr Reagan……
The solution to this problem is progressive taxation. A ‘maximum wage’ would take away the incentive for these “traders” to gamble with our economy. Some hedge fund traders extract over a $billion a year from us. It is unconscionable.