Oil Speculation Debate Heats Up Again as Prices Rise, Threatening Economic Recovery

Posted by Josh Garrett on April 1, 2010 at 10:56 am

Oil analyst Peter Buetel believes that speculation is the main force currently driving up oil prices, and is concerned about what high prices might do to the US economy. (image:msnbcmedia.msn.com)

Writing for the news network’s business news site, MSNBC producer John W. Schoen reported on Wednesday that speculation is driving up oil prices at great cost to American consumers and the economic recovery in the US. This is, of course, a story that dates back to the summer of 2008, when many believe excessive speculation caused the price of oil to skyrocket to $147 a barrel before it crashed due to the financial collapse. The story of speculation driving prices faded in the year after prices collapsed, as low crude prices brought lower gasoline prices that allayed consumers’ cost concerns. As President Obama put it in his recent speech on energy security, “When gas gets expensive at the pump, suddenly everybody is an energy expert. And when it goes back down, everybody is back to their old habits.”

While the president makes a good point, it’s not as true today as it once was. The recession led American drivers to seriously cut back on gasoline consumption. Today, cost-conscious conservation and other factors (like the growth of the biofuels industry) have led many analysts to declare that US gasoline consumption reached its all-time peak in 2007. It appears as though Americans’ “old habit” of gas-guzzling may in fact be gone for good. New consumption habits and a global recession have seriously reduced the world’s demand for crude oil and petroleum products, despite continuing demand growth from developing economies like China’s. More than a year of reduced demand has led to a build up of petroleum supplies that today remain well above average levels in most parts of the world.

Which brings us to the latest iteration of the debate over oil speculation and how it affects oil prices. In a world of low demand and high supplies, why have crude and heating oil and gasoline prices been rising steadily for the last 12 months? A growing number of journalists, analysts and politicians have said the answer is simple: oil speculation. Some analysts in this camp, including Schoen’s main source for his report, Peter Beutel at Cameron Hanover, warn that the stakes are even higher in today’s debate, as speculation-inflated prices are not only taking a bite out of consumers’ wallets, but also slowing the sorely-needed economic recovery in the US that is still in its infancy. The gravity of such concerns is clear in a quote from an OPEC minister included in Schoen’s article:

“Prices above $85 for a sustained period of time could well be harmful,” one OPEC delegate told Reuters. “We have to be aware that the economic recovery is still fragile.” (MSNBC, March 31st)

When members of OPEC, a group of nations whose lifeblood is oil sales to the world, say that prices are too high, it’s well worth listening to them. To address its concerns, OPEC has allowed its production levels to slip above official quota levels to sneak more supply into the market in an attempt to put a damper on oil prices. But if the engine of speculation keeps churning out higher prices, added supplies may have little effect on the market.

Some say the only way to reign in rising prices is to place limits on oil speculation. In the US, the Commodities Futures Trading Commission is considering imposing just such limits—the policies are currently in a public comment period and should be unveiled in their final forms at the end of the month. But plans to limit speculative activity have been met with strong resistance, primarily from institutions and individuals who participate in oil trading. This week Jeffrey Sprecher, the chairman and CEO of London’s Intercontinental Exchange (Europe’s main commodities market) called blaming speculators “a crutch for why prices went up instead of looking at the underlying supply and demand and fears.” Sprecher referred specifically to the price peak of $147 reached in July of 2008, but curiously omitted any comment on the current situation, when the evidence for speculation, not supply and demand, driving up prices is arguably stronger than it was two years ago.

Whether new limits on speculation in the US and/or UK will be adequate to curb volatility and reassert the influence of supply and demand over oil prices remains to be seen. But considering the strained budgets of heating oil and gasoline consumers and the fragile state of our economy, it is clear that lowering oil prices is more crucial than ever, no matter how they are brought about, as Peter Beutel explained:

Higher oil prices—even oil prices at existing levels—represent a tax on the American consumer at absolutely the worst possible time when we’re trying to fight our way out of a recession. We would still be producing plenty of oil at $50 and give consumers a reasonable relief that would allow this economy to grow much more substantially and put us on a much firmer footing.