There have been many stories in the news about the rising price of gasoline. This was to be expected, given that it is the kind of story that people can relate to easily. It’s the point where ordinary people meet a dark and strange part of the global marketplace, commodities futures.
The increase in these stories was predicted in Barataria, but that was an easy call. The potential for this to not go the Republicans’ way was also obvious. But this could be even more devastating as groups like Better Markets get the message out that unreasonable speculation is the real cause of the recent price spike. It has the potential to very much change domestic politics completely.
The arguments against excessive speculation are made very well in this op-ed piece by Dennis Kelleher, the President of the adocacy group Better Markets. What it comes down to is that when prices appear to be rising in the future more contracts are purchased for future oil delivery by people who have no need for the oil but hope to make some money off of it. Given that there is a rather fixed supply, Iran not withstanding, the increase in demand naturally raises prices. It has been estimated that for every million barrels of oil increase in futures contracts there is a $0.10 increase in the price of a barrel of oil – adding a net of $23.39 to the price, or about 20% of the total cost today.
That level of speculation does sound excessive by any measure, and it begs reform in the markets. It also means that the price is likely to crash if additional sources of oil can be found to over-saturate demand, which is why President Obama and Prime Minister Cameron are talking about working together on a release from strategic reserves. A sudden and large action would cause a lot of pain to speculators and probably make a very big difference. A high degree of volatility in both directions would indeed prove that the problem is speculation.
Meanwhile, however, the case is being made by Better Markets and many other people and groups. What is new about Better Markets is that it is not focused on a vague notion along the lines of “We are getting screwed!” but based on specific data and potential reforms to correct the situation. The effort is highly focused and wonkish. The partners listed on their site do not have actual commodities trading experience, which would be a big plus. What they could use more than anything is an endorsement from inside that world, possibly along the lines of Greg Smith’s now famous resignation from Goldman.
Will this message catch on? We know that the counter from the Republican side is that Obama has restricted domestic oil production. This is completely ridiculous, given that domestic oil production has gone from 147.3 million barrels per month in February 2009 to 182.2 million barrels in December 2011 – a 24% increase. This comes at a time when our oil consumption has been falling – and for the first time in over three decades the US imports less than half the oil it consumes.
What is important in this debate is that once the numbers make it into the mainstream media the argument from the right will be shown to be baseless. The counter on the left is not “you are wrong” but that speculators need to be reigned in. Republicans are very likely to lose this argument – and in the process lose very big on far more issues than the “Drill here, drill now!” they push. Once the public starts to accept that markets are in need of reform a genuine movement might be started.
As noted before, gasoline prices are not a good issue for the Republicans for many reasons and could easily hand Democrats an platform that will play much better. As the debate has played out it seems that there is much more than a short-term political gain in the works for the left if it can continue to align itself with specific and detailed steps for market reform. When it becomes a major movement we can expect some big changes.