Thursday, April 26, 2012


For years, I have warned you about the siren song of de-regulation.  It is offered seductively as a way to reduce prices and increase competition and always presented as a win/win for both producers and consumers.  De-regulation is a disaster for consumers and there isn't time or space to list all the examples, but radio (think KGO) and energy (think rolling blackouts and ridiculous P.G.&E. bills) are two which leap to mind.

     A while back, I wrote about the crap game which oil speculation has become.  The commodities market has become one giant casino.  Buying oil futures and speculating on oil's future price has resulted in driving up the costs of a barrel of oil even as the actual costs of getting it out of the ground have not increased significantly.  Currently, it costs about $11 to get a barrel of oil out of the ground, where it is then sold at over $100 per barrel on the open market.  I told you as much as 1/3 of the price is the result of pure speculation.  If we were to end speculation, we could dramatically reduce the price of a gallon of gas.

     In the meantime, between my piece and today, a number of interesting events have taken place.  President Obama has publically criticized speculators and announced he wants to reduce their activity and influence on the price of a barrel of oil.  (perhaps he or someone close reads this  It is no surprise Mitt Romney vehemently opposes such a move even as he bludgeons Obama about the price of a gallon of gasoline and labels his energy policy a failure.

     In an op-ed in the New York Times, former congressman Joseph P. Kennedy II takes up this subject and demands the government prohibit pure speculation on oil futures.  (Kennedy runs a non-profit organization which buys oil and subsidizes it and provides it below cost for heating the homes of people who could not afford it otherwise.)  Kennedy asserts eliminating speculation would reduce the cost of a barrel of oil by 40%.  It would immediately reduce the price of a gallon of gas by about $1.00.  This is real savings.  This would happen now and the impact on the economy would be huge.  Energy dependant industries, which have been raising their prices to compensate for the higher oil costs, could reduce these increases.  Inflation would remain cool.  (currently inflation is running higher than wage increases for the average American worker)  Imagine what the affect on the American psyche would be if the nation were to wake up tomorrow to gas at $2.90 a gallon?  Consumer confidence would rise and, since 2/3 of the economy is dependant on consumer spending, perhaps this would be the impetus needed to finally push a solid economic recovery.

     Kennedy points out prohibiting speculation is not a new idea.  The government put limits on pure speculation in grain exchanges more the 75 years ago.  Speculators were manipulating the market during the depression and President Roosevelt saw it was not good for the economy and stopped it.  Prohibiting pure speculation in oil would follow the same logic.

      Pure speculation, according to Kennedy, wasn't a problem 30 years ago when he first started buying oil.  It only became a problem when Goldman Sachs (yes them again) came upon the scene and petitioned, demanded, lobbied, bullied, the Commodity Futures Trading Commission into de-regulating restrictions on pure speculation.  In a surprise to know one, the commission agreed with Goldman allowing it to process billions of dollars in speculative trades.  More de-regulation followed, (the old camel's nose under the tent syndrome) and by 2008, eight investment banks accounted for 32% of the total futures market.  Only about 30% of traders in oil futures actually have some skin in the game and use oil in their industries or it’s a factor in their costs of doing business.

     I told you we needed a complete ban on oil future's speculation.  The president is talking the same language.  The Dodd/Frank Wall Street reform bill limits pure speculation, but not enough.  Kennedy, and others, are now exposing this practice for more to see.  This is not an esoteric exercise.  Once again, the 1% has rigged the game to their benefit under the guise of de-regulation.  Why should grain speculators be prohibited from pure speculation and not oil?  Why should hedge-fund traders be able to drive up the cost of energy just to realize billions in profits at the expense of limiting or stopping a fragile economic recovery?

    When I first wrote about this, it must have sounded far-fetched.  Perhaps you didn't believe me about what the effect would be if we eliminated pure speculation in oil.  However, more and more people are waking up to the fact this is another example of the 1% vs. the 99%.  When they propose a new round of de-regulation, its time to hold on to your wallet for dear life.

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