Well Duh: Relaxed Regulations and Exploding Speculation Cause Wildly Fluctuating Gas Prices

But from an another point of view, are wild oil price fluctuations really all that bad?


In my experience, it doesn’t take a higher degree and advanced knowledge of oil economics to see that rampant speculation is behind the crazy swings in oil prices we’ve seen in recent years. Even so, it’s a topic that economists and pundits have debated ad nauseum.

In what may be one of the most exhaustive analyses of the issues surrounding the murky field to date, Rice University researchers from the Baker Institute for Public Policy have released a new policy paper — “Who is in the Oil Futures Market and How Has It Changed?” — aimed at setting the record as straight as can be.

Kenneth Medlock and Amy Myers Jaffe, both coauthors on the paper, conclude that since US regulations on speculation and oil futures were eased back in 2000 under the Commodities Futures Modernization Act, there has been a clear correlation between the exploding rate of oil speculation and futures trading and wild oil price swings.

According to Medlock and Myers Jaffe, previous conclusions about the lack of influence of speculation on wild price swings by the US Commodity Futures Trading Commission were based on “inappropriate analysis.” As the authors suggest, speculative trading has had a clear impact on the volatility of oil prices and it has caused large amounts of market distress worldwide.

This is a matter of major international concern and recently world leaders including British Prime Minister Gordon Brown and French President Nicolas Sarkozy have called for a solution to the “destructive volatility.”

Ironically, as the world grapples to deal with the volatile oil market and seek solutions to that problem, sky high prices at the pump have added an immediate urgency to find solutions to the world’s environmental problems — something that I would argue is of great benefit to humanity in general.

As a result, my gut feeling might be to say, “let’s let the oil speculators speculate themselves out of a job.” The more we let the oil market self implode the faster we ween ourselves off the nasty stuff, right?

Well, maybe so, but taking a more tempered and perhaps realistic view of the situation, it still might be 20-30 years before we can really rid ourselves of oil completely (assuming peak oil doesn’t come sooner) and in that time wild oil price fluctuations could do an untold amount of harm. Also, as demand for oil increases at a staggering rate in both China and India, the problem is sure to get worse.

So perhaps it makes sense to try and fix the problem now? The Rice researchers suggest that the only way to do that is to increase market oversight and modernize the government’s involvement in the oil market. As Medlock says, “To protect the U.S. economy and American consumers, there needs to be greater market oversight. The tremendous increase in the market presence of speculators by fifteenfold [since 2002] speaks for itself.”

Certainly this is a complex topic and can’t be fixed easily. How do you all feel about the issues? Any experts out there that care to speak up (do I even need to ask)?

Source: EurekAlert

Image Credit: ezioman‘s Flickr Photostream. Used under a Creative Commons License.

Nick Chambers

Not your traditional car guy.