Are speculators driving up your gas bill?

I see that some in the U.S. Congress are gearing up to crack down on "speculators" accused of driving up prices for key commodities like oil and corn. Connecticut Sen. Joseph Lieberman is seeking to ban institutional investors from investing in commodities markets at all, and his colleague, Michigan Sen. Carl Levin, is urging the ...

I see that some in the U.S. Congress are gearing up to crack down on "speculators" accused of driving up prices for key commodities like oil and corn. Connecticut Sen. Joseph Lieberman is seeking to ban institutional investors from investing in commodities markets at all, and his colleague, Michigan Sen. Carl Levin, is urging the Commodity Futures Trading Commission, which regulates commodities trading in the United States, to take action.

I see that some in the U.S. Congress are gearing up to crack down on "speculators" accused of driving up prices for key commodities like oil and corn. Connecticut Sen. Joseph Lieberman is seeking to ban institutional investors from investing in commodities markets at all, and his colleague, Michigan Sen. Carl Levin, is urging the Commodity Futures Trading Commission, which regulates commodities trading in the United States, to take action.

As Diana Henriques explains for the Times, there’s a risk the proposed cure would be worse than the disease. Not only is it tough to identify who is engaging in "excessive speculation" versus merely "speculation," it’s also completely legal to try to make money from trading commodities. What’s more, some analysts argue that speculators actually make the markets function more smoothly by keeping them liquid. (Here’s an example of one such argument.)

There’s also a fierce debate about to what extent speculators are, in fact, to blame for the high prices. Fatih Birol, chief economist at the International Energy Agency, put the matter thusly in a recent interview:

I believe the main reason for the high prices [is] the growing perception in the markets that the growing demand growth may not be met by the supply growth. And this provides fertile ground for the speculators… [T]he main issue here is the fundamentals but the speculators play an amplifying role in that respect.

The Financial Times provides some support for this view today:

Refiners are paying record premiums for the high-quality crude oil they use to produce diesel and petrol, a sign of strong demand in the physical oil market that calls into question claims that soaring oil prices are being driven by speculators.

Refiners are paying up to $5-$6 a barrel on top of current record prices to secure high-grade oil, traders said, double the level of a year ago. The mark-ups are four times higher than the 2000-2008 average. The movement in prices paid for physical barrels of oil has gone largely undetected outside the refinery industry because financial markets pay almost exclusive attention to the price of oil futures traded in London and New York.

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