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OpEdNews Op Eds    H2'ed 6/18/08

Why Gas Prices are So High and What We Can Do About it

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Message Diana Marmorstein

Neither the G-8 nor oil-producing nations need act to stabilize oil prices, because neither supply and demand nor the weak dollar is to blame for the recent surge. Rather, the cause of this crisis is the creation and deregulation of energy commodity futures, options, index funds, and other derivatives.

Over the past 30 years, the U.S. Commodity Futures Trading Commission (CFTC), which regulates trading in these financial instruments, has vastly expanded the range of items that people can gamble on and the ways in which they can gamble. In the early days, merchants could offer to buy wheat in the future at a set price. Now futures traders can make (or lose) money by, for example, betting that the S&P 500 will go up or down in the future. Clearly there is now a monumental disconnect between the world of 'commodity futures' and real goods and services.

In this new world, large-scale traders can manipulate prices for goods they never see and never have any intention of buying or selling. It's a virtual market with ever increasing layers upon layers that obscure the actual goods being traded. Yet the effects on prices paid by consumers are very real.

While the G-8 and OPEC hold meetings and propose 'solutions' to this world crisis, the reality of how oil prices are now determined renders all such plans futile. The truth is, the total world supply of petroleum has remained in the range of 84 million barrels per day, and the total world consumption has varied only from 83.65 to 85.38 million barrels per day over the past three years. The small deficit in supply last year was made up via inventory withdrawals which amounted to only a 4% reduction in world inventories.

The commodities markets, on the other hand, are beset by speculation in energy futures, causing prices to rise meteorically (like housing prices rose on speculation over the past several years). The CFTC is charged with regulating the markets to ensure that prices reflect supply and demand, not manipulation or speculation. However, over the years, the CFTC has exempted many of these financial instruments from regulation.

In 2006, the CFTC permitted the Intercontinental Exchange (ICE), a London-based exchange, which previously operated energy commodity trading only in European energy products, to begin trading U.S. crude oil, gasoline, and heating oil derivatives - all without CFTC oversight. As this trading began, the price of crude skyrocketed.

And the CFTC, Congress, and the Bush administration did nothing - until a few weeks ago. But this should surprise no one as the president of the New York Mercantile Exchange (NYMEX), on which 75% of energy futures trade, is a former chairman of the CFTC. And Treasury Secretary Henry Paulson, who still claims that the price surge is caused by supply and demand, is a former chairman of Goldman Sachs, which is one of the two leading energy derivatives trading firms in the U.S.

Now that the Farm Bill passed Congress (May 22), with the Commodity Futures Title (XIII), requiring similar oversight of "Exempt Commercial Markets" (such as ICE) as has existed for markets such as NYMEX for years, perhaps we might get some relief from speculative prices. But having waited so long to take any action and considering the astronomically inflated prices of such an essential commodity, it seems to me that it's time for the CFTC to use its new emergency authority over such exchanges, as it has in the past, in ways that include requiring a reduction in open interest in contracts, liquidation of positions, and even suspension of trading of certain commodities.

Considering the background of the key players and the proliferation of deceptive 'explanations' of the cause of the problem, I don't think we can afford to take a wait-and-see attitude. I will continue to communicate with my Congressional representatives on the need for swift and strong action to end energy commodity futures speculation. I hope others will, too.


Energy Information Administration - Petroleum Info - Forecasting - Oil Production

Commodity Futures Trading Commission - history

"Regulation of Energy Derivatives: An Overview" Aug. 13, 2002, Susan C. Ervin, Dechert, Washington, D.C., susan.ervin@dechert.com

"Commodity and Crude Oil Prices: Supply and Demand No Longer Matter?" June 2, 2008, Jeff Pritchard, Altavest Worldwide Trading, Inc.

"Perhaps 60% of today's oil price is pure speculation" May 2, 2008, F. William Engdahl, Global Research

"U.S. regulators probe crude oil market" May 29, 2008, Associated Press, TheStar.com

"Crude Oil Futures: A Form of Pricing That Went to the Soul of the Industry" Michel Marks, Board of Directors, New York Mercantile Exchange, Inc.

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Diana Marmorstein, Ph.D. is a chemical engineer with an interest in politics. She is also an environmentalist and animal activist who spends a lot of time volunteering.
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