“What Obama Can Do about Gas Prices”

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The Story

“What Obama Can Do about Gas Prices”
by Paul Tullis
Bloomberg Businessweek, May 11, 2012

The Pitch

It’s a commonly-stated aphorism — I’ve written as much myself for Businessweek — that there’s not much President Obama can do about gas prices.

But how true is that really? According to a former director of the trading & markets division at the CFTC, a ban on two financial products, commodity index swaps and synthetic exchange traded funds, would remove half a trillion dollars from the oil market, reducing speculation and with it, oil prices.

US oil production and oil reserves were both up in the last 2 weeks, yet gas prices still rose by 7 cents nationally. Demand was down 2% in 2011, and consumer demand over the course of the recession has seen the greatest reduction since WWII. Yet the price of gas has gone up by more than a dollar since the start of the recession. Heating oil has been around $3.22/gal. during a year with no winter.

You can’t buy fire insurance on someone else’s house. Yet, perversely, traders in London can buy and sell futures contracts for oil they have no intention of ever taking delivery of in Cushing, OK. Derivatives were invented to enable users of the product to hedge against price fluctuations, and at this they’ve proven extremely useful: much of Southwest Airlines’ profitability over the last decade is attributable to jet fuel futures it acquired pre-9/11 at very low prices.

But when Southwest made those deals, the oil market was composed of 70% commercial players, 30% speculators. Michael Greenberger, the former CFTC official who’s now a professor at Univ. of Maryland, says today it’s flipped: 80% speculators, 20% commercial. “The market is overrun with liquidity,” he says. By removing these 2 financial products from the market, he says, “you’ll be stopping gambling, pure and simple– money only creating homes and yachts in the Hamptons.” This isn’t just lefty dogma: A former Energy Dept. official under Reagan agrees.

Ironically–or perhaps not–it’s House Republicans who’ve been hammering Obama over gas prices who have the power to make this change to oil trading.

Interested in a Politics and Policy piece on this? Please let me know.

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