Jeff Gelles: Has speculation fueled the rise in gas prices?

We're used to the occasional gap between what some politicians claim and - how to put this delicately? - the facts. But even with suitably low standards, there was something breathtaking - a gap the size of the Grand Canyon - in Newt Gingrich's comments last week on gasoline prices.

The former House speaker was urging Super Tuesday supporters to inculcate their friends with his vision of $2.50-a-gallon gas as a key reason to elect him to the White House.

"Point out three numbers to them," Gingrich said. "The price of gasoline when I was speaker was $1.13. The price of gasoline when Barack Obama became president was $1.89. All of this gigantic increase came from his policies."

Gingrich didn't mention the third number in his series, and didn't have to. Anyone paying attention knows that a gallon of gas is once again pushing, or passing, the $4 mark.

But did he really think that if he didn't mention it, his audience would forget gas prices' wild ride during the year before President Obama took office? That was 2008, when crude oil peaked above $145 a barrel and real-dollar gas prices neared heights unseen since 1981, before both plummeted in late 2008's collapse.

Gas prices are understandably drawing attention again, and not just because of lies, damned lies, and political speeches. Their volatility, typically blamed on uncontrollable trends and events such as Chinese growth and Mideast turmoil, seems inevitable.

But is it? More to the point, is all of this year's rise in gas prices, like a similar climb in spring 2011, likely to be driven solely by market fundamentals such as supply, demand, and the potential for supply-chain disruptions?

Not if you believe experts such as University of Maryland law professor Michael Greenberger, a former director of trading and markets for the Commodity Futures Trading Commission, the federal agency charged with overseeing the highly specialized trading in commodities futures.

Since last fall, and against staunch opposition from Wall Street traders and their GOP allies, the Democratic majority on the CFTC has been trying to reimpose market rules that fell into disfavor during the recent era of bipartisan deregulatory zeal.

A key element: so-called "position limits," which bar a single firm or its affiliates from controlling too much of a commodity. The CFTC began issuing waivers on position limits in 1991, when oil was cheap. The result, Greenberger argues, has been periodic bouts of excessive speculation as markets "became unmoored from economic fundamentals."

Last year, Greenberger worried the CFTC had made too many compromises when it wrote its new rule mandated by the Dodd-Frank financial reform - not just to mollify Wall Street speculators but also to win the crucial support of a wavering Democratic commissioner, Michael V. Dunn, who last month left the CFTC for Patton Boggs, a leading law-and-lobbying powerhouse. Now Greenberger is even more dismayed that the final rule, however imperfect, could be blocked by a court challenge by Wall Street.

How strong is the evidence on excessive speculation? Some economists question the entire concept, arguing that markets are self-correcting even when complex financial instruments and trading strategies are involved.

But here's the rub: If the market fundamentalists are wrong, speculators may be doing big damage. By one estimate last year from CFTC Commissioner Bart Chilton, excessive speculation costs drivers between $8 and $16 per tank.

Apparently because of Dunn's hesitance, the CFTC majority said it didn't need to conclude from more than 50 studies it weighed that position limits were crucial to prevent excessive risk. Instead, it said it was simply following the intent of Congress.

The CFTC didn't have to punt, which may make the rules harder to defend in court. Concerns over speculation are powerful enough to apply the "precautionary principle," often used to guide tough choices in areas such as public health.

Greenberger says position-limit rules are aimed only at financial speculators - the Wall Street firms that have turned commodity investments into a high-tech version of casino gambling.

"Stopping speculation for a time is a no-lose proposition," he says. "If it is true that speculation leads to a 'bubble' that unnecessarily inflates consumer prices, then limits on speculation will deflate the bubble. If speculation has nothing to do with prices and prices do not go down, the only thing you have stopped is gambling on the price."

Greenberger says a wealth of evidence suggests that in a healthy futures market, about 70 percent of contracts will be owned by commercial interests - such as airlines seeking to protect themselves against jet fuel's price volatility. With about 30 percent of the contracts owned by financial investors, there is plenty of liquidity to keep the market functioning.

But in July 2008, when crude oil hit its record high, oil-futures markets were just 30 percent commercial, he says. And he says evidence suggests the split has worsened - to 15 percent commercial vs. 85 percent speculative.

Wall Street isn't united in its opposition. In fact, some of the best arguments for stronger rules have come from those with financial credentials - perhaps because they're the ones who best understand how the casino works.

In a 2008 study, "The Accidental Hunt Brothers," hedge fund manager Michael W. Masters and analyst Adam K. White compared institutional investors in energy and food derivatives to the Hunts, whose famous attempt to corner the silver market drove the futures price for an ounce of silver from under $10 to more than $50.

Masters and White said that while such investors are trying to do the right thing for their portfolios, "they are unaware that collectively they are having a massive impact on the futures markets that makes the Hunt Brothers pale in comparison." Their answer urged the kind of caution that Congress embraced in Dodd-Frank: "Speculative position limits worked well for over 50 years and carry no unintended consequences," they wrote.

Many would dispute their "no unintended consequences" argument - market rules always have some sorts of effects. But some consequences are borne by wealthy Wall Street investors closed out of a casino with rich payouts, and others are borne by everybody who buys gasoline - including many who suffer harshly when prices spike.

Is it really that hard to choose?