Editorial: Stop the speculators

One of the most basic concepts of economics is the law of supply and demand, which helps determine the price of goods, services, and commodities. Unless, of course, that commodity is crude oil.

Just ask the motorists getting gouged at the pump by soaring gas prices what happened to basic economics.

The recession has helped to drive down demand for oil around the world. At the same time, supplies have increased 20 percent from a year ago. Yet, despite the economic slump and ample supply, gas prices have continued to climb.

A recent government report said crude storage levels were at the highest levels in almost 20 years. But oil prices have doubled since March to more than $70 a barrel, and gas prices are up more than 60 percent.

In fact, gas prices have risen every day for more than a month. The national average was $2.63 a gallon late last week, compared with $1.62 at the end of last year.

So what gives?

Analysts say two key factors have helped drive up oil prices: The economy is showing signs of improving, and oil-producing countries cut back supplies. Then, there are the Wall Street speculators.

Big Wall Street banks, like Goldman Sachs and Morgan Stanley, as well as pension funds and hedge funds, are helping to drive up prices. These firms are buying up oil futures contracts as a hedge against inflation.

Aren't these some of the same investment firms that drove the economy over the cliff, and then needed a taxpayer bailout?

Now they are back in action.

The speculators, er, investors, in New York and London impact the price of oil more than large fuel consumers such as airlines and trucking companies. Sure, the economy is showing some signs of life, but unemployment is at 9.4 percent and rising, and home prices remain depressed.

Motorists remember last year, when gas prices soared above $4 a gallon, while the economy was slowing. The Federal Energy Regulatory Commission concluded in a recent report that speculators were to blame for the jump in oil prices last year.

A Senate subcommittee report in 2006 said that market speculation contributed to rising oil and gasoline prices, and that too many energy trades occur without regulatory oversight. The report said analysts estimated that speculation added as much as $25 to the price of a barrel of oil that was selling for $70.

The report recommended that Congress close a loophole in federal oversight of oil and gas traders, passed in 2000 at the behest of Enron and other large energy traders.

The loophole - implemented under the Commodity Futures Modernization Act - allows large oil and gas traders to trade energy commodities in "over-the-counter" (OTC) electronic markets without any ongoing oversight by the Commodity Futures Trading Commission.

Traders in the OTC markets don't have to file large trader reports, and are exempt from limits on speculative trading. The reports would enable the CFTC to detect, prevent, and prosecute manipulation.

Clamping down on speculators would help put some reality back into oil prices. A good first step would be to close the loophole created in 2000.