As the crisis in Libya continues to shake world oil markets, a rising chorus of voices in Washington is calling for President Obama to release millions barrels of oil from our 727 million-barrel Strategic Petroleum Reserve (SPR), The New York Times reports. With gasoline prices up 33 cents a gallon in the last month, that's a tempting idea. The government tapped into the SPR after Hurricane Katrina in 2005 and during 1991's Persian Gulf War. In both cases, the moves took pressure off oil prices.

But is the current situation such an emergency? No way. After all, as I wrote last month on DailyFinance, Libya represents a mere 0.5% of U.S. oil imports, and Saudi Arabia is increasing its production to make up the difference. There has been no sudden increase in demand for oil, nor has there been a truly significant drop in supply. In fact, refineries -- which convert crude oil into gasoline and other chemicals -- are operating at a relatively low 88.4% of capacity, according to the U.S. Energy Information Institute.

So why are oil prices going up so much? Speculators.

Oil speculators using cheaply borrowed money to bet on rising oil prices and a falling dollar are playing on media-fueled fear to make big profits. The good news is that stopping those speculators would be easy: Regulators should demand higher margin requirements. By cutting off their easy ability to gamble with cheap debt, the regulators could push speculators out of the market and relieve consumers from pain at the pump.

The Politics of Regulation

Last time we had a huge run-up in oil prices was 2008 when oil hit $147 a barrel. When the Commodities Futures Trading Commission -- the body that's charged with keeping the trading pits honest -- investigated, it discovered that 81% of the trading volume in oil was being conducted by speculators. Put another way, businesses that actually use the oil, such as airlines, were doing just 19% of the trading. The vast majority was done by hedge funds and investment banks to make a quick buck.

The CFTC let speculators into the oil-trading market back in 1991. That's because, as I wrote on BloggingStocks in 2008, J. Aron, the trading unit that hired Goldman Sachs (GS) CEO Lloyd Blankfein, requested and got an exemption that allowed it to trade oil even though it wasn't going to take delivery. Once J. Aron got through that door, so did many others -- including Enron. Remember how that turned out?

The Dodd-Frank financial reform law requires the CFTC to do something about speculators, but they've managed to delay the implementation of so-called position limits until 2012. According to Heatingoil.com, the CFTC will be at least a year late in complying with the Dodd-Frank requirement that it limit speculators' ability to drive up oil prices.

Let Real Supply and Demand Dictate Prices


So, thanks to the CFTC's inaction, the level of speculation in oil prices is at record levels. According to Heatingoil.com, trading volume on the NYMEX from oil traders who don't take delivery -- so-called "net long positions," hit a level not seen in four years in January.

The fuel that keeps these speculators going is cheap capital -- supplied by our friends at the Federal Reserve. But again, it's easy to stop this: Simply require those speculators to use much less borrowed money when they trade.

Last month, two exchanges did just that -- but it wasn't enough. According to Bloomberg, the New York Mercantile Exchange (NYMEX) in February increased its margin requirements 20% to $6,075 per contract, and the International Exchange (ICE) increased its margin requirement 7% to $5,200.

If consumers had a say, NYMEX and ICE would double those margin requirements today, and you'd then see oil and gasoline prices drop to the levels dictated by supply and demand rather than Wall Street greed. Shutting down the speculators' ability to gamble quite so much with borrowed money would be a better answer than releasing oil from the SPR when we don't have a real supply emergency.


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March 13 2011 at 10:12 PM Report abuse rate up rate down Reply
rachelen

wow @robedixon. are you really that deluded and ignorant? You know why the market is unstable? because of the speculation and all of the greedy hedge fund morons out there tinkering with the market to their benefit. THERE IS NO REGULATION IN THE MARKET.

The "free-market" system is nothing but a tool for corporate greedmongers and greedy crooks to make money.

dont blame it on the middle east unrest...when has there every been stability in the middle east for the past 30 years??????


sounds to me like you are one of those middle class to upper middle class idiots who blindly support the conservative republican policies that have gotten us in this mess in the first place. and nope, i agree also that democrats in office currently are to blame too. why? they do NOTHING to take initiative to clean this mess up. maybe they are in bed with big business too, who knows. but what you people dont understand is that the conservative policies dont do anything for you but for a small subset of them population who are truly "rich". wealthy people are small potatoes compared to the true upper class. trust me, your voting habits of supporting this crookery is only hurting you.

they win more than they lose and they know this. hence, why they keep speculating out of control. they have nobody to answere to.

the government is helping by messing with the value of the dollar. that facilitates their behavior. this is doing nothing to aid recovery, if anything, its pushing us into another reccession.

this article is only pointing out the truth while other media outlets choose to run the Bullsh!t news stories that help aid speculators by providing them with excuse for their tinkering and theft.

March 09 2011 at 3:49 PM Report abuse rate up rate down Reply
robedixon

God bless Peter as always he thinks he knows so much more than he does. Let's call these people who keep a market stable speculators and people will hate them. If it was not for "speculators" or people who are willing to take the risk for future delivery of oil the market would spiral up and down every day wildly. Ditto for these "speculators" who are willing to do the same for cotton, wheat, and other commodities. Yeah, they are bidding it up, hell I would if the countries that deliver oil to the market were unstable as they are right now. Heck, I am glad someone, anyone, call them speculators are willing to take the risk so as to keep the oil price from spiraling even higher. Mr. Cohan knows these facts and also knows that unlike raising the margin requirements that the best way to keep traders from "speculating" too much is to let them over margin themselves and if they lose they lose big. Keeps the animal spirits in check unlike just raising the margin. I suspect Mr. Cohan, as usual, is only peddling a political agenda here and nothing less.

March 09 2011 at 2:54 PM Report abuse rate up rate down Reply
vcgh2000

Speculators should be forced to take delivery.....I'D love to see some guy with 10,000 barrels of crude parked on his lawn.

March 08 2011 at 10:05 PM Report abuse +1 rate up rate down Reply
vcgh2000

Speculators have turned the commodoties market and the stock market into nothing but a crap shoot....For once, I agree with Peter Cohan.

March 08 2011 at 9:55 PM Report abuse rate up rate down Reply
Nattxn

Get the do nothing congress that is bought and paid for and the CFTC that doesn't know what they are there for to do their jobs before there is more unrest in the USA....!!!!!!!
Mid-east unrest.How about a little American unrest over speculators running the price of crude up. Enough American unrest and we can get crude taken of the New York Stock Exchange. It should not be there, it should be on the commodity market and controlled. No more gambling on crude if you want to gamble go to the casinos

March 06 2011 at 5:01 PM Report abuse +3 rate up rate down Reply