While the Labor Department’s announcement last Friday that US employers had created 192,000 new jobs seems to confirm that the American economy is indeed showing signs of life, the adjective most observers have used to describe its recovery is “fragile.” The reasons are obvious: unemployment is still staggeringly high, household debt and underwater mortgages continue to put a drag on demand, and impending budget cuts by state and federal government could push unemployment back up and the economy back towards contraction.
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But arguably the biggest threat to recovery is the price of oil. If oil prices in particular, and commodities in general, begin to rise, those trends will almost certainly constrain demand and consumer confidence at exactly moment it is most needed. This week oil traded at $104.42 a barrel, up 7 percent from last week and at its highest since the September 26, 2008, close at $106.89. And we know from recent experience the oil prices (along with all sorts of other commodities) can skyrocket with little warning. Cast your memory back to the summer of 2008, before the financial crisis and in the heat of the presidential campaign. That summer, oil hit $147 a barrel and gas hit above $4 a gallon; airfare went through the roof and nearly every single major carrier came very close to declaring bankruptcy. Food prices shot up as well, with wheat trading up 137 percent year over year in July 2008, and corn 98 percent. Famine and food riots spread throughout the globe.
Though it seems like a distant memory now, for about six weeks during the 2008 presidential campaign during which all anyone talked about was the price of gas. John McCain and Hillary Clinton went so far to advocate for a temporary repeal of the gas tax, Congress held hearings and the Senate actually came close to passing legislation to crack down on oil speculation. And lest we forget, it was in this panic over the rising cost of living that the catchphrase “drill baby drill” was born.
So the White House should not only be worried about oil prices and recovery. They should also be worried about the well-established fact that when price of gas spikes, the country’s politics go haywire. FiveThirtyEight’s Nate Silver recently showed that high gas prices are correlated with poor incumbent party performance in presidential elections. So not only do rising oil prices present the single greatest substantive policy challenge to a president attempting to cajole the economy into a sustained expansion—it presents the biggest political danger as well.
At first blush you might think that there’s not a whole lot the president can do about the price of oil. After all, increase in demand from China and India plus seasonal demand in the United States during peak driving months, combined with the instability in the Middle East, all seem to be pushing the price of oil up and are all outside the White House’s control. But that’s not the whole story.
In the wake of the price explosion in the summer of 2008, a bubble that extended to all kinds of commodities, including copper and wheat, a number of observers from George Soros to Hedge Fund manager Michael Masters to former Commodities Future Trading Commission staffer and derivatives expert Michael Greenberg concluded that the underlying supply-and-demand fundamentals couldn’t account for sharp rise in prices. In the first six months of 2008, US economic output as declining while global supply was increasing. And even if supply and demand were, over the long run, pushing the price of oil up, that alone couldn’t explain the massive volatility in the market. Oil cost $65 per barrel in June 2007, $147 a year later, down to $30 in December 2008 and back up to $72 in June 2009.
The culprit, they concluded, was Wall Street speculators.
Commodities markets involve essentially two kinds of participants: there are so-called “end users” like farmers and airlines that use commodities markets as a form of insurance against future price fluctuations, and then there are speculators—hedge funds, investors, big banks that try to make money by correctly betting on those same price fluctuations. The presence of these speculators isn’t in and of itself a bad thing; in fact, they bring liquidity that should, in theory, make the market more efficient. According to an analysis by the House Energy Committee’s Subcommittee on Oversight and Investigations, in 2000, physical hedgers, trucking companies, farmers, bakers, made up 63 percent of the crude oil futures markets, with speculators accounting for the rest. By 2008, those proportions had basically flipped.
Of course, the Wall Street banks say there’s nothing to see here, but that’s hard to believe. It’s almost impossible to make sense of 2008’s massive commodity price spike without concluding that the speculators played an outsized role. When enough money floods into a booming market, Greenberger says it can “unmoor” the prices of commodities from their underlying supply-and-demand fundamentals. The basic mechanism by which this might happen should be familiar; it’s the same principle that drove the housing market bubble or the tech stock boom. When a bunch of people think the price of a stock is going to go up, they rush to buy it so they can realize the imminent gains. Of course, a surge of demand itself pushes the price up and the price cycles upwards until it pops. The difference being, no one puts Pets.com in their cars, trucks and airplanes.
“The most conservative thing that can be said right now [is that] this would be no time to dismiss the role that speculation plays,” says Greenberger. ” A moderate statement is that speculation is creating volatility that is aggravating the uncertainty in the market. If you start talking to industry people, they’re pulling their hair out. American Bakers Association is going bananas. They all believe that the markets are going screwy because of Wall Street.” A host of businesses and organizations from Virgin’s Richard Branson to Oxfam all make the same case.
One way to attempt to constrain these volatile mini-bubbles is for the Commodities Futures Trading Commission to impose “position limits,” essentially limits on the size of the bets that speculators can make. The New Deal–era Commodities Exchange Act gives the CFTC power to curb “excessive speculation,” and the just-passed Dodd-Frank bill explicitly calls for the CFTC to promulgate position limits.
Not surprisingly, the big Wall Street banks like Goldman Sachs don’t want this, and the two Republican members of the commission don’t favor any position limits rules with real teeth. To his great credit, CFTC Chairman Gary Gensler (a former Goldman banker I was quite critical of when nominated to the position) has taken a strong leadership position in advocating strong limits, and Democratic commissioner Bart Chilton has been supportive as well. That leaves the deciding vote in the hand of Democratic Commissioner Michael Dunn, who’s expressed misgivings.
Now, it just so happens Dunn’s term is up in June and last night MSNBC’s Ed Show reported that the White House has begun vetting his replacement. This may seem obscure and technical, but given the precariousness of the recovery and political explosiveness of gas prices, nominating a replacement enthusiastic about reigning in excessive speculation may be the single most important decision the White House makes between now and Election Day.
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I don't wish for another crash, but if that's what it takes to focus everyone's attention (where is the tea party now???)on the dangers of speculation, I say let it crash. __________________________________________________________________________________________
The way things are heading, we may as well let things crash. The wealthy are stripping anything worth while away in dividing them up amongst themselves. The Shock Doctrine is now being applied to this country and people are too blind to see it. All publicly owned properties are being stripped down, sold to the highest bidder and then watch out, inflation will be soon behind so that the public becomes indentured servants to the IMF, World Bank which of course are controlled by (YOU GUESSED IT) the richest aholes in the world.
Mr Hayes writes as if the NYMEX is an allpowerful exchange that controls the other global exchanges on the commodity of oil.
Do you really think we can control Brent Crude prices or ICE (Intercontinental Exchange)? Dubai Crude?
Brent Crude futures are used to price two thirds of the world's internationally traded crude oil supplies.
And what about Opec's Floor price of $70 per barrel? a floor they are considering raising to $100.
You alluded to but did not zero in on perhaps the best evidence of speculation driven prices.
After September 2008's crash, prices fell almost immediately. Paul Krugman says that it's because demand fell, and though I like most of Paul's writing on all subjects economic, he is dead wrong on this.
The crash didn't cause demand to fall immediately and as fast as it did. It was simply that the speculators ran out of money.
I don't wish for another crash, but if that's what it takes to focus everyone's attention (where is the tea party now???)on the dangers of speculation, I say let it crash.
Interesting thing happened. The White House merely mentioned using the strategic oil reserves and walla oil prices come down. If that's not speculation going on, I don't know what is. Maximize profits. Drum up any reason to increase prices. And of course as Liberal in Kansas points out, our brilliant wall street traders sure as hell won't invest in any alternative methods besides the gasoline engine, oil production and all that lines the pockets of those in the industry making billions...but once again, cut all of the worker's pay by all means.
Good article, but didn't anyone proof read this? So many typos.
Speculation is not the threat to Obamas re election. Obama and his 9% unemployment, coming uber inflation, $1.7 trillion deficits,taking debt from $6 trillion to $14 is less than 2 years(a record that should be hard to beat), collapsing currency, over the top union backing and the general recognition of incompetence and in ability to lead as well as obvious inexperience as he loses all influence in the Middle East.
Over regulation is strangling the econmy as it is..
Obama is his own biggest threat a return to the WH other than as a guest. He will soon join a well deserved lecture tour with Jimma Carter as they attempt re-write history to show their administration as great success...;-)
Remember the Arab Oil Embargo in 1973? Remember the Yom Kippur War?
Please recall that the United States Government and our wonderful friends on Wall Street and Corporate USA did next to nothing to develop alternative sources of energy and open up more and new oil fields and exploration in this hemisphere, so we would no longer have to act like Pimps and Prostitutes for Arab Oil and our dear friends those little darlings and sweetie pies in Tel Aviv.
Of course we had off shore rigs and wells - compliments of BP - so what can be said about disasters such as that?
Seems like when it comes to gas to fuel the American greed for our Super Belchfire Quadtorque BulgeMobiles everyone wants to drive we are at an absolute F***ing standstill.
Or if someone wants to drill in Alaska, we can't do anything because we might destroy the habitat of the three testicled Grizzly Bear (one of Sarah Palain's favorite hunts) and whatever else is up there.
But don't worry about a damn thing folks, those bum bashers over on SaudiLand will keep pumping and charging us the max as long as we want. RIGHT?!!
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