Let's Hear A Debate On the Oil Speculators

Here's a question for the town hall debates that Sens. Barack Obama and John McCain are talking about having: What will you do to reign in oil speculators who are profiteering off the pain of working class families by dealing in the dark, unregulated corners of global financial markets?

This issue must rise to the top tier of our policy debates in the coming months. It is increasingly clear that $4-a-gallon gasoline is not just a question of rising demand and diminishing supply, but is yet more bitter fruit of Bush-era deregulation, the price of conservative dogma that there should be virtually no restraint on the greed of financial traders.

A story in today's Washington Post [1]is explicit:

Hedge funds and big Wall Street banks are taking advantage of loopholes in federal trading limits to buy massive amounts of oil contracts, according to a growing number of lawmakers and prominent investors, who blame the practice for helping to push oil prices to record highs.

The federal agency that oversees oil trading, the Commodity Futures Trading Commission, has exempted these firms from rules that limit speculative buying, a prerogative traditionally reserved for airlines and trucking companies that need to lock in future fuel costs.

The CFTC has also waived regulations over the past decade on U.S. investors who trade commodities on some overseas markets, freeing those investors to accumulate large quantities of the future oil supply by making purchases on lightly regulated foreign exchanges.

These traders have no interest in actually buying or selling oil; they are buying and selling the opportunity to make money off of the oil deals that might be made in the future. This is casino gambling, not business dealing. As The Post writes, "the recent flood of investment money has transformed the markets for oil, as well as uranium, wheat, cotton and other goods, into a volatile realm that some insiders call the Wild West of Wall Street."

How high is this flood? Meghnad Desai writes June 6 in the Financial Times [2] that $260 billion has now been poured into commodity markets, compared to just $13 billion five years ago. Most of this is in oil contracts—so much so that:

The total open interest — the number of open or outstanding contracts for which an individual is obliged to the exchange because that individual has not yet made an actual contract delivery — in the 2008 contracts on May 21 was 849.472 contracts, which equals 849 million barrels, or nearly 10 times the daily crude oil production. The daily volume in the 2008 contracts on May 21 was 657.391 contracts, equivalent to 657 million barrels or nearly 8 times the daily crude oil production.

All of this should sound familiar to anyone who has been following the Bush administration's policy of deregulation. There are direct roots to the Enron debacle, which started with conservatives in the Congress and the White House agreeing to unbuckle the restraints on the ability of energy companies to manipulate energy markets.

What is also familiar is the systematic starving of the watchdog that is supposed to keep everything in check. In this case, the acting chairman of the Commodities Futures Trading Commission, in testimony before the House Appropriations Committee in February [3], conceded that in the past 10 years, the trading volume that the commission is required to oversee "has increased six-fold while Commission staffing levels have fallen 21 percent."

All the while, Treasury Secretary Henry Paulson and other administration officials have been tenaciously clinging to the it's-only-supply-and-demand argument in the face of persistent calls in Congress to actually gather the facts needed to explain why oil prices have undergone their extraordinary run-up—and why some on Wall Street are now talking about $150-a-barrel oil on the horizon [4].

It has gotten to the point that even the Bush appointees on the CFTC could no longer ignore the reality that the Wild West they created for their oil and Wall Street friends has gotten out of hand. That was clear last week when the commission announced that it has been investigating futures market manipulation [5]. The question yet to be answered is whether the results of this investigation will see the light of day unfiltered by White House politics.

There is also the bigger question of how the nation will address this unruly financial playground conservatives have created for their Wall Street benefactors. In spite of Enron, in spite of the subprime mortgage crisis, and in spite of what we are beginning to see in the oil futures markets, conservative ideologues and those who would pander to them insist that we can't impose reasonable rules on the traders and speculators, because if we do we will be unable to compete in the global economy. But we are smarter than that, and an alternative vision of how our economy can compete globally by playing some basic rules of fairness must be part of our political debate.

It would be worth asking candidates who constantly beat the drums about increased taxes why they support what is in effect a speculators' tax on gasoline.

Updated at 1:25 p.m. June 6.