President Obama has taken a lot of heat from Republicans in recent weeks over high gas prices, and what he coulda, shoulda done to keep them lower. The debate reached a fever pitch during the rejection of the Keystone pipeline, and it will be a constant political refrain as long as gas remains close to $4 a barrel. It’s no wonder that the President is now trying to turn the tables by going after commodities speculators, whom he blames for distorting markets, with tougher regulation.
Before I weigh in on the political and economic validity of that, let’s get a few facts straight. The price of gas is dependent on the price of oil. The price of oil is set on global markets, not in the U.S. And oil has been rising lately not because of Keystone, or opposition to fracking, or anything the White House has or hasn’t done – it’s been rising because emerging markets like China consume a ton of energy, because refinery capacity in the U.S has been constrained, because worries over conflict and supply disruption in Iran and other parts of the Middle East have added in a large fear premium to oil prices, and because oil is no longer just a raw material, but a tradable asset. In fact, commodity stocks now rival tech stocks as an investment of choice – as of last year, they accounted for about 30% of the global stock markets.
Ruchir Sharma, the head of emerging markets investment at Morgan Stanley, believes that oil has actually become a bubble similar to the tech bubble of 1999 – he calls it “commodities.com.” As he lays out in his excellent new book Breakout Nations, the sum of money invested in commodities has more than doubled over the last five years, so that traded energy futures now represent about 2 billion barrels a day of oil – 22 times higher than the daily total global demand for energy, and more than three times higher than a decade ago. In fact, the rise in commodities prices since the financial crisis was the sharpest spike ever recorded during a period of relatively slow global growth. Clearly, not all that oil is being used – a good chunk of it has been bopping round the Bloomberg screens of speculative investors.
While it doesn’t solve the whole price problem, I think it’s smart politics, and smart economics, for the President to take on the speculators. First, it shifts the focus of the “why can’t you keep gas prices down” debate, and puts it back on the problems of Wall Street, which still haven’t been solved. That has the potential of garnering the President political points. The jury is still out on the economic benefits to be gained by targeting speculators – we’ll know more when the President’s working group on oil and gas price fraud, formed over a year ago, finally weighs in. But even the threat of targeting speculators with tougher penalties and more regulation may be enough to scare some of them off, and help bring down energy prices. This is important because the worst cost of higher prices is always born by the less well off, who spend a much higher percentage of their incomes on gas, food and housing than the rich do. If the President can convince them he has their interests in mind at the pump, he may be likelier to get their votes in November.
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