As gasoline prices have soared to $4 a gallon, putting a pinch on consumers’ wallets and President Obama’s approval ratings, the president has been casting about for a convenient scapegoat. He’s found one in oil market speculators, whom he charges with driving up the price of crude oil and gasoline.
In response to speculators’ supposedly sinister machinations, Obama this week urged Congress to crack down on speculation by stepping up surveillance of energy futures traders and increasing the penalties for those convicted of manipulating Congress. No doubt the move will convince Obama’s supporters that he is “doing something” to bring down gas prices. In truth, the crackdown on oil speculation, not unlike Obama’s recent campaign for a “Buffet rule” tax on millionaires, is little more than a cheap political ploy. Laws are already in place to regulate market manipulation, making Obama’s crackdown largely symbolic. The bigger problem, though, is that there is little connection between rising oil and gas prices and speculation in energy futures markets.
That’s not to say that oil speculation has no effect whatsoever on gasoline prices. But since those prices are ultimately determined by the laws of supply and demand, the only way that oil speculation can influence gas prices is by impacting the supply of oil and gasoline available. Thus, if oil producers expect prices to rise in the future, they may keep oil from the market in the hopes of selling it at a premium. That in turn could lead to diminished supply and increased prices at the pump.
Unfortunately for Obama’s anti-speculation crusade, there is no evidence that this scenario is actually happening. Cato Institute scholars Jerry Taylor and Peter Van Doren observe that if speculation were having the effect on gas prices that Obama claims, we would see a buildup of inventory among crude oil producers. Instead, crude inventories have remained within the normal range. Even more significant is that gasoline inventories, rather than increasing, have actually been decreasing at a faster-than-average rate. Consequently, Taylor and Van Doren note, “there’s no evidence that speculators are reducing the supply of crude or gasoline through increased storage.” To be sure, inventory rates might not be a meaningful indicator if producers were instead curbing production in anticipation of future price increases. Yet there is no evidence that this is happening, either.
As it happens, there are external factors limiting the supply of oil on the global market. But the true culprit is not oil speculation but geopolitics. Oil analysts point out that due to disruptions in production in strife-torn countries like South Sudan, Yemen and civil-war-engulfed Syria, at least a half a million barrels of oil a day are being withheld from the global market. A precipitous drop in crude oil production in Libya following a complete shutdown last year has cut the global supply by another 2 percent. Combine that with a fall in spare oil capacity and the result is a 20 percent increase in oil prices just since December. Prices may rise even more as a policy that President Obama (along with most Republicans) has supported – new sanctions on Iran intended to curb its nuclear weapons program – goes into effect.