With oil surpassing $100 a barrel, drivers are feeling the pain at the pump and some wonder if it’s simply a case of supply and demand. Or maybe something else.
“It’s sad, but people are very greedy,” said Houston driver Jodie Minear as she put $60 of fuel into her Jeep SUV at a Chevron station along Highway 59.
Does she have suspicions as to how prices are set?
“Definitely, I think everybody does.”
She’s not alone.
Back in July 2008, oil prices topped out at a record $145 a barrel. Some in Congress were convinced it had to be because greedy speculators were gaming the system, running up the price of oil and fleecing American consumers.
“[The market for oil] has now been taken over by an orgy of speculation. Speculators control these markets, driving up the price, despite the fact there has been no change in the fundamentals.” said then-Senator Byron Dorgan, a Democrat from North Dakota. He was speaking on the Senate floor in July 2008, railing against what he said had “broken” the futures market for oil.
“Investment banks, hedge funds, pension funds running deep into these future markets, driving up prices. Investment banks buying oil storage capability to buy oil and take it off the market,” said Dorgan.
Since then, the price of oil dropped dramatically, and a debate began over whether there was in fact speculators manipulating the market and if so, what should be done to stop them.
The oil futures market is under the regulation of the U.S. Commodities Futures Trading Commission(CFTC). Its chairman, the Obama Administration appointee Gary Gensler, pledged to take a more aggressive approach to investigating market manipulation. And in a speech Thursday on his energy policy, President Obama called out speculators as being one of the reasons behind high gas prices. “When uncertainty increases, speculative trading on Wall Street can drive up prices even more,” he said. “So there are short-term factors at work here.”
In 2010, Congress passed the Dodd-Frank law that overhauled financial regulation including rules involving oil futures, callling on the CFTC to enforce new limits on the amount of oil speculators could trade.
Last May, the CFTC announced it was charging a group of companies and individuals who allegedly conspired in a scheme to hoard then dump oil stored in Cushing, Oklahoma in an effort to manipulate the price. The CFTC alleged the scheme netted $50 million in illegal profits.
But there were those who had their doubts about what the CFTC was finding.
“I sort of look at it (like) if this is the best they can come up with after all that digging, that suggests the market is actually pretty clean,” said Craig Pirrong, a professor of finance and energy markets at the University of Houston’s Bauer College of Business.
Pirrong is an outspoken skeptic of the extent of market manipulation. He said the Cushing case was, in his opinion, weak.
“Frequently, when prices go up, or should I say, invariably when prices go up, it’s like in Casablanca: round up the usual suspects. And essentially, the speculators are the first ones in line,” Pirrong told StateImpact Texas.
While acknowledging that price manipulation does happen, he said “it’s not what’s driving sort of the big price movement like we saw in 2008 … and it’s not driving what we see right now.”
Pirrong said far more influential is a world oil output that has stagnated, combined with disruptions in supplies from Libya and now Iran.
What’s more, the commodities trading industry is fighting the new limits on oil speculation, taking the CFTC to court to block it from enforcing limits.
The CFTC declined to comment to StateImpact on active cases but a spokesperson indicated that the commission had brought dozens of enforcement cases against energy traders in the past decade, resulting in millions in fines.