Levin Sheds Light on Link Between Gas Prices, Speculators

If you're like me, you get a lot of emails from politicians, some asking for money, others keeping you up to date on their activities. Some you open, glance through, and forget about. A few make an impact.

Sen. Carl Levin most recent email -- on gas prices -- fell into that last category. Republicans have been trying to make hay against President Obama as gas prices have risen in recent months. Estimates are that as much as 56 cents of the cost of each gallon of gas is due to speculators. And 80 percent of the trades made on a barrel of oil are made by speculators, according to testimony to the Senate Permanent Subcommittee on Investigations, chaired by Levin.

The excessive speculation distorts the relationship between supply and demand. As Levin explained, speculation keeps prices from falling when demand is low because speculators are betting that the price will eventually go back up, even if demand is low right now.

"Nowadays, that relationship is largely absent. There is no shortage in the supply of oil globally, and the United States is producing more oil than it has in a decade. Last year, the United States actually exported more gasoline and other petroleum products than we imported. At the same time, U.S. demand for fuel actually sank," Levin's email said.

"Under normal economic conditions, rising production and lower demand should mean lower prices. Instead, prices are more volatile than ever. One key reason is that speculators are playing too large a role in the oil market. If we are to get a handle on oil prices, we have to curb excessive speculation."

So why doesn't Congress do something? Turns out it already has. The Dodd-Frank Act passed in July 2010 told the Commodities Futures Trading Commission to establish trading limits to prevent speculators from dominating markets and distorting prices. The CFTC wrote the rules, but they are not yet in force because the financial industry has filed a lawsuit to stop the new rules and throw them out permanently.

Levin last week worked with a group of 18 other U.S. senators to file a brief with the court in support of the rules imposing limits on speculators. The brief stresses that the Dodd-Frank Act required limits on speculators, limits that were first put in place in 1936.

Lots of money is at stake, and the financial industry will be well-funded in this court fight. Levin is right to highlight that speculators are driving up the cost of oil.