Report: Wall Street Speculators Drive Up Oil Prices
|The view from Wall Street these days.|
A new investigative report puts the blame on Wall Street, specifically hedge funds and investment banks that today are involved in the lion's share of oil trading that's run up the price of gasoline to record highs in recent years. In an article Friday, McClatchy Newspapers documents how these speculators are now involved in 68 percent of all domestic oil trades. That's up from around 30 percent in the decades leading up to the 1990s.
But from 1991 forward, the big financial players such as Goldman Sachs and J.P. Morgan Chase won exemptions that freed them from limits on how much they could speculate in futures markets. They became classified as commercial traders, as if they were an airline hedging price risks in jet fuel. The big banks needed to invest in futures contracts to hedge bets they made in the unregulated swaps market. And the government, in the tenth year of Reagan Republicanism, was happy to reduce regulations on markets. Oil "swaps" increased from $13 billion in the 1990s to more than $313 billion in July 2008 at oil's peak priceAnd while oil executives are reluctant to admit the role of speculators in manipulating the market, the hedge funds and investment banks are the only explanation for the rising prices. Why? Demand for oil in the U.S. has actually dropped over the past five years and global demand is expected to remain flat in 2011. Meanwhile, there's plenty of supply of oil with refineries operating far below capacity.
Comments one Wall Street insider: "It's harder and harder for any reasonable observer to dismiss the role of excessive speculation in this market."