Regulation? Hardly! Try Speculation!

Deep Speculation -- from Harper's Weekly 2/11/1865

Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency. Market manipulation is prohibited in the United States under Section 9(a)(2) of the Securities Exchange Act of 1934...The Act defines market manipulation as transactions which create an artificial price or maintain an artificial price for a tradeable security. --- from Wikipedia

Advocates of free markets like to point out that government regulation strangles and upsets the equilibrium that laissez-faire capitalism provides and requires in order to maintain pricing that reflects the true value of goods and services. Libertarians are staunch believers of totally unfettered capitalism, although the majority of conservatives are its primary cheerleaders also. Or so it seems.

Certainly all the saber-rattling from the United States, and Israel (the tail-that-wags-the-dog), against Iran is having an unnerving affect on the oil commodity markets around the world. Add to this the declining value of the U.S. Dollar, which dominates and is linked to the value of each barrel of crude, and not to mention manipulation by unscrupulous producers that invokes shortages and drives prices upward. Of course, as would be expected, Republicans are jumping on the bandwagon and are more than happy to blame this on the Obama Administration. But there are definitely other factors involved -- factors that have had a long-term influence on steadily rising gasoline prices over the last few years. These are factors that are unrelated to consumer demand, since demand is currently at its lowest mark in the United States since 1997.

Many people are only vaguely aware that oil prices are set by commodities traders -- speculators -- who buy and sell futures contracts on the world's commodities exchanges. These are agreements to buy or sell oil at a specific date in the future at a specific price. Buyers will use these to avoid the risks associated with the price fluctuations of oil, while sellers will attempt to lock in a price for their products. As with all financial markets, speculators use such contracts to gamble on price movements. Commodities traders can create a self-fulfilling prophecy by bidding up oil futures prices (or bidding down, selling short, and still getting rewarded handsomely). This practice adds up to 30% to the cost of a barrel of oil without adding any value to the barrel. Once this starts, it can create an asset bubble. (Sound familiar?) Unfortunately, the one who pays for this bubble -- the artificially-created pricing -- is the consumer. That's you...and that's me!

The other night Cenk Uygur of The Young Turks had a segment on his nightly cable television show about the fluctuating pricing of oil and gasoline, which raised a ton of questions (and answered a ton more) about how speculators in oil have been able to manipulate market pricing to the detriment of us all. Here's the reason for it all: In 2004, commodity investment in oil speculation was a hefty $13 billion. By 2009, only five years later, that investment skyrocketed to $300 billion! Coincidentally, or not, in July of 2004 the market price for crude oil was around $31/barrel; by July of 2008 the price escalated to over $137/barrel. In the United States, that translated to $1.93/gallon (in 2004) and $4.09 (in 2008) at the pump. Granted, pricing dropped after those high-marks, but have since steadily increased and now approach those record levels -- with higher levels expected as we move deeper into the year.

"The cost of gas is expected to rise this spring and summer — but no matter how hard conservative pundits try to blame a potential threat of an oil cutoff from Iran, it’s just not the whole story. Speculation on oil futures — by big banks such as Golden Sachs, JP Morgan Chase and others — contributes to the rising cost. 'They make money if the price zooms up,' Cenk says. In 2011, the average American household paid $600 more out of pocket as a result of that speculation. 'It isn’t supply and demand. It isn’t the free market. It’s because these guys are playing with the market — so that they can make more money. They have got to love what is happening with Iran.' "

As Uyger points out, last year each family in America paid an extra $600 in fuel costs due to oil speculation -- an extra $600 that isn't related to supply and demand market forces or because of free-market competition. It was, pure and simple, just another example of how monopolistic capitalism manipulates market pricing, creating bubbles of artificially high pricing for the benefit of a few and to the detriment of the many. It is, by no other definition, market manipulation -- despite the Dodd-Frank Bill passed by the Democratic Congress that was supposedly designed to limit such abuses.

Here's an older video from last year, again by Cenk Uygur, that explains this subject even more thoroughly. It's happening again.