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TRNN Replay – Robert Pollin: From the price of food to gas at the pump, research shows how speculation raises price

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in New York City. A new study by Bob Pollin and James Heintz at the PERI institute has found that at least 30 percent of the price of gasoline over the last few months was caused by speculation in oil. Now joining us from Amherst, Massachusetts, at the PERI institute is Bob Pollin. Thanks for joining us, Bob.

ROBERT POLLIN, CODIRECTOR, PERI: Hi, Paul. Thank you for having me.

JAY: So, what are the numbers? How did you conclude this? And just how does the speculation work?

POLLIN: Well, the numbers are that the average price of gasoline at the pump in May, the last full month that we have, was $3.96. That’s a full dollar over what it was just in October. So just between October and May, the price has gone up about 35 percent. Over the last two and a half years, the price has doubled at the pump. The price was $1.96 in January 2009. So this is a remarkable increase. Now, the way we tried to get at the source of this was to say, okay, let’s look at all the factors that could be influencing the price over the long term. And so we measured those using a statistical technique, a simple statistical technique, and we said, if you toss in all of those factors, the price in May should be $3.13 per gallon. And instead it’s $3.96 per gallon. So that means that the part played by something other than the basic factors in the market, the basic supply and demand factors, technology, shipping, marketing, toss all of those things in, something is causing the price to go up from $3.13 to $3.96. So that’s an $0.83 difference. Now, why–.

JAY: The CEO of ExxonMobil, Rex Tillerson, testifying in May at a Senate hearing, actually came up with numbers that were even higher than yours in terms of factoring in speculation.

POLLIN: That’s right. So he was saying that if you take his testimony, which he said that the price of crude oil should be between $60 and $70 a barrel, that would translate into a price at the pump of between, say, $2.60 and $2.80. Now, why is ours actually higher? Why is our estimate more conservative than Tillerson’s as regards the effect of speculation? The basic reason is our technique–we’re saying we’re allowing for the increase in the role of speculators in the market. Speculators have been increasing their role in the oil futures market now, really, for a decade, especially for the past three or four years. So we’re saying toss those things in. Okay, we’re allowing for that. The only thing that we’re trying to isolate is the short-term effects. And he’s saying let’s take out the speculators altogether. I’m saying, let’s keep the speculators in, but only look at what they’ve been doing the last few months. That’s the sort of–.

JAY: The counterargument is that this is all about supply and demand, and speculation doesn’t play that much role. I’ve heard the argument that the spot market really does just respond to how–you know, who wants to buy that day, and speculation doesn’t affect it that much. So what’s your answer to that?

POLLIN: Well, we look into that in depth in the paper. And the only problem with that argument: there’s no evidence to support it. So if you look at the evidence–and it’s important to look at the evidence–if you look at the evidence as regards production of oil globally and demand for oil globally, they’re in very close correspondence. In fact, production has grown a little bit faster than demand. So if supply is growing a little bit faster than demand over the last four months, that would suggest, actually, that the price should be coming down, maybe even a little bit. But in fact the price has gone up, so it can’t be. I know people say that it’s due to turmoil in the Middle East, which is causing problems with supply. You know, we can tell that story, but it doesn’t show up in the evidence as regards the global availability of oil versus the global demand for oil.

JAY: I mean, one of the other arguments is that the world’s just running out of oil, and that’s sort of factoring into a generally higher price. What did you find in terms of how much oil?

POLLIN: Well, the world is running out of oil. Fossil fuels are not a–they are a nonrenewable resource. We will eventually run out. We’re just not going to run out any time soon. In fact, right now, according to the official estimates of the US Energy Department, at the current level of consumption, we have 42 years worth of oil reserves available, 42 years. And that number is substantially higher than what it was a year ago, five years ago. Fifteen years ago, we were only at 28 years worth of reserves, given consumption levels. So that argument also just doesn’t hold up.

JAY: But the price of oil going up has a lot more to do than just driving cars around. This has a lot to do with how much we pay for food. Can you talk a bit about that?

POLLIN: Well, there’s two ways in which the commodities futures market for oil affects food. Number one is that oil is a big input in food, and so when we look at the data on the relationship between oil prices and food prices, there is a strong correlation. Number two, the rise of the commodities futures market–oil is the biggest commodity in the commodities futures market, but food is next to oil, so that the same dynamic, the same speculative dynamic, as we’ve talked about before [crosstalk]

JAY: In fact, when you look at a company like Glencore, you have the same companies involved in food and oil speculation, and actually, in Glencore’s case, actually owns, you know, actual wheat fields, and they’re over here speculating on the oil side.

POLLIN: Right. Glencore, according to The Financial Times, reported a 47 percent increase in their profits in the last quarter. And The Financial Times story itself said this is due to the rise in the oil prices. So for all the–. So for all the people who say, no, no, no, no, no, this is about fundamentals, supply and demand, it’s not about speculation, how do you explain Glencore increasing their profits by nearly 50 percent in the last quarter? By doing what? By speculating.

JAY: So, Bob, tell me how speculation interacts with this daily spot market. How does one influence the other?

POLLIN: Okay. So the spot market is the market for buying and selling oil today. And then we have the speculative market, which is the market for futures contracts, buying oil into the future at a fixed price. And the futures market has been around forever, and we could call it an insurance market. So it’s basically big buyers of oil want to lock in a price, like an airline who’s going to buy a lot of oil over the course of the year, next year, two years. So they lock in a price. And that means they have a futures contract. That kind of arrangement has been going on forever. Now, what has happened recently over the last decade, but especially the last couple of years, is a massive increase in the financial market participation in this futures market. So they are buying up these futures contracts because they’re thinking of the oil contracts as assets, like stocks, like bonds, like mortgage securities. They aren’t interested at all in owning oil for oil.

JAY: Unlike airlines that might do this in order to guarantee the price of jet fuel over the course of the year and actually take possession of the fuel, these guys are just betting against each other whether the price is going up or down.

POLLIN: Right.

JAY: It’s the equivalent of being at a horse race and sitting in the stands and not owning any of the horses.

POLLIN: Well, that’s one way to think about it. So another way to think about it is it’s just another object of speculation like we’ve seen with the stock market when we had the stock market bubble in the late ’90s and early 2000s, the dot-com bubble that crashed. Then the speculation on financial markets moved into real estate, housing market, mortgage-backed securities. That went up. Bubble crash. And now the investing has moved into the commodities market, and oil is the biggest commodity.

JAY: So, Bob, it’s–effects not just the price of gas at the pump. It affects the price of food. What can we do about it is the real question.

POLLIN: Right. Well, I mean, a year ago, the US Congress passed the Dodd-Frank financial reform bill, which explicitly spent many, many pages on this issue of controlling the commodities futures market. And, in fact, there is a passage in the Dodd-Frank law which gives authority to the Commodities Futures Trading Commission to precisely control excessive speculation, that is, that the Commodities Futures Trading Commission is supposed to represent the interests of ordinary consumers and small businesses in the United States against these kinds of massive run-up in price increases on this speculative market.

JAY: So right now there’s a big battle on exactly what the regulations are going to say to enact this legislation. It’s not getting a heck of a lot attention, this battle. But what exactly is being fought over? And what could regulations say that might control this kind of speculation?

POLLIN: Well, the battle right now is that the Republicans are saying, well, we’re not even going to fund the Commodities Futures Trading Commission to an extent that will enable them to exercise their legal authority. Now, then, to the other debate that’s going on is within the–the Commodities Futures Trading Commission was supposed to have come up with their rules months ago, and they’re delaying. And now they’re saying they’re going to delay more. And the reason, they say, they say, we need more information, we need more data, because the nature of the speculative market today is so different than it had been in the past. Now, it’s true that you can always get better data. As a researcher, I’m all in favor of more data. But we have enough data in order to establish regulations, the most important being what are called so-called position limits, that is, limiting the amount of trading and ownership of these assets that any given trader can have. And you set those limits at a level commensurate with what is needed for the actual buying and selling of oil, per se, and not buying and selling of speculative contracts.

JAY: So where are we at in the process? Like, when are these regulations supposed to be written? What are the–who are the forces for and against? And what are the odds something serious about position limits might actually be passed?

POLLIN: Well, you know, when our report came out in the last couple of days, there has been some news stories. And one of the commissioners of the Commodities Futures Trading Commission, Bart Chilton, has said, yes, we’ve got to move. You know, he is certainly aware of everything that’s in our report–not necessarily through our report, but it’s certainly in front of his face and all the other commissioners’. And those people that actually take seriously their job of representing the interests of the American people on the commission know they have to do something, but they’re being stalled out, they’re being sidetracked by this debate around their budget. And they are not actually fulfilling the law as it was written and passed and signed by President Obama, the law saying that the Commodities Futures Trading Commission is supposed to regulate excessive speculation, in the interests of the American people. Simple. You know, there are people on the commission that are, in my view, as–my reading of it, are very sincere in trying to do what the law tells them they’re supposed to do. Now, how much is going on inside of Washington? You can probably answer that better than I can. I really don’t know. It’s obvious, it’s obvious that the Republicans are trying to stop the commission from even functioning. [crosstalk]

JAY: But it’s not–doesn’t seem so obvious that the White House is putting any of its political capital behind it.

POLLIN: It’s not clear that they are, or something would have happened by now. You’re right.

JAY: Thanks for joining us, Bob.

POLLIN: Thank you very much.

JAY: I guess, just to add, if people want to know more about this, Bob’s paper and James Heintz’s paper is available at the website at the PERI institute. And if you think this issue is important to you, you might want to let people in Washington know that. Thanks for joining us again on The Real News Network.

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.