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Bob Pollin: Oil speculation can be limited if regulations are adopted in the Finance Reform Bill

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. As unrest or uprising–depending how you want to describe it–unfolds across the Middle East–hotspots in Libya and Yemen, and now possibly in Saudi Arabia, we’re told–the price of oil is going up, crossing the $100 barrier, exacerbating a food crisis where food prices are already up substantially around the globe, and also threatening possible recovery from recession. Now joining us to talk about why oil prices are going up and what we can do about it is Bob Pollin. Bob is codirector of the PERI institute in Amherst, Massachusetts. Thanks for joining us.


JAY: So I don’t quite get why are oil prices going up, and from this point of view: there is nothing in what’s happened in the last couple of months that would lead one to think any of the oil supply is threatened. The closest you get to it is maybe something might get hit on the Libyan coast. Maybe Gaddafi will, you know, attack some oil installation, though it’s hard to understand why he would. He still hopes to cling to power. And it’s the–what is it?–less than 2 percent of the world’s oil supply anyway. And there’s already a kind of limited amount of production in places like Saudi Arabia. It’d be nothing, I would think, for them to up it 2 percent if they wanted to. So what’s driving this, this–?

POLLIN: Yeah. Okay. So we have the Libyan crisis. As you said, it’s less than 2 percent of total oil supply. So let’s say that there’s a massive collapse, and Libya, you know, is cut by half. That’s–means that we’ve cut 1 percent of total world supply. And that’s even an implausibly large cut. So it obviously isn’t to do with supply and demand.

JAY: Now, just to clarify again, it’s not 1 percent of capacity. It’s 1 percent of what OPEC is allowing to be pumped right now.

POLLIN: That’s right.

JAY: If OPEC wanted to up it 1 percent–.

POLLIN: And it–yes, yeah. So it’s where they are, yes, in terms of existing supply, but anyone else could easily compensate for any decline in the Libyan supply. So why would oil prices be going up? Well, number one, you know, there is the anticipation that there’s some crisis about to occur, and then that gets transmitted into the speculative market, into the commodities market. Oil is the prime commodity in the world economy. And as we’ve talked about before, the commodities market has been taken over by the same Wall Street institutions that run the stock market, bond market, derivative market. So oil isn’t interesting to Wall Street as oil; it’s interesting as an asset that could be–you know, increase rapidly in price and can be driven by large-scale trading. And that’s what’s going on. And it is encouraged, of course. The large-scale trading in the futures market and what people expect the future price is going to be isn’t of course fueled by the crisis, but there’s no underlying supply shock that’s actually occurred that would itself drive the price up.

JAY: So what’s the mechanism? I guess one of the main spot markets is in London. And where is the other major oil–?

POLLIN: In Chicago.

JAY: In Chicago?


JAY: So what happens? Something happens in Libya. The next day, someone that has, owns oil says, okay, well, I’m going to charge more for it.

POLLIN: Yeah, that’s basically what happens. And, I mean, what really matters is that the markets are big, so that you–yes, you have rumors operating [inaudible] well, my God, this–you know, the–we want to get ahead of the market. That’s what the futures market is about. So there’s a crisis. So, you know, in six months the price is going to go up. So let’s get ahead of the market and raise our prices now and fix in a price that we can handle. And then, you know, as happens in any kind of speculative market, the real action is not the people that are trying to decide where the market is going to be in three months or six months; it’s the people that try to figure out what other people are doing and get ahead of them. And if they have enough resources, if they have enough money to spend, then they’ll say, okay, well, we will move ahead of the herd. There is a herd moving in the–in terms of higher oil prices due to the crisis. So let’s get way ahead of the herd and start buying up the futures market at high prices. Well, then the herd is going to follow them, just like you have herd behavior in stock markets.

JAY: So where the speculation comes in is the futures market starts to go up, and that starts to influence what they call the spot market, today’s price,–

POLLIN: Today’s price.

JAY: –’cause everyone see it’s going up in the future, so let’s see if we can’t get it now.

POLLIN: And let’s see if we can get it.

JAY: So what do you do about it?

POLLIN: So, I mean, you know, the first thing that you need to do is go back to regulating the commodities futures speculation. And we do have a mechanism that is at least vaguely in place through the new financial regulations, the Dodd-Frank law, which is passed as a law, but what really has to happen is implementation of the law at the Commodities Futures Trading Commission. And they are debating exactly how to implement things that would limit speculation. And their actual main driving issue is oil price shocks. Rising oil prices, no matter what they come from, will hurt the economy, will push us into a recession. So even you have at least rumors that Ben Bernanke, the chair of the Fed, favors, you know, serious regulations of the commodities futures market because of the impact on the overall macro economy, the impact on the recovery. So you have to have, for example, so-called position limits, limits on how much any given trader in the commodities futures market can control the market, ’cause if you can control–if you’re much bigger–.

JAY: Okay, define “position limit” really quickly.

POLLIN: Yeah. A position limit says that you only are allowed to buy a certain percentage of the overall number of contracts in the market. So it’s limited so that you can’t come in with $1 trillion and take over the market, and by taking over the market drive up the price and also influence the herd behavior. The herd behavior is there, and it’s easy to influence it if you have enough resources. But a position limit–.

JAY: So where is the fight on–just isolate this, the fight over the regulatory authority and position limits. Where is that fight at right now?

POLLIN: The fight is at the Commodities Futures Trading Commission.

JAY: As we speak?

POLLIN: As we speak. And they are collecting opinions. And so they’ve actually been delaying, ’cause obviously this is highly controversial. And the law that was passed in Congress was pretty strong on setting position limits, on regulating the speculative market, on forcing all the commodities trading onto exchanges, but they were set in general terms. And then they took the charge and they said, okay, take it now to the regulatory body, the Commodities Futures Trading Commission; you guys work out the details. Now, what the people that don’t want regulations figured is that, well, once we get into that detail, we’ve got 10,000 lawyers and they have two, and we’ll control the debate. And that’s really what’s going on, and that even, actually, some of the commissioners are concerned and want to maintain a serious regulatory environment, but the politics are pushing in the other direction. So that’s really where the fight is.

JAY: Okay. So somebody watching this is going to talk to their local congressman and whatever. What should they be saying to them?

POLLIN: Well, I mean, I think that they should be saying is that you guys passed a serious law called the Dodd-Frank regulatory law–I don’t remember all the details, but it does have serious features. There’s a lot of weaknesses to it, but it also has serious features. And the congresspeople should be checking back and saying, this is the thing we passed; we really do want regulations that will limit the price of oil so that we don’t have these kind of massive speculative upsurges in the oil price that will bring on the recession again.

JAY: Thanks for joining us.

POLLIN: Okay. Thank you.

JAY: Thank you for joining us on The Real News Network. And don’t forget the donate button, ’cause if you don’t do that, we can’t do this.

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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.