Skip to main content

Don't blame speculators for high gas prices

By Lutz Kilian, Special to CNN
updated 12:30 PM EDT, Thu April 19, 2012
High oil and gas prices cannot be blamed on market manipulation, says Lutz Kilian.
High oil and gas prices cannot be blamed on market manipulation, says Lutz Kilian.
STORY HIGHLIGHTS
  • Obama announced proposal to increase surveillance of oil futures markets
  • Lutz Kilian: Rise in oil prices -- and gas prices -- is not caused by market manipulation
  • Kilian: Obama's premise is wrong; swings in oil prices caused by global business cycle
  • Kilian: Unpleasant truth is that high prices at the pump are not likely to go away

Editor's note: Lutz Kilian is a professor of economics at University of Michigan. He is a research fellow at the Center for Economic Policy Analysis and the Center for Financial Studies.

(CNN) -- This week, President Obama announced policy measures to enhance the surveillance of oil futures markets. The president stressed that the new measures would not bring down gasoline prices overnight, but implied that they would lower gas prices in the long run because more oversight would deter market manipulation.

There is universal agreement on the need to prevent the manipulation of oil prices, but the premise of this proposal could not be more mistaken. There is no evidence that rising crude oil prices were caused by market manipulation, and there is no reason to expect increased oversight to lower gas prices across America.

This policy initiative confuses the increased financialization of oil futures markets in recent years with illegal activities such as market manipulation. Market manipulation occurs when traders herd the market into positions from which they can profit, resulting in excessively high oil prices. There is no evidence that the bulk of the financial investors taking positions in oil futures markets since 2003 have engaged in such activities.

Lutz Kilian
Lutz Kilian

More generally, the Obama administration is mistaken in attributing high oil and gas prices to the presence of financial investors in oil futures markets. A popular view among pundits and policymakers has been that the sustained oil price increase between 2003 and mid-2008 could not possibly be explained by economic fundamentals, but must have been brought about by financial investors taking speculative positions in oil futures markets. Recent research has not been kind to this hypothesis. A large number of scientific studies have failed to produce any credible evidence that high oil and gas prices were caused by the presence of financial investors in oil futures markets.

New crackdown on oil market speculators
Obama blaming Wall Street for gas prices
Velshi picks apart Obama oil regulations

For example, seemingly compelling and widely cited data regarding the relative size of the financial market for oil and the physical volume of oil being consumed has been shown to be misleading. All indications are that the financial market is smaller than oil consumption when measured correctly. Equally importantly, studies based on financial data provided by the Commodity Futures Trading Commission shows that financial investors did not take the positions in oil futures markets commonly ascribed to them. For example, changes in index funds' positions do not precede changes in the price of oil futures, but prices predict positions. Nor is there a systematic relationship between commonly discussed measures of speculation and movements of oil prices. Finally, price increases in commodity markets for which there are no futures exchanges are as large as price increases in the oil market.

In fact, there are strong indications that recent oil price fluctuations were mainly associated with changes in the global business cycle. Notably, between 2003 and mid-2008, global demand for oil increased faster than global oil production, resulting in a sustained increase in the price of oil. Much of the additional demand for oil came from emerging Asia. No nefarious speculators are required to explain this surge in the price of oil. Indeed, oil futures prices responded to much the same economic forces as prices in the physical market

Notwithstanding widespread agreement on this explanation among oil market experts, policy makers have remained intrigued with the speculation hypothesis. The apparent reason is that this hypothesis seems to provide an easy alternative to less popular policies of energy conservation.

In fact, the Obama administration's approach to lowering gasoline prices is as impractical as the Republican proposal of bringing gasoline prices down by increasing U.S. oil production. Neither proposal recognizes that oil prices today are determined by the highest bidder in global oil markets. The unpleasant truth is that high prices at the pump are not likely to go away, short of another global recession.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Lutz Kilian.

ADVERTISEMENT
Part of complete coverage on
updated 3:47 PM EDT, Wed October 1, 2014
Julian Zelizer says Jimmy Carter's message about the need to restore trust in public officials is a vital one, decades after the now 90-year-old he first voiced it
updated 9:09 AM EDT, Thu October 2, 2014
Ford Vox says mistakes and missed opportunities along the line to a diagnosis of Ebola in a Liberian man have put Dallas residents at risk of fatal infection
updated 9:11 AM EDT, Thu October 2, 2014
Pepper Schwartz says California is trying, but its law requiring step-by-step consent is just not the way hot and heavy sex proceeds on college campuses
updated 10:17 PM EDT, Wed October 1, 2014
Mike Downey says long-suffering fans, waiting for good playoff news since 1985, finally get something to cheer about
updated 5:39 PM EDT, Wed October 1, 2014
Steve Israel saysJohn Boehner's Congress and the tea party will be remembered for shutting down government one year ago
updated 8:15 AM EDT, Thu October 2, 2014
Yep. You read the headline right, says Peter Bergen, writing on the new government that stresses national unity
updated 7:12 PM EDT, Wed October 1, 2014
Hong Kong's pro-democracy demonstrators are but the latest freedom group to be abandoned by the Obama administration, says Mike Gonzalez
updated 12:53 PM EDT, Tue September 30, 2014
Jeff Yang calls Ello a wakeup call to Facebook and Twitter, and a sign of hope for fast-rising upstarts Pinterest and Snapchat.
updated 10:23 AM EDT, Wed October 1, 2014
Paul Waldman says the Secret Service should examine its procedures to make sure there are no threats to the White House--but without losing the openness so valuable to democracy
updated 10:55 AM EDT, Wed October 1, 2014
Jesse Williams says the videotape and 911 call that resulted in police gunning down John Crawford at a Walmart reveals the fatal injustice of racial assumptions
updated 7:03 PM EDT, Tue September 30, 2014
Mel Robbins says officials should drop the P.C. pose: The beheading in Oklahoma was not workplace violence. Plenty of evidence shows Alton Nolen was an admirer of ISIS.
updated 3:11 PM EDT, Tue September 30, 2014
The Occupy Central movement has already achieved much by bringing greater attention to Hong Kong's struggle for democracy, William Piekos says..
updated 3:11 PM EDT, Tue September 30, 2014
The Occupy Central movement has already achieved much by bringing greater attention to Hong Kong's struggle for democracy, writes William Piekos.
updated 10:13 AM EDT, Tue September 30, 2014
As Prime Minister Narendra Modi visits America, Madeleine Albright says a world roiled by conflict needs these two great democracies to commit to moving their partnership forward
updated 10:04 AM EDT, Tue September 30, 2014
John Sutter: Lake Providence, Louisiana, is the parish seat of the "most unequal place in America." And until somewhat recently, the poor side of town was invisible on Google Street View.
updated 9:11 AM EDT, Mon September 29, 2014
Julian Zelizer says in the run up to the 2016 election the party faces divisions on its approach to the U.S.'s place in the world
updated 10:19 AM EDT, Mon September 29, 2014
Ruben Navarrette says Common Core supporters can't devise a new set of standards and then fail to effectively sell it.
updated 9:29 AM EDT, Tue September 30, 2014
Earlier this month, Kenyans commemorated the heinous attack on the Westgate Mall in Nairobi.
updated 2:59 PM EDT, Tue September 30, 2014
David Wheeler says Colorado students are right to protest curriculum changes that downplays civil disobedience.
updated 9:58 PM EDT, Fri September 26, 2014
Sally Kohn says when people click on hacked celebrity photos or ISIS videos, they are encouraging the bad guys.
updated 7:55 AM EDT, Fri September 26, 2014
Loren Bunche says she walked by a homeless man every day and felt bad about it -- until one day she paused to get to know him
updated 9:32 AM EDT, Tue September 30, 2014
ISIS grabs headlines on social media, but hateful speech is no match for moderate voices, says Nadia Oweidat.
updated 8:33 AM EDT, Mon September 29, 2014
A new report counts jihadists fighting globally. The verdict? The threat isn't that big, says Peter Bergen.
updated 5:37 PM EDT, Tue September 23, 2014
Ebola could become the biggest humanitarian disaster in a generation, writes former British Prime Minister Tony Blair
updated 12:58 PM EDT, Fri September 26, 2014
ISIS has shocked the world. But will releasing videos of executions backfire? Four experts give their take.
updated 10:39 AM EDT, Fri September 26, 2014
Eric Holder kicked off his stormy tenure as attorney general with a challenge to the public that set tone for six turbulent years as top law-enforcement officer.
updated 9:09 AM EDT, Fri September 26, 2014
LZ Granderson says Obama was elected as a war-ending change agent, not a leader who would leave behind for his successor new engagement in Iraq and Syria. Is he as disappointed as the rest of us?
updated 5:10 AM EDT, Wed September 24, 2014
Gayle Lemmon says the question now is how to translate all the high-profile feminizing into real gains for women
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT