Skip to main content

Don't blame speculators for high gas prices

By Lutz Kilian, Special to CNN
April 19, 2012 -- Updated 1630 GMT (0030 HKT)
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
July 28, 2014 -- Updated 2231 GMT (0631 HKT)
LZ Granderson says the cyber-standing ovation given to Robyn Lawley, an Australian plus-size model who posted unretouched photos, shows how crazy Americans' notions of beauty have become
July 28, 2014 -- Updated 1156 GMT (1956 HKT)
A crisis like the Gaza conflict or the surge of immigrants can be an opportunity for a lame duck president, writes Julian Zelizer
July 26, 2014 -- Updated 1822 GMT (0222 HKT)
Carol Costello says the league's light punishment sent the message that it didn't consider domestic violence a serious offense
July 28, 2014 -- Updated 1251 GMT (2051 HKT)
Danny Cevallos says saggy pants aren't the kind of fashion statement protected by the First Amendment.
July 28, 2014 -- Updated 1852 GMT (0252 HKT)
Margaret Hoover says some GOP legislators support a state's right to allow same-sex marriage and the right of churches, synagogues and mosques not to perform the sacrament
July 28, 2014 -- Updated 1831 GMT (0231 HKT)
Megan McCracken and Jennifer Moreno say it's unacceptable for states to experiment with new execution procedures without full disclosure
July 28, 2014 -- Updated 1850 GMT (0250 HKT)
Priya Satia says today's drones for bombardment and surveillance have their roots in the deadly history of Western aerial control of the Middle East that began in World War One
July 28, 2014 -- Updated 1635 GMT (0035 HKT)
Jeff Yang says it's great to see the comics make an effort at diversifying the halls of justice
July 26, 2014 -- Updated 1555 GMT (2355 HKT)
Rick Francona says the reported artillery firing from Russian territory is a sign Vladimir Putin has escalated the Ukraine battle
July 27, 2014 -- Updated 1822 GMT (0222 HKT)
Paul Callan says the fact that appeals delay the death penalty doesn't make it an unconstitutional punishment, as one judge ruled
July 24, 2014 -- Updated 2225 GMT (0625 HKT)
Pilot Robert Mark says it's been tough for the airline industry after the plane crashes in Ukraine and Taiwan.
July 25, 2014 -- Updated 1510 GMT (2310 HKT)
Jennifer DeVoe laments efforts to end subsidies that allow working Americans to finally afford health insurance.
July 26, 2014 -- Updated 1533 GMT (2333 HKT)
Ruti Teitel says assigning a costly and humiliating "collective guilt" to Germany after WWI would end up teaching the global community hard lessons about who to blame for war crimes
July 25, 2014 -- Updated 1245 GMT (2045 HKT)
John Sutter responds to criticism of his column on the ethics of eating dog.
July 25, 2014 -- Updated 1302 GMT (2102 HKT)
Frida Ghitis says it's tempting to ignore North Korea's antics as bluster but the cruel regime is dangerous.
July 25, 2014 -- Updated 1850 GMT (0250 HKT)
To the question "Is Putin evil?" Alexander Motyl says he is evil enough for condemnation by people of good will.
July 24, 2014 -- Updated 1803 GMT (0203 HKT)
Laurie Garrett: Poor governance, ignorance, hysteria worsen the Ebola epidemic in Sierra Leone, Guinea, Liberia.
July 24, 2014 -- Updated 1349 GMT (2149 HKT)
Patrick Cronin and Kelley Sayler say the world is seeing nonstate groups such as Ukraine's rebels wielding more power to do harm than ever before
July 23, 2014 -- Updated 2205 GMT (0605 HKT)
Ukraine ambassador Olexander Motsyk places blame for the MH17 tragedy squarely at the door of Russia
July 24, 2014 -- Updated 1142 GMT (1942 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1853 GMT (0253 HKT)
Les Abend says, with rockets flying over Tel Aviv and missiles shooting down MH17 over Ukraine, a commercial pilot's pre-flight checklist just got much more complicated
July 24, 2014 -- Updated 1317 GMT (2117 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1637 GMT (0037 HKT)
Gerard Jacobs says grieving families and nations need the comfort of traditional rituals to honor the remains of loved ones, particularly in a mass disaster
July 24, 2014 -- Updated 1413 GMT (2213 HKT)
The idea is difficult to stomach, but John Sutter writes that eating dog is morally equivalent to eating pig, another intelligent animal. If Americans oppose it, they should question their own eating habits as well.
July 23, 2014 -- Updated 1630 GMT (0030 HKT)
Bill van Esveld says under the laws of war, civilians who do not join in the fight are always to be protected. An International Criminal Court could rule on whether Israeli airstrikes and Hamas rocketing are war crimes.
July 23, 2014 -- Updated 1408 GMT (2208 HKT)
Gordon Brown says the kidnapped Nigerian girls have been in captivity for 100 days, but the world has not forgotten them.
ADVERTISEMENT