By proposing a crackdown on oil-market manipulation, President Barack Obama scored a few political points last week. If Congress goes along with his $52 million request to hire more regulators, he may even root out a few bad actors who are making illegal trades.
Just don't expect any of this to make a dime's worth of difference at the gasoline pump.
Blaming higher prices on speculators is a tried and true political tactic, and there's some truth in the charge. Economists at the Federal Reserve Bank of St. Louis found, for instance, that speculation accounted for about 15 percent of the run-up in oil prices between 2004 and mid-2008.
What pushes prices up can also push them down, however. In late 2008, financial players contributed to a spectacular collapse in oil prices when they all dumped risky investments at once.
Most of what gets counted as speculative money in today's market is invested by pension funds, hedge funds and other sophisticated players. They consider commodities a good way to diversify their portfolios beyond stocks, bonds and real estate.
Not all players are benign. On Thursday, the Commodity Futures Trading Commission extracted a $14 million penalty from Optiver Holding, a Dutch company that was accused of manipulating the market for oil and gasoline.
Markets need to be kept fair and efficient, so this looks like an important victory for regulators. Such fines are rare, though – this was the first oil-manipulation case settled in five years – and the money involved is small relative to the size of world markets.
“Fourteen million? That much gets traded in a couple of minutes,” said James Williams, an energy economist with WTRG Economics in London, Ark.
Williams says he's all for cracking down on rogue traders, but he doesn't think the bad guys caused oil prices to rise. That can be traced to worries about Iran, supply problems in Nigeria, and other trouble spots around the world.
“I don't think what they're thinking about so far will have that great of an impact, certainly nothing that you or I would notice at the pump,” Williams said.
If Obama's crackdown goes far enough, he may succeed in making it more expensive to be an oil speculator, but that's not necessarily a good thing. Speculators add liquidity to the market, making it easier for oil companies and big oil users, like airlines, to make their trades.
Besides, no crackdown is going to change the basic reason many investors want to own oil: It's a hedge against inflation. With central banks around the world keeping interest rates low to stimulate their economies, many investors figure it's smart to bet on rising commodity prices.
If Obama and the CFTC make it harder to invest in U.S. oil futures, these investors will take their trading overseas, or they'll invest in actual tankers full of oil.
Even if the CFTC raises margin requirements, which Obama wants it to be able to do, the desire to own oil won't go away.
“All it does is it opens doors for better capitalized speculators to come in and take the positions that the weaker hands give up,” says William O'Grady, chief market strategist at Confluence Investment Management in Webster Groves.
Squeeze out too many small traders and prices could become more volatile, not less. That won't play well with consumers who already are just as frustrated with politicians as they are with gasoline prices.