How much of your fill-up goes to speculators?

Convenience story owner Floyd Bisson lowering the price of regular gas at the pumps in front of his store in Phippsburg, Maine, on June 27.

How much of your fill-up goes to speculators? A study released today by two University of Massachusetts economists estimates that without the dominant role taken by Wall Street speculators over the last decade in commodities trading,  the average price of a gallon in gas in May would have been $3.13, not $3.96.

To estimate that 83-cent-per-gallon premium, Robert Pollin and James Heintz, faculty members at UMass-Amherst's Political Economy Research Institute, used a simple technique that they say offers a conservative estimate of where oil prices should be based on long-run trends in the commodities markets. Although they don't disentangle the role of short-run factors such as the impact of Libya's upheaval, they say it's clear that prices are substantially affected by the role of Wall Street traders - even though they included the long-term growth in speculation as part of their baseline:

Indeed, our method does also take account of increases in the speculative trading of oil, but only the long-run expansion of the speculative market, not the market’s short-term ups and downs. That is the main reason why our estimate of the speculative premium today is significantly smaller than that of Exxon-Mobil CEO Rex Tillerson. Tillerson testified before the Senate on May 12 that, absent speculative market effects, the global price of crude oil today would be between $60-$70 dollars a barrel. This would translate into a price of gasoline at the pump of between $2.56 and $2.77 (assuming that these crude oil prices would have held steady at this lower level over the past several months). According to Tillerson’s informal estimate, the speculative premium for May would therefore be between $1.19 and $1.41 a gallon.

It is not likely that any two observers will agree on the exact size of the speculative premium in oil markets today. But there is no doubt that big-time traders are receiving windfalls. For example, in mid-June, Glencore, the world’s largest commodity trader reported a 47 percent surge in profits, driven, as reported in the Financial Times “by stellar results in oil trading” (FT, June 14, 2011).

Pollin and Heintz said May's 83-cent-per-gallon premium increased costs for the average car owner by about $41.  "Considering the U.S. economy as a whole, this translates into a speculation premium of over $1 billion for May alone. If the May price were to hold for a year, that would mean that the speculative premium would total $12 billion," they write.

Commodities markets are incredibly complex, and may also be subject to manipulation, as I wrote about in Sunday's column.  Some role for speculators is crucial for liquidity, but Wall Street critics have long warned that too much can have unintended consequences, especially now that financial traders hold an estimated 70 to 80 percent of oil-futures positions versus historical averages in to 20-to-30-percent range.  That's why the Dodd-Frank financial reform requires the Commodities Futures Trading Commission to reinstate so-called position limits, which cap the portion of a futures market that can be controlled by a single financial player.

Concerns about the damage caused by commodities speculation goes well beyond oil markets, of course. During a conference call sponsored by Americans for Financial Reform to highlight the new study, Pollin joined in urging that the CFTC move forward as quickly as possible with new position limits, and other speakers warned of the dangers of delay as commodities speculators boost world food prices, too.

"Every day that the CFTC delays putting limits on speculation is another day of needless hunger around the world," said David Kane, an associate for Latin America and economic justice with the Maryknoll Office for Global Concerns.