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).