Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Speculation on Oil Prices Threatening Recovery, Panel Told Danger Is Likened to Housing Collapse

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Speculation on Oil Prices Threatening Recovery, Panel Told Danger Is Likened to Housing Collapse

Article excerpt

WASHINGTON -- Financial speculators are gambling on oil the same way they gambled on the housing market a few years ago -- a frightening prospect for the fragile economy, a Democratic congressional committee was told Wednesday.

"It is similar to the gambling Wall Street did on whether or not people would pay their subprime [below-market rate] mortgages in the mortgage meltdown," said University of Maryland law professor Michael Greenberger, a former federal regulator of financial markets. "Now, they are betting on the upward direction of the price of oil."

The housing industry collapse helped trigger the deep recession that began in late 2007, and whose effects are still felt today.

The economy is slowly recovering, Mr. Greenberger said, but it could come to a halt unless oil prices come down. Gene Guilford, president of the Independent Connecticut Petroleum Association, told lawmakers that the recent oil price run-up has cost consumers an additional $10 billion a month since mid-December.

The House Democratic Steering and Policy Committee, which consists of party leaders, called the hearing to spotlight the party's efforts to promote lower oil and gasoline prices. No Republicans were present.

Today's routine $4-and-higher prices for a gallon of gasoline have nothing to do with conventional supply-and-demand forces, Mr. Greenberger said. He formerly directed regulation of market trading in futures contracts and derivatives for the Commodities Futures Trading Commission.

"It is excessive speculation, which is a fancy word for saying that gamblers wearing Wall Street suits have taken these markets over," he said.

Financial speculators such as investment banks and hedge funds account for at least 65 percent of purchases of contracts for future oil deliveries -- more than twice their traditional share -- while buyers who intend to actually take delivery of the oil and use it, such as airlines, make up only about one-third of demand.

Speculators bid up contract prices, sending oil and gasoline prices higher and reaping them huge profits. …

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