Tuesday, April 26, 2011

Randian Greed-Based "Free" Markets Driving Up Gas Prices In Orlando, Driving Political Instability In The Middle East... And Hunger Worldwide


I thought the most expensive gas in America was in my neighborhood. I was wrong. Orlando, Florida has that distinction this weekend.
Suncoast Energys, located near the Orlando International Airport, was charging $5.69 a gallon for regular gasoline on Friday. That's the highest of any gas retailer in the nation, according to price tracker gasbuddy.com.

Overall, Orlando has about the same gas prices as the national average, still under $4.00 a gallon. Thursday President Obama announced a new working group to look into and combat fraud and manipulation in the oil and gasoline markets, although many worry that he needs to put more focus on Wall Street political donors in the commodities sector, who are the worst of the predatory speculators.

In 2008 the Democratically-run House overwhelmingly passed an anti-speculation bill but it was filibustered to death by the GOP in the Senate at the urging of their allies in the Oil industry and on Wall Street. Anyone paying $5 a gallon in Orlando this week should remember that Florida's two senators split along party lines on this vote. Bill Nelson opted to protect consumers from criminal speculators. Republican Mel Martinez decided it was more important to protect the right of predators to fleece the public.

According to a Marist poll last week "36% of U.S. residents think the volatility in the Middle East is at fault while 34% say U.S. oil companies are the culprits." You may have missed the brilliant reporting last February by Ryan Grim and Zach Carter on how Wall Street speculators destabilize the world. That's because they focused on how unjustifiable but galloping food prices were undermining stability in places no one cared much about: Tunisia, Egypt, Morocco, Yemen, Algeria... "Food price hikes typically have a muted impact in the United States, where consumers spend only a small fraction of their income on what they eat. But in many other parts of the world, ordinary citizens spend as much as 80 percent of their earnings on meals, and such increases can have a devastating impact." Today, though, the same Randian Wall Street forces embraced as religious icons by the Republican Party, are driving up the price of gasoline here in America.
Since July, the price of corn has jumped 62 percent. Wheat has climbed by two-thirds, and soybeans are 38 percent more expensive. For many of the world's poorest citizens, the costs of both basic necessities and things that make life bearable are climbing out of reach: sugar has jumped by 81 percent, tea by 42 percent and arabica coffee by more than a quarter. Soybean oil has risen by half and fuel, overall, is a quarter more expensive than it was this summer.

In Tunisia, protesters' demands for lower food prices helped spark a revolution. In Egypt, the government's most significant concession to the uprising-- before President Hosni Mubarak stepped down-- was to offer major increases in food subsidies. On Feb. 3, the Bahrain government responded to protests with generous food subsidies, before adopting a violent strategy against demonstrators. Demonstrators have gathered in Algeria, Morocco and Yemen to protest food prices, as well.

There's no question that people in the Middle East and northern Africa are hungry for freedom. But people are also simply hungry. "We're in an era where the world and nations ignore the food issue at their peril," Josette Sheeran, the head of the World Food Program, told Bloomberg in a prescient January interview.

The current crop of deposed heads of state may have Wall Street to thank for their forced retirement. While the causes of helter-skelter commodity prices are complex-- natural disasters such as floods and droughts can play a big role, as can interest-rate shifts engineered by central bankers around the globe-- rapid-fire trading and speculation on the Street can magnify the problem.

In an era when vast pools of capital shift in and out of markets for basics like food and oil with the a few computer keystrokes, trading can cause prices to see-saw in ways that are sometimes harrowing and hard to control... [D]erivatives trading remains a largely under-regulated affair, even though such gambling was a major cause of the financial crisis in the United States and broadened the severity of the entire debacle.

Last year's Dodd-Frank financial-regulatory legislation sought to address the problem speculation can play in commodity markets specifically and financial markets more generally, requiring federal regulators to police the massive, multitrillion-dollar derivatives game.

But to be effective cops, regulators will need a bigger budget, something Republicans are already lining up against.

The Commodity Futures Trading Commission, which will shoulder much of the burden for monitoring derivatives trading, currently only oversees about $5 trillion worth of trading on commodities exchanges. Dodd-Frank envisions the CFTC empowered as the primary regulator of a much vaster market that involves more than $500 trillion worth of trading.

That's an ambitious goal even with the new funds the Obama administration proposed in its budget Monday, which would increase the CFTC's annual funding by 77 percent, from $168.8 million to $298.8 million. The Securities and Exchange Commission, another keyregulator of Wall Street trading, would get a $300-million boost to its $1.12-billion annual budget, a jump of 27 percent.

Despite plans for a dramatically broader regulatory mandate at these agencies, Republicans now openly plan to defund key elements of Dodd-Frank, legislation which most of the congressional GOP opposed. Among the budgets that Republicans are seeking to kneecap? Those the regulators need to do their work.

...Commodities traders have wielded huge influence over the lives of farmers and manufacturers for more than a century, and the Populist movement of the late 19th century was one of the first mass protests against the growth of that influence. Regulations were eventually enacted to temper the role traders could play in the markets.

Today, thanks to trillions of dollars worth of financial speculation in commodities -- which are bounced around on computer screens and loosely regulated -- Wall Street's role is even more entrenched and potentially more destructive.

"Commodity markets functioned fairly and effectively for over sixty years," wrote David Frenk, executive director of the market-transparency advocacy group Better Markets in a June paper. "In 2000, the Commodity Futures Modernization Act deregulated commodities markets ... providing loopholes for speculation through completely unregulated shadow markets."

The lion's share of that speculation is taking place in an unregulated, multitrillion-dollar dark market that was born in 2000, when Congress passed the CFMA. A sweeping piece of legislation, it placed many financial derivatives beyond the reach of regulatory supervision. Secret trades were explicitly legalized, ensuring that most players in this so-called "over-the-counter" market would be unable to access key price information.

...Too much speculation, however, can wreak havoc. When the amount of speculative capital in these markets overwhelms their usage by farmers and commercial firms, speculation itself has the opportunity to drive prices.

"The recent flood of speculative money into commodities markets is increasing price volatility and pushing up further the prices of raw commodities and food products," 10 Texas A&M economists wrote in a 2008 report.

Speculation in other commodities can push up the price of food, since the commodities are often "indexed" together. Speculation in oil is particularly important, since transportation costs are a major factor in the prices food, and oil is a key ingredient for many fertilizers.

"Paper oil and physical oil are about the same thing, economically. If you're going to have speculation, you're going to have some impact on the price of physical oil," said economist John Parsons of MIT's Center for Energy and Environmental Policy Research. "We can have speculation in the share of a high-tech stock. If people believe that a stock is going to be worth more in the future, they can bid up the price now. We can have similar speculation in housing or oil or other commodities."

And speculation in commodities took off after the deregulation of 2000. The over-the-counter market exploded from about $674 billion in 2001 to $13.2 trillion by June 2008, according to the Bank for International Settlements. The more transparent, regulated forms of speculation grew with the over-the-counter gambling. Between June of 2000 and June of 2008, the U.S. futures market for oil grew from bets on 517 million barrels, or $16 billion, to bets on 1.44 billion barrels, or $202.5 billion, according to a 2010 paper by Parsons. Commodity index funds-- new speculative vehicles that allowed fund managers to bet on "baskets" of multiple commodities all at once-- jumped in popularity, growing from $15 billion in 2003 to $200 billion in 2008, according to a 2009 report by the Senate Subcommittee on Investigations.

...[L]ow interest rates combined with a very weak economy-- creates the potential for problems. Without a big new source of demand in the American economy-- the only plausible source is higher government spending-- the Fed's low interest rates for big banks encourage traders to plow money into assets well beyond levels suggested by supply and demand.

"So long as you have money available to banks at zero cost, no long-term productive outlets for investment, and the capacity to make money by manipulating commodity pools, the situation is ripe for speculative excess," University of Texas economist James Galbraith told HuffPost.

"The reality is, as commodity prices go up, there's only a finite amount for food aid and things. People really are going to start dying," Sen. John Boozman (R-Ark.), who took Blanche Lincoln's seat in November, told HuffPost, adding that the danger of speculation is "a legitimate concern."

Boozman said the Fed deserves some blame. "One of the problems that we've got is the Fed doing the things that they're doing, keeping the interests rates down, is devaluing the currency, so people are fleeing into commodities," he said.

Whatever happens to the recovery at home, soaring food prices appear certain to drive the global poor deeper into destitution this year, Kane said. The Maryknolls currently have missionaries in 35 countries all over the world, and conditions are already deteriorating.

"These are countries where chronic hunger has been a problem for decades," Kane said. "They're used to living on very little, and the fact that spontaneous food riots broke out all over the world demonstrates how desperate things got in 2008, and how desperate they are now."

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At 10:30 AM, Anonymous John Evan Miller said...

People are often too naive-this is not the first time that the issues in the Middle East have been to blame for high gas prices. You are right--a lot of it has to do with greed. Sadly, these high gas prices are coming at a time when people are having a hard time making ends meet and keeping their homes from undergoing foreclosure.

At 2:29 PM, Blogger Taylor Wray said...

Unless you're an executive at an oil/gas company. Times aren't so bad for them...


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