With high gasoline prices across the United States, the long knives are out for speculators in the oil market. Elected officials worry that pain at the pump might cause them pain at the ballot box this fall. Last month, dozens of House and Senate Democrats sent a letter to the Commodity Futures Trading Commission (CFTC) criticizing federal regulators for failing to police energy markets sufficiently, implying that Wall Street is culpable for the rising cost of gas. At the same time, President Barack Obama asked Attorney General Eric Holder to “pay attention to potential speculation in the oil markets” and reconstitute a task force to investigate whether Wall Street is artificially driving up oil prices. These moves mirror the popular view that reckless gambling in financial markets is catapulting retail gasoline prices far beyond what supply and demand warrant. A CNN poll found that 59 percent of Americans believe that “speculators and other investors who buy and sell oil in the financial markets” deserved “a great deal” of the blame for the rise in gasoline prices that occurred last spring.
What critics derisively refer to as “oil market speculation” is all too often a nebulous, epithetical catchall meant to bring to mind clandestine profiteering by financial tycoons at the expense of the rest of the nation. But casting the blame for high gas prices on speculators is sloganizing populism, not serious oil policy. Wall Street is a morally and politically convenient scapegoat for the country’s energy woes -- and it is the wrong one. Speculation in the oil market, when properly regulated, helps energy prices respond efficiently to shifts in supply and demand, benefitting those that produce and consume energy, as well the economy at large.
In the popular media, the term “speculation” tends to refer to several types of activity that occur in the oil market. The first is the buying and selling of futures contracts, which are financial securities that give their holders the right to buy