Why Does Gas Cost So Much Right Now? Shameless Wall St. Betting on the Price of Oil

The cost of filling up a gas tank has shot up in recent weeks as oil trades at unusually high prices for this time of year. Oil prices have come down slightly since hitting a high of  $106.95 a barrel two weeks ago -- the highest price for a barrel since the record 2008 oil price hike -- but early trading today has already pushed prices back up.

The spike in the cost of oil this early in the year poses a serious threat to the fragile economic recovery, with experts saying that prolonged high gas prices could cripple economic growth at a critical time. Some economists are even warning that high oil prices could cost the economy up to 600,000 jobs.

"[S]ustained rises in the prices of oil or other commodities would represent a threat [to] both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored," Fed Chairman Ben Bernanke warned Congress earlier this month. A new CNN poll of experts shows that "economists are most fearful of one major headwind [to recovery]: oil prices." So what's causing this spike in prices? One factor is Wall Street speculation. The government has new powers created by the Dodd-Frank Wall Street reform law to deal with this problem, but as part of their war on consumer protection regulation, Republicans have so far prevented this from happening.

WHAT'S BEHIND OIL PRICES: While there are several causes that contribute to rise in oil prices, many experts point to Wall Street speculation: hedge funds, investors, and big banks trying to make money by betting on the price fluctuation of oil and other commodities.

Speculation in and of itself isn't a bad thing -- in fact, it's necessary in moderation with proper regulation to help end users like airlines hedge against price fluctuation -- but excessive speculation, especially when it is based on fear about inherently unknown future events, can artificially inflate the price of oil beyond the price that natural supply and demand forces would set.

Experts concluded in 2008 that that year's spike in oil and other commodity prices couldn't possibly be explained by supply and demand forces, and that speculation must have played a role. "[T]here is substantial evidence that the large amount of speculation in the current market has significantly increased prices," a House Homeland Security Committee report on oil prices from 2008 concluded. The same appears to be true today. While many blame high oil prices on the crisis in  Libya, the country accounts for only 2 percent of the world's output. More importantly, Saudi Arabia has vowed to make up for any shortfall in global supply by increasing its own production. So supply issues are not likely having a significant impact on prices. And despite conservatives' scapegoating, President Obama's policies are clearly not to blame either. Meanwhile, a commissioner of the Commodity Futures Trading Commission (CFTC) -- the government agency charged with policing commodity speculation -- said earlier this month that speculation on energy futures, including oil, is at an all-time high, jumping 64 percent even since 2008. Speculation was blamed by both Republicans and Democrats three years ago for oil prices, and even with conservatives' tea party embrace of Wall Street today, several Republican congressmen, and conservative leaders have acknowledged that speculation is a driver of oil prices.

A SOLUTION: Recognizing the problem of oil speculation, Congress gave the government new powers to protect consumers and help ensure market stability with the Dodd-Frank Wall Street reform law passed last year. The law gives the CFTC the ability to limit "excessive speculation" by limiting the bets speculators can make. The law expanded the CFTC's authority to regulate the entire market for the first time. While futures -- bets on the future prices of commodities like oil and wheat -- were regulated before the law passed, traders could choose to instead purchase "look-alike" futures that were not subject to regulation. Dodd-Frank changes this by allowing the CFTC to "impose a uniform set of rules across exchanges and the over-the-counter market, replacing a patchwork of inconsistent restrictions for different venues and commodities." Curbing regulation could help make these markets more stable and transparent, and help bring down the cost of oil.