Filed under: International markets, Forecasts, Consumer experience, Economic data, Politics, Commodities, Oil, Housing, Federal Reserve, Recession
With oil at $135 a barrel - up 463% since January 2001, Washington wrings its hands and states there’s nothing it can do to lower the price. I think that’s nonsense. There are two things that Washington can do today to get the price down: raise interest rates and close the swaps loophole.
What’s the role of speculators in the price of oil and other commodities and what should be done to get those prices down? Some argue that oil prices are set by supply and demand. But if that were true, oil would drop because global demand is forecast to grow 1.2 million bbl/day — and demand in the U.S. is down 300,000 barrels a day — while global supply is expected to rise 2 million bbl/day.
Perhaps sixty percent of trading volume in oil is due to speculators — these traders bet on a declining dollar and a rising price of oil. Raising interest rates would help lower the value of the dollar which has lost 70% of its value relative to the Euro since January 2001. Our Fed Funds rate fell from 5.25% to 2% since last August whereas in Europe, their rate is 4% and expected to rise. This difference makes Euros a more attractive currency for investors. So if the U.S. raises interest rates, people will start to purchase dollars instead.
The New York Times reports that Sen. Joe Lieberman (D-CT) wants to ban speculators from trading oil. I would not go that far. But I would close the swaps loophole that allows investment banks and their clients — hedge and pension funds — to make unlimited bets on a declining dollar and rising oil prices. Closing that loophole would limit the size of those bets and grant regulators to monitor their trading more closely.
Our economy depends on consumers for 70% of its growth. But their incomes are down since January 2001 from $61,000 to $60,500. Meanwhile, oil and food prices have skyrocketed and the value of real estate — on which they’ve been relying for cash — has been tumbling. So consumers are being squeezed which will ensure an economic slowdown, more layoffs, and more squeezed consumers.
We’ve the ideal government money can purchase. In 2004, for example, the incumbent received $2.7 million from the energy industry and millions more from Wall Street. That money is buying an awfully profitable set of government policies. But the current regime is soon to change, and with it will go the policies that are putting the screws to the majority of Americans.
Raising interest rates and closing the swaps loophole could relieve some of that pressure fast — leading oil prices down to as low as $70.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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