A funny thing happened on the way to $5 a gallon gas. The price at the pump nationwide has fallen well below $4 a gallon, and it may yet decline even more.
Every motorist who gasses up during this Memorial Day weekend should be grateful for the break, which defied the dire forecasts of just a few months ago. And we hope it isn’t asking too much for populist politicians to at least temporarily lay off one of their favorite whipping boys: commodity speculators.
In the run-up to the summer driving season, oil traders were taking the heat as prices rose. Their activities were making prices more volatile, their critics maintained. They were distorting the marketplace, and possibly manipulating it to make money on their trading bets.
Never mind that Iran’snuclear program threatened to disrupt Middle East oil production. Never mind how the U.S. economy temporarily surged in the first three months of the year, boosting demand for energy. Never mind the supply constraints imposed by limited oil-refining capacity.
Speculators made an easier target than fundamental factors such as those.
In reality, speculators should get neither the credit nor the blame for whatever direction prices take over time. They should get credit, however, for being the grease that keeps the wheels turning in the oil markets.
Speculators provide liquidity that makes the market work more efficiently. Speculators take on risk that enables the energy industry to hedge more effectively. Speculators play an important role in price discovery. Thanks to speculators, the market reflects the best available information — leading prices to rise or fall as conditions change. That function helps to keep producers honest by discouraging any effort to set prices artificially high.
In recent weeks, just in time for Memorial Day vacationers, gas prices have fallen sharply. Based on market fundamentals, that decline should come as no surprise: The U.S. economy slowed down a notch after its fast start to 2012. Fuel stockpiles have increased. Saudi Arabia is pumping more oil. And the biggest wild card in oil supplies — a military strike to cripple Iran’s nuclear program — appears, for the time being, not to be imminent. It’s no wonder the market has come under selling pressure.
In metro Chicago as of Friday, a gallon of regular unleaded had fallen to an average retail price of $4.08, down from a 2012 peak of $4.68 on March 27, according to AAA. A year ago, gas in Chicagoland was selling at $4.49 a gallon. Our gas is typically among the costliest: The national average as of Friday was $3.67 a gallon.
We understand that high gas prices can hurt the prospects of incumbent politicians. During a speech at the White House in April, President Barack Obama accused speculators of rigging the oil markets: “We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.” The president urged regulators to crack down.
No crackdown was needed, as trading activity in recent weeks illustrates. Saddling speculators with stricter position limits, higher margin requirements and other regulatory impediments only would make the market less efficient. Such steps do nothing to keep prices down over the long run. By imposing unnecessary constraints, they could have the opposite effect.
Let speculators be speculators. The marketplace, and the driving public, will be better off for it.
