Zeev's Turnips Patch-No Politics (ZEEV)

[Alex G]

Since April President Obama Cut Oil Prices 21%, Boosted GDP $78.4 Billion
http://www.forbes.com/sites/petercohan/2012/06/23/since-april-president-obama-cut-oil-prices-21-boosted-gdp-78-4-billion/

In April, I predicted that President Obama’s $52 million plan to increase the margin requirements and otherwise tighten the screws on oil speculators — who borrow huge sums to bet on the direction of oil without taking delivery — would cut oil prices by 10%. He’s beaten that prediction and the lowered price of gasoline has added $78.4 billion to its consumers’ spending power.

In case you never heard about it, in April the Obama administration asked Congress to spend $52 million to regulate this speculation. According to the Washington Post, this included the following steps:

- Increase by a factor of six Commodity Futures Trading Commission (CFTC) surveillance and enforcement staff “to better deter oil market manipulation,”

- Boost 10-fold to $10 million the civil and criminal penalties against “firms that engage in market manipulation,”

- Give the CFTC authority to increase the trader margins — the amount of their own capital that traders must set aside for each bet. The administration officials said such authority “could help limit disruptions in energy markets,” according to the Post.

Why does this have anything to do with the price of oil? That’s simple. When oil hit $147 a barrel four years ago, those speculators accounted for 81% of the trading volume. And margin requirements can affect the price of oil.

When regulators raise those requirements, oil speculation becomes less attractive to traders and they place bets elsewhere. And when margin requirements drop, the traders pile into their oil speculations — confident that they can borrow enough to limit their downside while boosting their upside opportunity.

In February 2011, when commodities exchanges raised the amount of their own capital that speculators must set aside in order to trade — according to Bloomberg, the New York Mercantile Exchange (NYMEX) increased its margin requirements 20% to $6,075 per contract, and the International Exchange (ICE) increased its margin requirement 7% to $5,200 – the price of oil fell 10% within a few months.

And a year later, the commodities exchanges cut the amount of capital that speculators need to set aside before trading — the Chicago Mercantile Exchange (CME) cut by 9% to $6,885 the amount that Nymex crude speculators have to post to trade the so-called front-month contract, according to MarketWatch – leading prices to soar to $109 that month.

So what’s happened since April? Oil ended the month at $106 and as of June 22, it had lost 21% of its value — sitting at $84. I guess I under-estimated the impact of the CME’s boost in margin requirements for oil speculators.

But there are other factors that could have affected the price of oil. For example, the dollar has strengthened compared to the Euro since the end of April — rising 6% from $1.33/Euro to $1.25/Euro – and since oil is traded in dollars, the stronger the dollar, the more oil it can buy.

It’s entirely possible that supply and demand have something to do with this as well. MarketWatch claims that “traders are more concerned about plentiful supplies and deteriorating demand expectations.” And on June 20, the EIA reported a 2.9 million barrel supply increase in the week ended June 15 while Platts analysts expected to see a decline of 600,000 barrels for the week.

Certainly oil prices affect gasoline prices and rising gasoline prices tax consumers’ budgets. According to AP, “every one-cent increase in the price of gasoline costs the economy $1.4 billion.” So it stands to reason that a drop in the price of gasoline would add to consumers’ discretionary spending.

So just how much has President Obama stimulated the economy through his April crackdown on oil speculators? Well, if my experience is any indication, the answer is quite a bit. After all, I was paying about $4.05 a gallon for mid-grade back then and this week the price had fallen to $3.49.

That 56 cents a gallon decline would amount to me saving about $582 a year — assuming that I fill up my 20 gallon tank once a week. But if the AP is right, that same 56 cent a gallon drop would add $78.4 billion to U.S. GDP.

That’s not much for a $15 trillion economy, but it represents a 1,508% return on President Obama’s $52 million investment in two months.