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Are Oil Speculators Burying the American Economy?

|Includes: BP p.l.c. (BP)

By Luci Morland

If supply is solid and demand is solid, how can it be that oil prices are skyrocketing? President Obama offered his thoughts on the matter this week, in a speech in Virginia.

"It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. There's enough oil out there for world demand," Obama said.

"The problem is ... speculators and people make various bets, and they say, you know what, we think that maybe there's a 20 percent chance that something might happen in the Middle East that might disrupt oil supply, so we're going to bet that oil is going to go up real high. And that spikes up prices significantly."

The news comes on the one-year anniversary of the massive BP (NYSE:BP) oil spill.

According to the US Department of Energy, high oil prices can harm the economy in five ways.

First, high oil prices lead to consumers paying a larger share of their income on oil-derived products. Considering the low savings rate in America, this money comes at the expense of other goods and services, as those businesses see a decline in revenues.

Second, higher oil prices increase transportation costs, many of which cannot be passed on to the consumer. This leads to businesses cutting payroll, laying off workers, or even closing some manufacturing plants.

Third, because the United States is a net importer of oil, higher oil prices affect the purchasing power of U.S. national income through their impact on the international terms of trade. The increased price of imported oil forces U.S. businesses to devote more of their production to exports.

Fourth, Changes in oil prices can also cause economic losses when macroeconomic frictions prevent rapid changes in prices for final goods or for key inputs, such as wages. When a nominal increase in oil prices threatens purchasing power, the adjustment process is slowed, with multiplier effects throughout the economy

Finally, higher oil prices cause, to varying degrees, increases in other energy prices. Depending on the ability to substitute other energy sources for petroleum, the price increases can be large and can cause macroeconomic effects similar to the effects of oil price increases.

Considering the harm to the American economy that high oil prices bring, and considering the attention that the administration is now paying to speculators, might changes be on the way? Following the 2008 oil price boom, when crude hit $136 a barrel and gas hovered above $4 a gallon, Congress introduced nine bills to end speculation.

It is unknown whether the Obama Administration or the divided Congress has plans to take up the matter, presumably after the budget talks are ended.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.