THE BLOG
04/27/2011 03:25 pm ET Updated Jun 27, 2011

How To Drop Gas Prices By a Dollar -- Overnight

Want to see lower prices at the pumps? Obama says there's "no silver bullet," while Boehner considers removing tax subsidies to big oil. Romney and Pawlenty take up the cry of "drill, baby, drill," but even unrestricted access to U.S. reserves would only result in another 500,000 barrels a day at the outside, a piddling help to our country that consumes 21 million barrels a day. The bottom line is, none of those ideas will help us lower gas prices in the short term.

How about a ban on all long-only commodity funds (LOCFs) and commodity ETFs instead? I believe such a bill supporting the liquidation of these funds could knock a dollar a gallon off the price at the pumps practically overnight.

For the past ten years, but particularly in the last five, Wall Street has created and sold commodity index funds, ETFs, hedge funds and online trading to compel investors into buying oil as if it were a stock or a bond, even though oil is anything but. They've had incredible success: Since 2003, index investment into commodities, overwhelmingly directed at oil, has grown from virtually zero to now top $350 billion dollars. ETFs have increased by $50 billion in the last year alone and commodity hedge funds, as well as individuals investing in oil, have ballooned similarly.

But oil is not like a stock. Commodity markets require equal amounts of sellers to match the number of buyers, and this one-sided appetite to own oil has had one overwhelming effect: driving prices through the roof.

And who's paying for it? It's not just the consumer who suffers from the wagering taking place with oil. More than 50% of the businesses listed on the New York Stock Exchange have energy as their primary input cost. For businesses both small and large, hyped energy prices threaten our tenuous recovery by stifling new hiring and growth. The high costs of imported oil only serve to fill Middle Eastern sovereign wealth funds with U.S. capital. A recent shocking report from Morgan Stanley puts the total "oil bill" of current crude prices at $2.4 trillion dollars or 3.7% of the total GDP of oil importing countries.

For Wall Street, this is just collateral damage. They continue to fight for these new instruments and new markets for the same reasons they created and traded sub-prime mortgage securities and credit default swaps: Wall Street, and particularly the major investment banks, are terrific at trading off of and posting huge profits from these money flows.

What can be done to stop this? What's clear is that oil is just too important a resource -- to every aspect of our lives -- to be subject to the same financial manipulations as other investment assets like stocks and bonds. Besides just the costs for gas and heat, energy is the main component cost for processing foods and drugs, plastics and aluminum - just about everything we depend upon.

A quick way to promote fairer prices would be a direct ban on commodity indexes and ETFs that use futures and swaps. Not one dollar invested in any of these instruments could be mistaken for a "hedge" -- they're all just bets. Our priorities should be clear and non-partisan: the right to bet on oil prices should be less important than the right of consumers and businesses to a fair and honest price. So far, however, this measure to try and control some of the money flowing into oil is not even being discussed.

And it's not a change that anyone should expect any time soon. Wall Street influence in Washington is powerfully strong. Rolling back the clock on financial "innovations" that benefit traders is an uphill battle. Without further action, however, higher oil prices become a self-fulfilling prophecy: rising prices inspire more money to bet on rising prices. As early as this summer, we could be looking at $5 a gallon gas.