Joe Nocera's column makes many accurate points regarding oil prices. Here is an additional significant factor to consider.
In 2014 the Volcker Rule was fully implemented as an amendment to Dodd-Frank legislation drafted by Congress in the aftermath of the 2008 economic collapse. The Volcker Rule is named for former Federal Reserve Chairman and Wall Street veteran Paul Volcker, who believed large financial institutions played a pivotal role in the 2008 market crash.
The Volcker Rule, in essence, restricts banks from engaging in proprietary securities trading and other speculative activities like commodities trading. So, if a financial institution borrows money from the Federal Reserve, has the privilege of auctioning government bonds, or holds federally insured deposits, that institution cannot trade their own capital (taxpayer backed) in stocks, commodities, and other exotic instruments.
The decade-long run in oil prices has many contributing factors, including Chinese preparation for the 2008 Beijing Olympics, which created a massive buyer (Chinese central planners) disrupting energy and other commodity markets.
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Our largest banks, seizing on insatiable Chinese demand in futures markets, advised endowment, pension and hedge funds to "go long" (buy) oil futures because "peak oil" (the now debunked theory that oil reserves were in permanent decline) and higher demand would create a floor for ever increasing oil prices.
The main impetus for higher prices was the enormous speculative, noncommercial end user capital flows into the oil futures market, orchestrated by our largest banks. This capital overwhelmed the futures markets and prices went much higher than fundamentals warranted.
In the spring of 2008, with the global economy spiraling into near depression, oil prices spiked to all -ime highs. How could this be? Influential banks called for a price "super spike" in the event the Straits of Hormuz were cut off. Why would this happen? Because Israel might invade Iran, according to these banks. Why? Because Iran's hidden nuclear reactor had been discovered.
With wars raging in both Iraq and Afghanistan, it was highly unlikely Israel or the United States would attack Iran without first exhausting diplomatic efforts and imposing onerous sanctions. Which is exactly what happened.
Our financial institutions drove massive speculative capital into the oil futures market on a classic "war fear" trade that never materialized. The speculative spike in energy prices undoubtedly played a key role in the economic contraction of 2008, which in part led to to the subsequent market crash that took oil from about $150 a barrel to $30 a barrel in six months.
Currently the U.S. is pumping over 9 million barrels a day, effectively ending the speculative geo-political trade. We now produce the oil. The Volcker Rule has removed a price disruptor, our financial institutions, from the markets. Additional relevant supply/demand factors combined with the Volcker Rule have created a normalization in the oil futures market for now. West Texas Intermediate (WTI) prices have fallen over 50 percent since June 2014, about the time the Volcker Rule was fully implemented.
There is an oil glut to be sure (roughly 1 million excess barrels per day), the dollar is strong and OPEC is fractured. But the key variable change is the reduction in capital flows and speculative activity engineered by our financial institutions. The unwinding of exotic energy investment vehicles by aforementioned investors and the forced divestiture of oil holdings of financial institutions explains the price plummet of the world's most highly monitored and scrutinized strategic resource.
The Volcker Rule is an example of effective, concise regulation. Government at its best. There will inevitably be another price distortion in energy markets. The Volcker Rule ensures our financial institutions will have a more difficult time harming our national interests by distorting oil prices.