By John W. Schoen Senior producer
msnbc.com
updated 5/26/2008 12:41:48 PM ET 2008-05-26T16:41:48

The spike in oil prices has led to a lot of speculation — about what’s causing the surge. One of the usual suspects is the oil speculator — who’s trying to make a buck betting prices will go even higher. So, a lot of readers are asking, why can’t we just put a stop to all this speculation?

Why is there no way to stop the speculation of oil futures in hedge funds? The NYMEX started trading oil futures in 1983. Certainly regulations had to be put in place to allow that...
- Tom, Cincinnati, Ohio

With the latest spike in oil prices, consumers and Congress have started taking names. For awhile there, Big Oil — raking in more profits than it invested in finding more oil — was the main culprits. Strong demand from the developing world took part of the blame. Then the weak dollar was in the hot seat. Lately, speculators in the oil futures markets are the bad guys. (Our e-mail inbox contains a number of more creative theories about why oil prices are rising, but this list includes the usual suspects.)

All of these factors are playing a part: the growth in demand is coming faster than new supplies are being found and developed. If that keeps up, we may face an actual shortage — one side of the equation has to give. But as the value of the dollar has fallen and inflation has perked up, there’s no question that investors have been flooding the oil trading oil pits with orders. Buying oil is a great hedge against both.

So if all this speculation is pushing oil prices higher, why don’t we just clamp down on the speculators? Congress is considering doing just that. One quick solution: make speculators put up more money when they buy futures contracts. Under current rules, you can buy large volumes of oil with relatively small amounts of money. By raising the “down payment” on oil futures contracts, the theory goes, you’d eliminate some of the buyers who are just there to place bets.

The problem, as with everything to do with oil prices, is that the oil market is global. So if you shut the door on the U.S. commodity market, speculators could turn to other oil markets — like the International Commodity Exchange in London — to place their trades.  If you got all the governments around the world to agree to clamp down (a neat trick if you can pull it off), traders would still figure out how to find each other. They could go on eBay.

That could make matters worse. One benefit of having a unified market, with the price of each trade made public, is that everyone can see what oil is trading for — right now. If you chase traders away from an open market, it’s becomes much harder to know what oil is “worth” at any given moment.  Prices would take bigger swings because you couldn’t get an accurate market price when it was your turn to buy or sell. If the seller demanded $200 a barrel, you’d have a harder time arguing that the price was too high.

Speculators get it wrong, too. The ones who paid $135 a barrel on Thursday paid too much —based on the closing price on Friday. If we begin getting news that demand is falling — which is what’s supposed to happen when prices get this high — those traders could stampede in the other direction. It’s happened before: there have been several major oil price crashes since supply and demand became an issue in the 1970s.

Both my husband and I are looking forward to retirement, but do not think retirement means we want to quit working. We would like to supplement retirement income with jobs…. The problem for us and for others is we would lose Social Security benefits by earning "too much." Raising the limit on the amount individuals can earn and still receive Social Security benefits would be a good idea because it would allow many seniors to work and supplement their income without losing their Social Security earnings for doing so. Do you see this as a logical approach to the ongoing problem?
-Dairdre M., Rochester Hills, Mich.

It’s absolutely logical. But unfortunately logic doesn’t seem to be playing a big role in the debate about Social Security reform.

The problem with your suggestion is that raising the earnings threshold for Social Security recipients would cost the program more money — at a time when the projections show that it’s going to have trouble making ends meet in a few decades. Under your proposal, retirees who are now ineligible because they earn “too much” would get paid. Where would that extra money come from?

There’s no question the fund needs to be fixed. Just like any retirement plan, you have to make adjustments along the way. Retirees know this well. As conditions in the financial markets and the economy change, many of them have to change their mix of investments, or the amount they withdraw to live on. If times are good, you take that cruise you’ve been wanting to go on for years. If times are tight, you skip the “extras” and economize where you can.

Today, the Social Security Trust Fund is — probably — going to run out of money sometime toward the middle of the century. We say “probably” because no one knows. The Trustees, who analyze and report on the fund’s status every year, acknowledge as much in their report.

So they offer up three different scenarios — the low, intermediate and high cost assumptions (call them the Good, the Bad and the Ugly), depending on forces and conditions that are really unknowable. What is the average life span going to look like in 2030? Will economic conditions continue to generate Social Security tax receipts at the same pace they’ve been coming in for the last two decades? Just as you make assumptions on those retirement calculators about the future rate of inflation or your spending requirements, you can only make — at best — educated guesses about how long the fund will be able to keep up with payments promised retirees.

There’s certainly cause for concern. The baby boom generation is going to put an historic strain on the system. (It’s worth noting, though, that if the “low cost” assumption turns out to be correct, there’s no problem: the fund remains in the black as far as the eye can see.)

We’ve seen this movie before. In 1983, President Reagan asked future Fed Chairman Alan Greenspan to chair a bipartisan committee to get the fund back on track, which it did with relatively minor tax increases, including making higher income retirees pay taxes on their benefit, and other tweaks. Those changes helped generate big surpluses to create a gigantic nest egg to cover the coming wave of baby boom retirees.

Twenty-five years later, it’s time to make similar adjustments to get the fund back on track before the problem gets worse. Unfortunately, the “bipartisan” concept is in very short supply in Washington these days. Unless that changes fairly soon, the solutions to the problems facing the Social Security trust fund will only get harder to fix.

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