With oil at $135 a barrel - up 463% since January 2001, Washington wrings its hands and says there's nothing it can do to lower the price. I think that's nonsense. There are two things that Washington can do today to get the price down: raise interest rates and close the swaps loophole.

What is the role of speculators in the price of oil and other commodities and what should be done to get those prices down? Some argue that oil prices are set by supply and demand. But if that were true, oil would drop because global demand is forecast to grow 1.2 million bbl/day -- and demand in the U.S. is down 300,000 barrels a day -- while global supply is expected to rise 2 million bbl/day.

Perhaps sixty percent of trading volume in oil is due to speculators -- these traders bet on a declining dollar and a rising price of oil. Raising interest rates would help lower the value of the dollar which has lost 70% of its value relative to the Euro since January 2001. Our Fed Funds rate fell from 5.25% to 2% since last August whereas in Europe, their rate is 4% and expected to rise. This difference makes Euros a more attractive currency for investors. So if the U.S. raises interest rates, people will start to buy dollars instead.

Continue reading Two quick steps to lower the price of oil

Two quick steps to lower the price of oil originally appeared on BloggingStocks on Thu, 12 Jun 2008 10:00:00 EST. Please see our terms for use of feeds.