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Your Money, Your Vote; The Home Front, Gas Pains ;What's Driving Oil And Gas Prices?; A Day In The Life Of A Speculator; The Future of Energy

Aired March 3, 2012 - 13:00   ET


ALI VELSHI, HOST: Can we vote our way to a better economy? Welcome to YOUR MONEY. I'm Ali Velshi. We are looking ahead to Super Tuesday. Ten states from all across the country are heading to the polls. Economic conditions vary greatly from state to state.

Let's take a look at a few. Vermont's unemployment rate is at 5.1 percent. That is much lower than the 8.3 percent national average. In January, only one in about 21,000 homes in Vermont were in the foreclosure process.

A very different picture in Ohio. Unemployment much higher there, 8.1 percent, though lower than the national average. One in 616 homes is in foreclosure in Ohio.

In Georgia, seen some of the worst numbers. Unemployment there, 9.7 percent. Higher than the national average. One in 328 homes are in the foreclosure process in Georgia.

CNN's chief national correspondent John King joins us now. He hosts "JOHN KING, USA" weeknights at 6:00 p.m. Eastern. As if John King needs an introduction to anybody who watches TV.

John, as we just pointed out, we just pointed out three states. Every state has a different economy. So what economic issues are going to be the most important both in Super Tuesday and in the election?

JOHN KING, HOST, CNN'S JOHN KING, USA: Ali, you make a very critical point going state by state because we often look at national polling, we look at national numbers like the unemployment rate. We look at national numbers like GDP and we say, well, the economy is doing better or it's doing worse so pick the national number.

Presidential elections are decided not just the nominating process, the general elections, state by state, electoral college. You just pointed Ohio, a state that's still struggling. Unemployment in the 8 percent range, the industrial base. Move -- you know, move over, go to Pennsylvania, go to the other way to Michigan, some of the big electoral battlegrounds are the state that were hit the hardest in the recession and they're having the hardest time coming back. Yes, it's better now than it was a year ago but it's still a struggle.

Go to Nevada, a small state in the electoral college but a swing state in presidential politics. Enormous foreclosure and housing crisis. So if you're in Ohio, if you're Michigan, it's probably manufacturing, made in America, what can we do to get jobs back? If you're in Arizona or Nevada or Florida, what about housing, kicks in as well.

So you have to go state by state when you do this. Can you vote your way to a better economy? You know a lot of voters -- I don't mean this in any way disrespectfully. A lot of voters thought that when they're voting for President Obama four years ago, and it's been tough.


KING: And he will make the case -- he will make the case things are better and that will be the defining debate of the election.

VELSHI: But that is the key question in this discussion right now. By the way, you don't need the promo, John, but on Super Tuesday, you want to be looking at watching CNN for the results, only because, John, I think it's weird how you know the details not only of states but within states and down to the county level in terms of the economy. I learn a lot from you.

Stay right there, John. Harvard University Professor Ken Rogoff is the former chief economist with the International Monetary Fund.

Ken, I spoke with Lakshman Achuthan. You and Lakshman and I have spoken before about whether we're in a recession, whether we're going to have another recession, whether we're out of it. He's the co- founder, as you know, of the Economic Cycle Research Institute. He's one of the best predictors of the business cycle.

Now he says despite all of the positive indicators that we've seen recently, remember, four years ago there weren't these state-by-state disparities generally, it was all bad. Some were worse than others. This economy, the one that we think is headed into a recovery or in a recovery, Lakshman says it's headed for another recession. Listen to what he told me.


LAKSHMAN ACHUTHAN, MANAGING DIR., ECONOMIC CYCLE RESEARCH INSTITUTE: Even with the firming in jobs growth which we fully acknowledge and include in our coincident index of activity, we still have on balance the definitive hard data, not a forecast, showing us that the economy is actually still slowing, which is the direction that you go in when you're heading towards a recession.


VELSHI: OK. So he says definitive data, not a forecast. Lakshman makes these calls by studying the business cycle, which he said operates largely outside of the realm of politics. He admits that politics can influence it by things like stimulus, but largely he says a business cycle is a business cycle.

Ken, is there a contradiction in what he says for those Americans who want to vote on the economy? Is Lakshman basically saying it can't really have much to do with it?

KEN ROGOFF, ECONOMICS PROFESSOR, HARVARD UNIVERSITY: Well, I think the president and the Congress definitely set the tone for where the country is headed over the long run. In the short run, there's much less they can do. We're in the aftermath of a deep financial crisis. In some ways we never left the recession.

I don't agree with Lakshman that actually we're about to head for negative growth or about to start falling. I think we're probably steady at a low level now. But huge unemployment, a lot of problems to fix.

VELSHI: Zanny Minton Beddoes is the economics editor for "The Economist." Ben Bernanke said earlier this week that the job market remains, quote, "far from normal." That's his words. And that stronger growth, stronger economic growth, usually what we refer to through GDP, will be required to turn this around.

Now we did have some positive GDP growth news this last week. Take a look at it. In the fourth quarter of 2011, GDP is measured by quarter, by every three months. And that's the bar all the way to the right. GDP grew from the third quarter to the fourth quarter at a rate of 3 percent. That is higher than initially estimated. It was supposed to be 2.8 percent. You can see that over the four quarters of 2011, makes up the entire year, growth steadily picked up.

Zanny, how do we keep GDP momentum going despite all of the threats out there from Europe, from gas prices, from Iran, what do we do?

ZANY MINTON BEDDOES, ECONOMICS EDITOR, THE ECONOMIST: Well, that's the big question. I think what we have to hope for is that we don't have any new external shocks. And I think there is a risk of that. I think the new risk is oil prices. Little service that we might mess things up with policy domestically if we tighten fiscal policy too much. But the hope is if we don't mess things up, that you gradually get some kind of momentum. As the labor market improves, people spend more, firm start to hire a bit more and you get a virtual circle.

Now I think there are some signs to be more confident. "Consumer Confidence" is up, the stock market is doing much better, but I think it's a very, very fragile situation and I think Ken Rogoff is absolutely right that, you know, this is -- we're not going anywhere to a roaring recovery. And as Ben Bernanke said, you know, we need a lot more growth to get the unemployment rate down.

But I think in contrast perhaps to last year where we started off with high expectations and they were dashed.

VELSHI: Right.

BEDDOES: It does seem that there's some reason to hope that this time maybe we may be able to continue.

VELSHI: Robert Shiller is a professor of economics at Yale University. Bob, you're not one known to be -- can I use the words, irrationally exuberant about the economy? But let's talk about the things that are not working yet. If there's an area of the economy that you or politicians or candidates could fix, whether it be jobs, housing, oil prices, that would help create or continue the momentum that this recovery has, what would it be? Can we even isolate one?

ROBERT SHILLER, ECONOMICS PROFESSOR, YALE UNIVERSITY: Well, I don't know. Everything is interconnected in the economy. But of the things you mentioned, I think jobs are the most important issue because they underlie confidence and the kind of thing that would bring back entrepreneurship hiring, lending. And we've seen increases in the "Consumer Confidence" indexes, but I don't think that we're there yet.

I'm not sure that these indexes measure what we want. We want to see people thinking we're safe now. Our job is secure. We can spend money. And if I'm an employer, I can hire people now. That's where I would put jobs first on your list.

VELSHI: One of your areas of specialty, however, is housing. We've seen new data from you, the Case-Shiller Report, that indicated that in 2011 we had -- we had remarkably low home prices. We hit -- we hit another low. Where do you think house prices are going? Because obviously that's where so many people's savings are wrapped up and that will have an influence on how they feel about the economy and whether they're ready to spend more.

SHILLER: Well, you know, there's a lot of positive indicators. Permits are up, the starts are up, though more in multi-family. We have, as I said, confidence up. Survey data of other sorts are suggesting the housing market should go up. But with our numbers, it keeps going down. And we have it down 4 percent in the last year. It's a puzzle. You know, when I learned about forecasting home prices is that momentum matters more than anything else.

VELSHI: Interesting.

SHILLER: And we still have downward momentum.

VELSHI: All right. See, this is where the rub is, right, because we're all feeling relatively good about a lot of the economic indicators we have but Lakshman did have some things to say about economy. Generally you've got some things to say about the housing market that say don't everybody get crazy just yet.

Let's talk about this in a second. The housing market, despite what Rick Santorum said, did start off the financial crisis. It did trigger it. Next we're going to have the best solutions that my guests have heard for fixing that market going forward. Stay with us.


VELSHI: We teased you with this just before the break. Take a look at home prices in the United States over the last decade. If you've got small children in the room, you may want to tell them to look away from the TV. Look at that. National home prices fell 4 percent last quarter to levels not seen since 2002. That's according to the S&P Case-Shiller National Home Price index. The Shiller there, by the way, is Robert Shiller, who've got on this panel. Prices are down more than 33 percent from their peak in 2006.

John King, looking at those housing numbers, we know that the jobs numbers have been looking better for the president in recent months. We know there has been 16 months of job growth. But we've got a couple of problems here. One is we've got this oil price, gas price thing which some say could derail our recovery. And then we've got this stubborn, strangely stubborn housing situation.

Tell me how that plays out for President Obama, who was kind of hoping that he's going to get some momentum and be able to go into this campaign saying, hey, things aren't that bad under me.

KING: Well, Ali, when you travel, when you travel, the psychology of the housing market is fascinating because this was a big part of people's consumer confidence. And this is a consumer-spending driven economy. People thought their own home values were going up. They looked around the neighborhood, everybody's home values were going up. Now that world doesn't exist anymore. And some of the data is better in the housing market.

However, if you're most states I had visited in the key presidential battleground, the prices aren't better so people aren't feeling better about their personal nest egg, if you will. Now maybe it was a mistake to think of your house is a big investment and maybe people will now rethink that. It's a generational question. But when you see them now, they're still very uncertain about where this housing market is going.

You've seen the administration, three, four, maybe even five times re- jigger its programs trying to help people who are under water. You've have a big debate in the Republican campaign versus the Democrats, you know, Mitt Romney says the market has to fix this with not that much government intervention.

There's a great uncertainty. And if you're the consumer who used to look at your house value going up every year as part of your confidence, guess what, you don't have that and that psychology affects politics, trust me.

VELSHI: Right. So you're talking about the psychology of housing. Bob Shiller is talking about the momentum. These are -- these are the non-scientific sides so you think, John, it may have been a mistake to use your home as a nest egg. That probably would have been only one of several mistakes in the housing sector. The other one was getting involved in loans and being sold loans that you weren't able to afford. The other one was the housing valuations that didn't make sense.

And then the big mistake I would say is the fact that lenders and banks have not done the right thing in the last few years to try and keep the situation from getting worse unless forced to by government regulators. When it comes to the housing market, we understand the multitude of problems. On this show we want to talk about solutions. Robert Shiller has written about an idea that we describe as kind of like a prenuptial agreement for mortgages. Now the idea is that if a home's value drops below a set level, the mortgage would automatically reset to a predetermined payment.

Bob, can this help stabilize the housing market going forward? Does it fix problems we already have? Or is it something we should implement for mortgages from here on in?

SHILLER: Well, it doesn't immediately fix the fact that we have these foreclosures in the pipeline. This is a new kind of mortgage. But it is something. You know, Dodd-Frank called for a study on what they said were shared appreciation mortgages which is something similar. I think this is a time to reconsider our home mortgage institutions. We got into this crisis because we had most homeowners putting themselves in a leveraged, undiversified portfolio.

They put their entire life savings in a house in one city and leveraged it. And boy, is that asking for trouble. It's elementary finance. Don't do that. We have to change our institutions that make it easier for people to do something more sensible. VELSHI: Ken Rogoff, what do you think of this idea?

ROGOFF: I couldn't agree with what Bob said more. You don't want to put all your eggs in one basket. People put more than 100 percent of their eggs in one basket in their house. We need to give them mortgages, shared appreciation mortgages where they give up some of the upside, but some of the downside. The pre-nup specifically, one of the problems and why it hasn't happened is they aren't always enforceable in court, as people know, and so the government really has to provide a firm way that this can work.

VELSHI: Zanny, what's the best solution that you've heard to the housing crisis?

BEDDOES: Well, I think the idea the professor put forward is a very good going forward, it makes a lot of sense. I think the thing to realize now is that there isn't actually a single magic bullet. And one of the reasons so little has happened is because there's actually drawbacks and downsides to all the attempts to deal with the housing market.

So all the efforts of loan modification have run into trouble, whether it's regulatory trouble, whether it's going to be too expensive. But I think one of the things that hasn't been focused on enough but I think is worth looking at is the encouraging single family homes to move into the rental market, to make it easier for investors to buy up a lot of them and rent them out. Because we're actually seeing a recovery in the rental market and that people want to rent. Yet there's a lot of people who, before the crash were able to qualify for mortgages who now really can't, and so we have a huge increase in the demand for rentals. So something there I think would be useful.

And the other thing, I think, which is probably less popular is that I think there's a -- a kind of tendency to think that it's great to keep people in their houses for as long as possible and to make foreclosure as hard as possible. And paradoxically actually I think that does mean that it takes longer for the market to clear and kind of putting a lot of barriers into that process isn't terribly happening.

VELSHI: Well, let me -- let's understand this letting the market clear. We'd all like to know what a house is actually worth in America and no one really knows.

Bob Shiller, you know, John King knows that Ron Paul continues to do particularly well in this primary season, and one of his arguments are -- is to let it clear. Foreclose on everybody who needs to be foreclosed on. Get the government out of subsidizing mortgages. Get rid of the mortgage interest credit and let house prices go where they may. And in fairness to Ron Paul, he's been saying this forever. Your thoughts.

SHILLER: Well, I think that there's a legitimate argument that homeownership promotes good citizenship, a feeling of connectedness. It's an American tradition, too. It's part of our capitalist values. So I think that -- but I think that government role in subsidizing housing for the long run perhaps should be limited to marginal home buyers. You know, people who are struggling to be part of the middle class. And I think it is a good thing to give them a subsidy. It creates positive externalities for all of us.

But I think we do want to scale back. Fannie and Freddie should ultimately lower their conforming loan limits so that they're not subsidizing big McMansions.

VELSHI: John King, this is very interesting watching how this plays out, you know, because there's a remarkable piece of the Republican primary electorate out there supporting not just Ron Paul but these independent ideas, these libertarian ideas to get the government out of all of this. Do you think there's a real understanding when it comes to getting government out of subsidies and regulations that voters have that this may be economically prudent over the long term, it may help us clear out the system, but home prices could collapse as a result?

KING: I don't think there's a deep enough understanding of the potential consequences, because we're not having that conversation. But we are having a pretty sharp conversation, Ali, and this is one of the problems. In divided government, especially when the Republicans won the last election, attacking big institutions, attacking the bailout, attacking government itself.

VELSHI: Right.

KING: And the role of government, you have a campaign now that is defined on big questions. What should the government do, what shouldn't the government do. What has the government done in the past that is a big mistake, not what are we going to do tomorrow. Not how do we clean up this mess. And the lack of trust in all big institutions -- people don't trust the banks, people don't trust the government, people sometimes don't trust our business in the media.

In that environment, it's very hard to have a serious conversation as you -- you know, you have three people much smarter than me on this panel saying there's an upside to this, a downside to this. That's a conversation the country has to have.

VELSHI: Right.

KING: And then make its choices. But we're not getting that conversation in the election because it's a much more pointed government is good, government is bad, it's not specific.

VELSHI: Right. Well, that's why we like to have this sort of a nuance conversation. Sometimes the things we say on this show don't fit well onto a bumper sticker for somebody's campaign but they are important.

John, thanks for breaking that down for us. We'll be watching you very closely over the next few days and into Super Tuesday. John King.

And Bob Shiller, always a pleasure to have you here and thanks for your interesting idea about what we can do about the housing market. Let's see if we can get some traction on ideas like that.

Ken and Zanny, stick around.

Gas already above $4 a gallon in some states. We could see $5 a gallon gas by summer. Those prices won't just hurt consumers, they could derail the entire economic recovery. We'll talk about that next on YOUR MONEY.


VELSHI: Welcome back to YOUR MONEY.

The U.S. economy is starting to actually feel like we're in a recovery and now a spike in gas prices threatens to derail that.


VELSHI (voice-over): Signs that the U.S. is well into a recovery are clear. Gross Domestic Product, the broadest measure of the country's economy, grew 3 percent between the third and fourth quarters of 2011. Consumer spending was up more than 2 percent over the same three-month timeframe.

The U.S. unemployment rate dropped to 8.3 percent in January, and more importantly, the U.S. economy has been adding jobs for almost a year and a half. More than 1.8 million net new jobs were created in 2011 alone. New weekly filings for unemployment benefits are at lows not seen since 2008.

And the S&P 500, the broadest measure of major U.S. listed companies, and the best reflection of invested U.S. retirement portfolios, has rallied 25 percent from its low in October. The problem is oil is up 40 percent over the same period.

Economists and money manager Stephen Leeb is an expert on energy and commodities.

STEPHEN LEEB, LEEB CAPITAL MANAGEMENT: These green shoots could turn brown very, very quickly if oil, let's say, made a run to $140 or $150.

VELSHI: Economist Lakshman Achuthan, who heads a group, which tracks economic cycles and advises businesses on them has a proven track record of forecasting economic cycles. He says the signs of economic recovery are fool's gold. He predicts another U.S. recession possibly by summer.

ACHUTHAN: If we have another shock, like a spike in oil, what that can do is take what right now my best case scenario is a relatively mild recession. If we have a new shock on top of that scenario, it could take a mild recession and make it worse. And we saw an example of that in the last recession.

VELSHI: So far U.S. gasoline prices are up 14 percent or 46 cents per gallon in 2012 alone. Deutsche Bank estimates every one-cent increase to U.S. gasoline costs American households $1.4 billion a year.

And in a political season which is underscoring economic inequality in the U.S., economist Stephen Leeb fears that higher prices at the pump will only make that problem worse.

LEEB: There are a massive number of people in this country, I would guess around 40 percent now, that are really making choices involving food versus old gasoline.


VELSHI: So there's two distinct problems here. Do we derail an economic recovery en masse and are the hardest in our economy going to get hit harder than society in general?

Ken Rogoff and Zanny Minton Beddoes are back with us.

Ken, Americans depend on their cars to get around possibly more than other places in the world. We've created this entire society around the fact that it's acceptable to drive 30, 40, sometimes 50 miles each way to work. $4 gas is a reality in some places. Prices could hit $5 by the summer driving season.

At what point are you starting to worry about a spillover effect into the rest of the economy as we take that money away from the ability to be spent on other things?

ROGOFF: Well, I don't think there's any question that there's some spillover effect already. It is a risk to the recovery, but I think it's a small risk until it spikes a lot more. But you mentioned inequality. I mean it's really rough on a lot of people. This is a recovery which has been very unequal and gas prices really hit some people. They're struggling to try to make it.

VELSHI: What's your sense of how bad -- when you say if it spikes, what are we worried about? I mean if oil hit a record in the 140s a few years ago, what will worry you? Is it a matter of a number or is it a matter of the velocity?

ROGOFF: It's a matter of why. I mean so, if Europe picks up and the U.S. picks, and China picks up and oil goes to $140 I wouldn't break a sweat at all. If, on the other hand, we have a big problem in the Mideast and oil goes even higher than that, say, to $180 or $200, that will be a problem. Of course it's connected with a lot of other problems.

VELSHI: Right.

ROGOFF: But I think it'd take a much bigger hike to really, really derail the recovery in a way you'd really feel.

VELSHI: Zanny, let's talk about solutions and this is a problem because the rest of the world, it gets kind of annoyed with Americans complaining about gas at $4 a gallon. In the U.K., you know, when you transfer it over from liters and pounds, I think you end up with well over $10 a gallon. But the difference is in the U.K. and in Europe and a whole lot of other places, consumer and lifestyle behavior is not the same.

How do Americans adapt to what could be longer-term gas prices?

BEDDOES: Well, the interesting thing is if you look over the longer term, Americans have been adapting to higher gas prices.


BEDDOES: I mean, driving more fuel efficient cars, driving smaller distances. But I think in the short term there's very little you can do to change behavior radically. I think it's worth pointing out that I agree with Ken that, you know, if oil spikes, particularly if it's a supply shock, it's a very worrying sign. But there are some factors this time around which are slightly different than when oil spiked last year or indeed in 2008 and that's this time natural gas prices are very low.

VELSHI: Right.

BEDDOES: And it's been a very mild winter, so there are two other -- two other factors kind of counteracting and helping people's pocketbooks. And I think that's one reason why consumer confidence is actually still very strong, that plus the labor market. So I think that there seems to be -- you know, if you just look at the economics, it's obviously the change, how much more are you spending on gasoline means there's less to spend elsewhere. But there is, I think, some kind of threshold effect. That once gasoline prices go above a certain level, it really hits consumer confidence.

VELSHI: Right. We start to --

BEDDOES: People start feeling nervous.

VELSHI: We start to saw that at about $3.50 a gallon a few years ago where consumer behavior stopped, you know, pushed people back from those trucks and into more fuel efficient cars. Now the automakers are in a better position than they've been in before when there have been gas prices because they've got more offerings that are more fuel efficient.

But you're absolutely right, consumer behavior changes because of gas prices much more than it does because of conservation campaigns or taxes or cafe standards. Thanks to both of you. What a great discussion.

Ken Rogoff is an economics professor, Harvard University, former chief economist with the International Monetary Fund. Zanny Minton Beddoes, we hope you'll come back again, the economics editor at the "Economist."

When it comes to who or what is behind the rise in oil and gas prices, Americans and politicians are quick to point a finger. The problem is they aren't pointing it in the right direction. I'll explain next on YOUR MONEY.


VELSHI: When it comes to high gas prices, the headlines tell the story. Wall Street, greed, Iran, speculators, presidential policies, opinions on who or what is causing higher gas prices vary greatly, so what's the real story? And more importantly, what can actually be done about it? Take a look.


VELSHI (voice-over): The price of a barrel of oil accounts for about three-quarters of a price of a gallon of gas, so a significant move up or down in oil prices should, within days, be reflected in prices at gas pumps worldwide.

U.S. crude has been getting more expensive, going from about $80 a barrel last October to about $110 a barrel now. That's an increase of 40 percent in just five months. But what Americans may be seeing at the pump right now is gasoline catching up with the price of oil.

Gas prices are actually up only 9 percent since October, from $3.40 a gallon then to $3.70 a gallon now. If they had really tracked the price of oil, gasoline would be selling at a national average of $4.76 a gallon.

But prices are higher and absent a clear and obvious culprit, Americans and their politicians in this election year are pointing fingers. Legendary oil investor T. Boone Pickens says blaming speculators is a tired old song.

T. BOONE PICKENS, CHAIRMAN, BP CAPITAL: That's the first thing that politicians will say, the speculators are doing it. And when anybody comes out with that, it's the first reason and they can't give you any more to talk about than speculators, they don't know what they're talking about.

VELSHI: Pickens says the mix of increased global demand and just the potential loss of the two million barrels per day that Iran currently supplies the world have got investors worried.

Iran has threatened to shut down the Strait of Hormuz, a choke point on the eastern end of the Persian Gulf, just 21 miles wide at its narrowest point, through which an estimated one-fifth of the world's oil passes.

But Iran depends heavily on the revenues of that oil and may not want to jeopardize it. Still companies like airlines, which actually use oil, speculate on it to use in businesses and hedge against price spikes.

Others, investors will never need the oil invest just for profit. Between the tension around Iran and increased global demand for oil, the profiteers are betting there's no way oil prices will drop, but are they actually driving the price higher themselves?

PICKENS: There isn't anybody running up the market on a speculative basis. The market is moving up because the oil supplies are tight globally. From there you can goose it up a little bit, but not much.

VELSHI: There may be another reason for the sudden gas price spike. U.S. oil production is up, but gasoline consumption is down, leaving the U.S. with more gas than it needs. So instead of excess gasoline driving prices down --

FADEL GHEIT, SENIOR ANALYST, OPPENHEIMER: In the last six months, not only that we stopped importing gasoline, we're actually exporting gasoline. The total drop in supply of gasoline available to the consumer in the U.S. is down pie about one and a half million barrels a day.


VELSHI: Jeff Rubin joins me now, he's an economist and the author of "Why Your World is About to Get A Whole Lot Smaller, Oil and The Globalization." Jeff is in Toronto where, by the way, one spends a lot more money for gasoline than they do in the United States.

Jeff, good to see you. You just heard America is not moving the needle on consumption. I mean, the bottom line is it's been stagnant for a while. Might grow a little bit this year, might not, who knows. What's causing this?

JEFF RUBIN, ECONOMIST: Well, in fact, America has actually reduced its consumption of oil in the last five, six years by about two million barrels a day.

Unfortunately, what's happening is that the rate of reduction of oil consumption in the United States and Canada and Europe is a fraction, only a fraction of the rate of increase of oil consumption in places like India and China, so that world demand keeps on growing.

We're almost up around 90 million barrels a day. And while we can find supply to meet that demand that supply only comes at triple-digit oil prices. VELSHI: All right, so let's talk about 1998 when oil was $12 a barrel. Are we consuming 10 times as much oil? What are the factors that make a $100 difference in a price of a barrel of oil?

RUBIN: Well, I'll give you an example. Like in the 1980s, China was consuming two million barrels a day. Now, it's consuming 10 million barrels a day. India was one. Now it's over three.

So what we're seeing -- the same pattern that we saw in coal, 10, 15 years ago, just like the developing world has long surpassed the developed world in coal consumption, that's now happening in oil.

VELSHI: You've got an idea, though, you've got a theory that at triple-digit oil prices, it may actually change not only U.S. lifestyle behavior, but it may change industrial behavior around the world. We may stop shipping expensive things around the world and we might become a little more local. Do you still hold to that opinion?

RUBIN: I do. And look at the surprising strength of the U.S. manufacturing sector and what has been on the whole a pretty modest and weak recovery.

And I think what we're finding is that in a world of triple-digit oil prices, it doesn't make sense to access all our goods from halfway around the world, and that was what my last book was about.

I think the issue going forward and the issue that my new book will talk about is does triple-digit oil prices change the speed limit at which economies can grow.

VELSHI: Right.

RUBIN: And I think we're finding the answer is the same from China to Washington, and it's that the U.S. and Chinese economy cannot grow at the same rate when oil is $120 a barrel as it was when oil was $20 to $30 a barrel. And neither zero interest rates nor a trillion dollar budget deficit is really going to be a substitute for the cheap oil that has driven economic growth.

VELSHI: Interesting theory, Jeff. Thanks very much, always a pleasure to talk to you. Jeff Rubin is an economist and the author of "Why Your World is About to get A Whole Lot Smaller, Oil in the End of Globalization."

Coming up next, how you might actually benefit from higher oil prices.


VELSHI: Everybody loves to blame speculators for the high price of gas or oil, but so many folks out there don't even know how a speculator works, and that is where CNN's Lizzie O'Leary comes in.

Lizzie went down into the oil pits of the New York Mercantile Exchange, NYMEX as we call it to show you how the market works.

(BEGIN VIDEOTAPE) LIZZIE O'LEARY, CNN AVIATION AND REGULATION CORRESPONDENT (voice- over): It looks like chaos, but what these guys are shouting about will determine how much that gallon of gas you put in your car will cost.

UNIDENTIFIED MALE: If they weren't shouting, I wouldn't have a job.

O'LEARY: This is the world of oil traders.

(on camera): OK, so think about it this way. Every single energy product that you use, whether that's home heating oil or gas that goes in your car or crude oil that makes up that gas, even the fuel that goes into fertilizer used on a farm is traded on this exchange.

(voice-over): Ira Eckstein has been doing this for 20 years.

IRA ECKSTEIN, CEO, AREA INTERNATIONAL TRADING CORPORATION: This is a trillion dollar game and there are billion dollar players.

O'LEARY: And almost none of them will ever see a drop of the gooey stuff. They are trading the chance to buy or sell oil at a certain price in the future. It works like this.

If you buy an option at $120 for next month and oil goes to $150, you make money. That's long before the barrels of oil ever make it to their final owner, like an airline or an oil company.

And right now, regulators are debating whether all this trading is pushing up the price. The big players make expensive bets.

(on camera): How much money do I have to have to buy a contract?

ECKSTEIN: It's a good contract. It's a 1,000 barrel contract and crude is trading, you know, at $110, $110,000 to own the contract.

O'LEARY (voice-over): Those of us who don't have that much can do it this way.

(on camera): Do people call you and say, I noticed that I'm paying a lot more for gas and I see oil in the news. I want to get in on that.

UNIDENTIFIED MALE: Of course, of course.

O'LEARY (voice-over): Jeff Goldberg makes investments for ordinary people. You want oil. You can buy a fund that goes up when it goes up and down when it goes down.

JEFF GOLDBERG, BRANCH MANAGER, TD AMERITRADE: Buy low, sell high. That's the key.

O'LEARY: Pretty simple.


VELSHI: Lizzie joins me now from Washington. Lizzie, shameless plug, first of all. If you were to buy the oil and take delivery of it, you would take delivery of it, generally speaking, at Cushing, Oklahoma, and that's where I will be on Monday with the CNN Express. I take it you were not tempted to buy oil?

O'LEARY: No, look, you like to lug around your oil barrel. I didn't want to do that. No, and part of it is the price. If you want to buy a big contract, it's a lot of money.

But the other thing is regular people can buy an exchange traded fund but most people don't know they probably, if they have a 401(k) or retirement fund, they probably already have oil.

Because maybe they have that exchange traded fund or maybe they have got some stocks that are shares of Exxon or whatever, so you're paying more for gas. You're actually ling your own pocket.

VELSHI: Right. So in fact I wrote an article in "Money" magazine about the idea that maybe you should be smart about how -- there's nobody says oil prices are going down in the near term so maybe you should figure out a way to line your pocket.

Now the other side of this, though, is did you have a chance to discuss with these guys who are traders, they know how to make money on these things, this discussion about whether the industry should somehow be regulated, and what role speculators have in the price of oil?

O'LEARY: Yes, this is a big question even with the guys on the NYMex floor. The argument they make is this is a trillion dollar market. Ira Eckstein said to me, three guys sitting in an office really can't move it that much.

That certainly is met with a skeptical eyebrow raise here in D.C. there was, as part of that big Dodd-Frank law, there is a part of it that goes in that the speculators if you will can't hold more than a certain percent of a certain commodity, but that's being argued right now.

So the law is written, but it hasn't gone into effect and it's getting a court challenge. This would be a very long process before we even know if that has any effect on prices.

VELSHI: Lizzie, our specialist on aviation and regulation, so we're going to be seeing a lot of her over the course of the year. Thanks, Lizzie, great to see you. I'm glad you didn't have to lug a barrel of oil back to D.C. with you. All right, Lizzie, we'll see you soon. Thanks very much for that.

Coming up, searching for solutions to rising oil and gas prices. Former Energy Secretary Bill Richardson joins us next.


VELSHI: Continuing our conversation on gas and oil prices and what it may do to the economy, I'm joined now by Bill Richardson, he's the former governor of New Mexico and former energy secretary under President Clinton. Christine Romans joins me as well. Governor, thanks for being with us. Clearly, the president and this always happens when gas prices go up is under political pressure to do something about gas prices.

You were the energy secretary. Are there short-term options? And should we even be involved in short-term solutions when we talk about gas prices increasing?

BILL RICHARDSON, FORMER GOVERNOR, NEW MEXICO: Well, we need long-term solutions. We need to have energy diversification for energy security. That means, I think, the key alternative fuels are natural gas and renewables.

We need to move in that direction with natural gas as a bridge. We also have to have more energy efficiency, more fuel efficiency, I think the president has pushed that. Short-term, you know, maybe the strategic petroleum reserve. I wouldn't sell barrels in the Clinton administration, we did. We put some barrels on the market and that helped reduce the price a little bit, but that's short-term.

Other steps that we need to take obviously are work with consumer countries, with Japan, with Europe to get them to work on OPEC countries. I used to be criticized, Ali, when I was energy secretary. I'd go around to the OPEC countries, to the Saudi Arabias and say the price is too high.

Actually at the time it was about $25. I'd say, increase production. And generally, the OPEC countries in those days were in the mood to help us, but they're not anymore. But there are no short-term solutions. But the fact is, this president under this president, there's been an increase in domestic oil and gas drilling.

CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: It's interesting, though, I will bring up, Ali, that I think you mentioned short-term, Governor, and short-termism is something that's been a problem not just now, but for administrations for a long, long time.

That one of the things that we do is we look at the near term, what's happening to gas prices, it drives voters, it drives sentiment. We talk about the strategic petroleum reserve and then we don't really -- we don't really accept the failures that come in the near term because, you know, we're just so concerned about the next election.

Do you think if we can get past this short-termism that we could actually start having a solid energy policy?

RICHARDSON: Well, Christine, my hope is that when and if the president is re-elected, I think he is, the voters are sending a message that they want solutions. We don't have a national energy policy because of the bipartisan bickering.

And we need a comprehensive policy that says there has to be a renewable portfolio standard for every state, 20 percent renewable. Yes, we have to do domestic oil and gas drilling carefully in the Gulf in public lands. We need to have more fuel efficiency. I think standards on automobiles is a move in the right direction. Energy efficiency policies, you could create a green economy with a new policy. So what we need more than anything is for the parties to come together and pass a comprehensive energy bill. This can only be done after voters send a message.

But there's no question, gas prices are high. And the president, I think is taking the right short-term steps to deal with this politically because generally, incumbents are blamed that the prices go up at the pump.

But this is what happened to us in the Clinton/Gore years. So you have to be politically very careful, but at the same time, try to have some long-term bipartisan solutions to diversify our energy supply.

VELSHI: But you know, compared to the U.K. and other European countries where taxes both at the federal level and lower than federal levels were very, very high. We don't really have that situation.

It's not like the government can do something. You mentioned the strategic petroleum reserve. But as you said, it generally has a short-term and relatively minimal. In fact, at some point, the psychology becomes mixed in with what should be done.

RICHARDSON: One of my big messages is don't give up on renewable, solar, wind, biofuels, I know they're getting expensive. I know there are some technology issues that have to be dealt with, some not in my backyard issues.

But I really think for the world, for the United States, we need to move more in that direction. Nuclear, I think you have to keep it on the table as an option because it doesn't emit greenhouse gas emissions.

We have to resolve the waste issue, the cost issue, issues relating to safety. The public is very leery about nuclear and the nuclear companies. I would recommend they do is ban where the environmentalists to push for climate change.

They both emit -- hardly any green house gas emissions, but, you know, they all fight each other. And worse, the political process, Republicans and Democrats are just so miles apart on what should be done.

But politically, they're unwilling to come up with a comprehensive bipartisan bill that I think is sorely needed. Gas prices, energy are the biggest, I believe, negative entity in our international and national economy.

We better resolve some of these fuel gas price energy diversity issues because it's our energy security. We don't want to be dependent on OPEC. We don't want to be dependent on the Persian Gulf, on Iran shutting off the Straits of Hormuz. We're in a perilous situation right now.

ROMANS: We're going to use 90 million barrels a day this year on record. We're talking about all these new things to do. We're going to use more oil this year than we've ever used.

VELSHI: But, you know, it was only because oil prices went up the way they did last time that those renewables that you're talking about, Governor Richardson, had traction.

When you endorsed the Pickens plan it was because of those high oil prices that people were saying, this is viable because we invest in solar and we invest in wind and we invest in natural gas.

And the problem is people have very, very short memories, Christine. Your short-termism problem is a problem. Governor Richardson, always a pleasure to talk to you. Thank you for being with us again.

RICHARDSON: Thank you very much.

VELSHI: Listen, next week, we're not going to be in the studio, we're heading out on the road and you'll want to pay attention to where you we're going. I'll tell you about it next.


VELSHI: Next week is a big one at CNN. I'll be jumping on the CNN Election Express as we count down to Super Tuesday. We'll start in Oklahoma and after Tuesday's drama unfolds, we'll head south making several stops along the way to Austin.

That's where we'll land for full coverage of south by southwest, the biggest digital and interactive conference in the world. We'll have lots of special treats in store for you next week as YOUR MONEY will be live from the CNN Grill right next to the Austin Convention Center at 1:00 p.m. Eastern on Saturday.

We hope you'll join us for that. Thanks for joining the conversation this week on YOUR MONEY, you can stay connected to us 24/7 on Twitter. My handle is @alivelshi. I watch and read every one of your tweets. The show handle is @cnnyourmoney, follow it so you'll know what's coming up on the show. Have a great weekend.