Will Federal Regulators Crack Down on Oil Speculation?
While the Labor Department’s announcement last Friday that US employers had created 192,000 new jobs seems to confirm that the American economy is indeed showing signs of life, the adjective most observers have used to describe its recovery is “fragile.” The reasons are obvious: unemployment is still staggeringly high, household debt and underwater mortgages continue to put a drag on demand, and impending budget cuts by state and federal government could push unemployment back up and the economy back towards contraction.
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Christopher Hayes
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For the condo-buying, sushi-eating Beltway elite, the recession is over. For the rest of America—not so much.
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But arguably the biggest threat to recovery is the price of oil. If oil prices in particular, and commodities in general, begin to rise, those trends will almost certainly constrain demand and consumer confidence at exactly the moment they are most needed. This week oil traded at $104.42 a barrel, up 7 percent from last week and at its highest since the September 26, 2008, close at $106.89. And we know from recent experience the oil prices (along with all sorts of other commodities) can skyrocket with little warning. Cast your memory back to the summer of 2008, before the financial crisis and in the heat of the presidential campaign. That summer, oil hit $147 a barrel and gas hit above $4 a gallon; airfare went through the roof and nearly every single major carrier came very close to declaring bankruptcy. Food prices shot up as well, with wheat trading up 137 percent year over year in July 2008, and corn 98 percent. Famine and food riots spread throughout the globe.
Though it seems like a distant memory now, for about six weeks during the 2008 presidential campaign, all anyone talked about was the price of gas. John McCain and Hillary Clinton went so far to advocate for a temporary repeal of the gas tax, Congress held hearings and the Senate actually came close to passing legislation to crack down on oil speculation. And lest we forget, it was in this panic over the rising cost of living that the catchphrase “drill baby drill” was born.
So the White House should not only be worried about oil prices and recovery. They should also be worried about the well-established fact that when the price of gas spikes, the country’s politics go haywire. FiveThirtyEight’s Nate Silver recently showed that high gas prices are correlated with poor incumbent party performance in presidential elections. So not only do rising oil prices present the single greatest substantive policy challenge to a president attempting to cajole the economy into a sustained expansion—it presents the biggest political danger as well.
At first blush you might think that there’s not a whole lot the president can do about the price of oil. After all, increase in demand from China and India plus seasonal demand in the United States during peak driving months, combined with the instability in the Middle East, all seem to be pushing the price of oil up and are all outside the White House’s control. But that’s not the whole story.
In the wake of the price explosion in the summer of 2008, a bubble that extended to all kinds of commodities, including copper and wheat, a number of observers from George Soros to Hedge Fund manager Michael Masters to former Commodities Future Trading Commission staffer and derivatives expert Michael Greenberg concluded that the underlying supply-and-demand fundamentals couldn’t account for the sharp rise in prices. In the first six months of 2008, US economic output was declining while global supply was increasing. And even if supply and demand were, over the long run, pushing the price of oil up, that alone couldn’t explain the massive volatility in the market. Oil cost $65 per barrel in June 2007, $147 a year later, down to $30 in December 2008 and back up to $72 in June 2009.
The culprits, they concluded, were Wall Street speculators.
Commodities markets involve essentially two kinds of participants: there are so-called “end users” like farmers and airlines that use commodities markets as a form of insurance against future price fluctuations, and then there are speculators—hedge funds, investors, big banks that try to make money by correctly betting on those same price fluctuations. The presence of these speculators isn’t in and of itself a bad thing; in fact, they bring liquidity that should, in theory, make the market more efficient. According to an analysis by the House Energy Committee’s Subcommittee on Oversight and Investigations, in 2000, physical hedgers, trucking companies, farmers, bakers, made up 63 percent of the crude oil futures markets, with speculators accounting for the rest. By 2008, those proportions had basically flipped.
Of course, the Wall Street banks say there’s nothing to see here, but that’s hard to believe. It’s almost impossible to make sense of 2008’s massive commodity price spike without concluding that the speculators played an outsized role. When enough money floods into a booming market, Greenberger says it can “unmoor” the prices of commodities from their underlying supply-and-demand fundamentals. The basic mechanism by which this might happen should be familiar; it’s the same principle that drove the housing market bubble or the tech stock boom. When a bunch of people think the price of a stock is going to go up, they rush to buy it so they can realize the imminent gains. Of course, a surge of demand itself pushes the price up and the price cycles upwards until it pops. The difference being, no one puts Pets.com in their cars, trucks and airplanes.
“The most conservative thing that can be said right now [is that] this would be no time to dismiss the role that speculation plays,” says Greenberger. ” A moderate statement is that speculation is creating volatility that is aggravating the uncertainty in the market. If you start talking to industry people, they’re pulling their hair out. American Bakers Association is going bananas. They all believe that the markets are going screwy because of Wall Street.” A host of businesses and organizations from Virgin’s Richard Branson to Oxfam all make the same case.
One way to attempt to constrain these volatile mini-bubbles is for the Commodities Futures Trading Commission to impose “position limits,” essentially limits on the size of the bets that speculators can make. The New Deal–era Commodities Exchange Act gives the CFTC power to curb “excessive speculation,” and the just-passed Dodd-Frank bill explicitly calls for the CFTC to promulgate position limits.
Not surprisingly, the big Wall Street banks like Goldman Sachs don’t want this, and the two Republican members of the commission don’t favor any position limits rules with real teeth. To his great credit, CFTC Chairman Gary Gensler (a former Goldman banker I was quite critical of when nominated to the position) has taken a strong leadership position in advocating strong limits, and Democratic commissioner Bart Chilton has been supportive as well. That leaves the deciding vote in the hands of Democratic Commissioner Michael Dunn, who’s expressed misgivings.
Now, it just so happens Dunn’s term is up in June and last night MSNBC’s Ed Show reported that the White House has begun vetting his replacement. This may seem obscure and technical, but given the precariousness of the recovery and political explosiveness of gas prices, nominating a replacement enthusiastic about reigning in excessive speculation may be the single most important decision the White House makes between now and Election Day.
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Comments
posted by: lvliberty1 at 03/09/2011 @ 4:03pm
Do you also boycott BP, they are HQ'd in a socialist country, as is Royal Dutch Shell
As to the current spike in oil prices, it too has nothing to do with supply/demand. There is no less oil available to bid on than there was 3 weeks ago. Libya accounts for about 2% of global output. The Us actually has a surplus of oil available to be refined.
posted by: Bob_1234 at 03/08/2011 @ 9:09pm
Crack down on oil speculators? Just how in the hell do you propose on doing that. Does anyone here, especially the writer of this article now anything about supply and demand.
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Reading comprehension 101 vs economics 101:
"In the wake of the price explosion in the summer of 2008, a bubble that extended to all kinds of commodities, including copper and wheat, a number of observers from George Soros to Hedge Fund manager Michael Masters to former Commodities Future Trading Commission staffer and derivatives expert Michael Greenberg concluded that the underlying supply-and-demand fundamentals couldn’t account for the sharp rise in prices."
A simple geography lesson would show that the U.S. should (and does) get most of it's oil from Canada and Venezuela.
posted by: Beethoven1 at 03/09/2011 @ 1:45pm
That is incorrect. Canada and Mexico are the top 2 exporters of oil to the US. Venezuela is number 5 due to their ownership of Citgo whom I boycott.
http://tinyurl.com/7ldt
It is not just the act of speculation that is causing prices to set record highs on petroleums, grains, gold and other commodities. Speculation provides liquidity in the futures markets. Who else would be there to sell to the commercial buyers who need to hedge their business needs? It was the introduction of ETFs (exchange traded funds in “commodity futures”) in 2002, with the introduction of the gold ETF, which set us on this path of straight up prices.
ETF traders are one-way (buy and hold) stock traders, which differ greatly from commodity traders. Commodity traders in the futures markets buy to get long when they think prices will rise in the future; and most importantly they sell to get short when they think the prices are headed lower due to supply and demand. There is always a group of commodity traders that think prices are too high and will fall in the future, balanced against a group that think prices will go higher. These two groups create some degree of equilibrium in the markets. Now that there are ETFs in these markets, the number of buyers far outweigh the number of sellers; thereby giving the bias to the upside because ETF traders typically don’t sell short. There is a small contingent of ETF traders that sell to get short, but the vast majority of people trading ETFs buy to get long and hold that stock forever. So equilibrium in the trading and price of commodities is skewed to rise unless something is done.
12. posted by: Bob_1234 at 03/08/2011 @ 9:09pm
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Crack down on oil speculators? Just how in the hell do you propose on doing that. Does anyone here, especially the writer of this article now anything about supply and demand.
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Economics is not that difficult to understand. The plain truth is that the oil speculators drive the price of oil up on anything....supply and demand my ass.
A simple geography lesson would show that the U.S. should (and does) get most of it's oil from Canada and Venezuela.
CORRECTION #9: BLACK CATS are omens of good and bad luck, depending on how you've invested.
Chris & Ed, please keep up your efforts on exposing the BLACK CATS on Wall Street.
Senator Obama embraced CTL Fuel Promotions Act of 2007, so why should we be suprised with the COAL FIRED corn-based agenda, set by Warren Buffett, the president's economic advisor?
Any way you cut it; corn-based ethanol will always require high priced crude oil, in the receipe for $4 gasoline.
The president wishes to tap the SPR, BECAUSE if gasoline demand destruction is allowed to take place, the administration will face, increasing the already huge EXPORTS of U.S. corn-based ethanol!
OBAMA ETHANOL IS NO ALTERNATIVE
Chris:
Excellent article. I'm probably fairly ignorant when it comes to figuring out Wall Street, but I don't understand how the increase in oil company stock prices caused by unregulated speculation results in an increase in the price of oil itself. Please enlighten me. Thanks.
Short answer to the question raised by the headline: No.
What would make anyone think that government regulators could out-smart the world's oil traders? If the chickens put a lock on the door of the hen house, the fox will enter through a hole in the floor.
posted by: 2HAPPY at 03/09/2011 @ 10:28am
You know, 2Hap, at least Larry tries to present counter-arguments with references to the real world (although he ignores all of the capitalists who are complaining about runaway oil speculation). From you, we get just another empty, abstract and condescending lecture purporting to explain economics to us peons that boils down to:
"The market will always correct itself! Regulation bad, deregulation good!"
Yeah, financial deregulation has been just as wonderful for the economy as Carter's deregulation of air and transport. That's just so blindingly obvious to everyone!
Question: Should the Hunt brothers have been let off the hook? That probably would have pleased some POLITICALLY conservative allies of theirs, by the way.
Hey, young Christopher.....You know, there is something called SELLING SHORT!
Eventually, `excessive speculation' (as you call them) leads to counter-bets and the market returns to some semblance of equilibrium.
If you places restrictions on `excessive speculation', you also introduce political DISTORTIONS and with all its usual catastrophic consequences.....Great Society? Hopey and Changey? Anyone?
It is not just the act of speculation that is causing prices to set record highs on petroleums, grains, gold and other commodities. Speculation provides liquidity in the futures markets. Who else would be there to sell to the commercial buyers who need to hedge their business needs? It was the introduction of ETFs (exchange traded funds in “commodity futures”) in 2002, with the introduction of the gold ETF, which set us on this path of straight up prices.
ETF traders are one-way (buy and hold) stock traders, which differ greatly from commodity traders. Commodity traders in the futures markets buy to get long when they think prices will rise in the future; and most importantly they sell to get short when they think the prices are headed lower due to supply and demand. There is always a group of commodity traders that think prices are too high and will fall in the future, balanced against a group that think prices will go higher. These two groups create some degree of equilibrium in the markets. Now that there are ETFs in these markets, the number of buyers far outweigh the number of sellers; thereby giving the bias to the upside because ETF traders typically don’t sell short. There is a small contingent of ETF traders that sell to get short, but the vast majority of people trading ETFs buy to get long and hold that stock forever. So equilibrium in the trading and price of commodities is skewed to rise unless something is done.
My suggestion is to...
There was not a problem with speculators until the introduction of ETF's (Exchange Traded Funds.) ETFs are stocks based on the underlying futures markets. The first ETF was introduced in Gold in 2002, and look where gold prices are. There are ETFs for petroleums, grains, etc., and they are driving prices higher because ... ETfs are stocks, stock traders are "buy and hold" traders. So now mom and pop are buying these ETFs in record amounts, with no spec sellers in sight to add balance. Only a handful of stock traders sell stocks short. Futures traders sell futures contracts short all the time, and help to keep a lid on prices. Supply and demand pressures get thrown out the window with ETFs. Eliminate ETFs and the price of petroleums will plummet along with the price of grains and gold. Futures traders historically provided a place where commercial users of these products hedge their risks, and a place for farmers to sell their crops when prices hit a level that they can lock in a profit.
WTH,getting to a world without OIL should be the number one goal. Not complaining incessantly about the prices. And for the record its NOT that frigging high priced. Europeans are paying $8US a gallon, so get a grip people.
I noticed sales where up last quarter in auto sales, all SUV's and Pick-Up trucks. Good Lord people, was the "Matrix" really that comforting? America, land of the "Scarecrow" brain trust.
I think Democratic Commissioner Michael Dunn is giving cover for Chairman Gary Gensler. Dunn worked enough years at the USDA to qualify for retirement.
In addition, like most CFTC staff, the revolving door to big dollar jobs prevents any independence to actually perform their jobs of protecting the markets.
Democratic Commissioner Bart Chilton has been speaking out on speculators for a long time, but I would not trust any of them.
Former Commodities Future Trading Commission staffer and derivatives expert Michael Greenberg has been testifying before Congress or writing articles against CFTC actions since shortly after he left the CFTC around 2000. Too bad no want took his advice or the advice of his former boss Brooksley Born, former CFTC Chair.
We will not lose anything if the Tea Party Republicans in the house lower funding for the CFTC. They are all very over paid.
FAT CATS & BLACK CATS
I just watched your interview on 'the ED show' and decided to share my thoughts, regarding Wall Street Petroleum Speculation. First point to remember. President Barack Hussein Obama IS Wall Street!
Ed has already educated most, with regard to the "Fat Cats" so I'll take his opinion one step further, and continue with what constitutes 'Black Cats'. Fat Cats are omens of good and bad luck, depending on how you've invested. I've been a Wall Street Hippie investor, for over 12 years...
3 BLACK CATS!
OBAMA - BERNANKE - BUFFETT
WARREN BUFFETT to CNBC 'Elephants & Zebra'
"CNBC acts like Buffet is this sweet old grandpa type...he is just as greedy and cold as any wallstreeter..make no mistake..." @ 64gigahertz | Mar 2, 2011 09:21 AM ET
Bubbles that grow in a short time span, require MANIPULATION.
1.) 'Prince Charming' Barack Hussein Obama may preach Global Warming, but who will PROFIT with the resurrection of COAL. FutureGen coal fired IL..
2.) Warren Buffett will ring the till, with every eastbound BNSF train loaded with Powder River Basin coal, destined to heat corn for ethanol. No CRUDE OIL = No Ethanol diluted $4 gasoline!
3.) Petroleum Bubble Chairman Ben 'Revolution' Bernanke, 3 of 3...Need we know more?
COAL + ETHANOL + OIL = COMMODITIES 'BUBBLE'
Al Gore calls corn-ethanol subsidies a "MISTAKE"
The American speculators are our own worst enemy.
Crack down on oil speculators? Just how in the hell do you propose on doing that. Does anyone here, especially the writer of this article now anything about supply and demand.
Whether the planet is warming is irrelevant to the need to get off fossil fuels.
The economic, geopolitical and environmental benefits will kick in even without a CO2 benefit. Less pollution, less military deployments, energy dollars stay at home.
- Balkingpoints / www
Chris' point that it's not speculation per se that causes market distortion but excessive speculation is well taken. Without position limits on oil speculators - as there always have been on agricultural commodities - then people of great wealth (think Koch Bros.) can manipulate the market to enrich themselves, to create political crises for elected officials they dislike, for any one of many reasons. The far right wing Hunt Brothers of Texas tried doing this with silver in the 1970s and got caught with their hand in the cookie jar thanks to government regulators who were suspicious of price moves and went looking to see who was buying all of that silver.
I'd be very interested in seeing who is accumulating all of these oil futures contracts, driving up the price when market fundamentals show an excess of gasoline in the US.
If the CFTC can't or won't start investigating, then the Justice Dept. should.
I don't wish for another crash, but if that's what it takes to focus everyone's attention (where is the tea party now???)on the dangers of speculation, I say let it crash.
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The way things are heading, we may as well let things crash. The wealthy are stripping anything worth while away in dividing them up amongst themselves.
The Shock Doctrine is now being applied to this country and people are too blind to see it.
All publicly owned properties are being stripped down, sold to the highest bidder and then watch out, inflation will be soon behind so that the public becomes indentured servants to the IMF, World Bank which of course are controlled by (YOU GUESSED IT) the richest aholes in the world.
Mr Hayes writes as if the NYMEX is an allpowerful exchange that controls the other global exchanges on the commodity of oil.
Do you really think we can control Brent Crude prices or ICE (Intercontinental Exchange)? Dubai Crude?
Brent Crude futures are used to price two thirds of the world's internationally traded crude oil supplies.
And what about Opec's Floor price of $70 per barrel? a floor they are considering raising to $100.
You alluded to but did not zero in on perhaps the best evidence of speculation driven prices.
After September 2008's crash, prices fell almost immediately. Paul Krugman says that it's because demand fell, and though I like most of Paul's writing on all subjects economic, he is dead wrong on this.
The crash didn't cause demand to fall immediately and as fast as it did. It was simply that the speculators ran out of money.
I don't wish for another crash, but if that's what it takes to focus everyone's attention (where is the tea party now???)on the dangers of speculation, I say let it crash.
Interesting thing happened. The White House merely mentioned using the strategic oil reserves and walla oil prices come down. If that's not speculation going on, I don't know what is. Maximize profits. Drum up any reason to increase prices. And of course as Liberal in Kansas points out, our brilliant wall street traders sure as hell won't invest in any alternative methods besides the gasoline engine, oil production and all that lines the pockets of those in the industry making billions...but once again, cut all of the worker's pay by all means.
Good article, but didn't anyone proof read this? So many typos.
Speculation is not the threat to Obamas re election. Obama and his 9% unemployment, coming uber inflation, $1.7 trillion deficits,taking debt from $6 trillion to $14 is less than 2 years(a record that should be hard to beat), collapsing currency, over the top union backing and the general recognition of incompetence and in ability to lead as well as obvious inexperience as he loses all influence in the Middle East.
Over regulation is strangling the econmy as it is..
Obama is his own biggest threat a return to the WH other than as a guest.
He will soon join a well deserved lecture tour with Jimma Carter as they attempt re-write history to show their administration as great success...;-)
Remember the Arab Oil Embargo in 1973? Remember the Yom Kippur War?
Please recall that the United States Government and our wonderful friends on Wall Street and Corporate USA did next to nothing to develop alternative sources of energy and open up more and new oil fields and exploration in this hemisphere, so we would no longer have to act like Pimps and Prostitutes for Arab Oil and our dear friends those little darlings and sweetie pies in Tel Aviv.
Of course we had off shore rigs and wells - compliments of BP - so what can be said about disasters such as that?
Seems like when it comes to gas to fuel the American greed for our Super Belchfire Quadtorque BulgeMobiles everyone wants to drive we are at an absolute F***ing standstill.
Or if someone wants to drill in Alaska, we can't do anything because we might destroy the habitat of the three testicled Grizzly Bear (one of Sarah Palain's favorite hunts) and whatever else is up there.
But don't worry about a damn thing folks, those bum bashers over on SaudiLand will keep pumping and charging us the max as long as we want. RIGHT?!!
