Will Federal Regulators Crack Down on Oil Speculation?

[Better Believe It]

Will Federal Regulators Crack Down on Oil Speculation?
Christopher Hayes
March 8, 2011

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.

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.

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.

Read the full article at:

http://www.thenation.com/article/159078/will-federal-regulators-crack-down-oil-speculation


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The Problem

Wall Street speculators manipulate oil prices at your expense. This speculation increases the cost of gasoline, diesel, jet fuel, heating oil and other energy products. Higher fuel prices make it more expensive to drive, travel, farm, pay utilities and ship goods. Government regulators must now implement the recently passed financial-reform law to stop rampant speculation once and for all.

What is causing the high price of fuel?

Fuel prices remain high despite the weak economy. Gasoline costs nearly the same as the days following Hurricane Katrina – even though people and companies around the world are using less fuel because of the weak economy. There is absolutely no justification for today’s inflated prices.

The only logical explanation for this disconnect in supply and demand is the rise of rampant speculation on Wall Street. Speculators buy and sell as much oil as possible to make a quick and easy profit – even though they will never use the oil that they purchase. Speculators might trade a barrel of oil more than 20 times before it is ever used – the price going up with each speculative trade, and consumers picking up the final tab. This rampant speculation reportedly increases oil prices by as much as $10 to $30 a barrel – raising the cost of nearly everything you purchase.

High energy prices have forced many families to choose from paying their heating bills, filling up on gasoline or putting food on the table. Many businesses have struggled to stay afloat and keep workers on the job because of high shipping and transportation costs. Enough is enough. It is time for Wall Street to earn its money – not get rich at your expense by recklessly gambling on oil.

A federal agency called the Commodity Futures Trading Commission (CFTC) is in charge of interpreting the anti-speculation legislation to establish new regulations on oil trading, but this process could take up to a year to implement. This extra time provides Wall Street lobbyists with the opportunity to push for weak regulations. Oil speculators will continue to manipulate oil markets and influence energy prices while the CFTC debates future regulations.

Read the full article at:

http://www.stopoilspeculationnow.com/Pages/problem.aspx


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NEWS RELEASE
AIR TRANSPORT ASSOCIATION OF AMERICA (ATA

ATA Calls on CFTC to Strengthen Proposed Rule to Curb Excessive Speculation
Proposed Position Limits Are Too Weak; Will Not Protect Consumers and Economy as Congress Intended

WASHINGTON, January 14, 2011 – The Air Transport Association of America (ATA), the industry trade organization representing the leading U.S. airlines, today urged the Commodity Futures Trading Commission (CFTC) to further reduce speculative position limits for energy to protect consumers and prevent the negative impact of unwarranted price spikes on the country’s economic recovery.

ATA believes that limits in the Notice of Proposed Rulemaking (NPRM) are too high and do not meet the clearly stated requirements in the Dodd-Frank Wall Street Reform Act to address excessive speculation, which drives fuel costs and, as the single largest expense for airlines, detrimentally impacts profitability, employment and our customers.

“Excessive speculation, unrelated to the fundamentals of supply and demand, creates volatility in prices that simply cannot be effectively managed by the airlines or, for that matter, any other industry where fuel is a key cost item, and it damages the economy,” said ATA Vice President and General Counsel David Berg. “The extraordinary price fluctuations that harmed consumers, industry and the economy in recent years will not be prevented by the proposed limits, and with predictions that prices will once again exceed $100 a barrel, the CFTC must do more to address this problem by delivering on the intent of Congress as clearly outlined by Dodd-Frank. The market easily can function efficiently and effectively with more stringent limits.”

Bona fide hedgers, such as airlines and truckers, used to represent 60 percent of the oil futures market; today, speculative interests control 60 percent of the market. Restoring historical levels of speculative interest in the oil futures market will do much to prevent unfounded volatility in energy prices, maintaining adequate liquidity for bona fide hedgers and ensuring that efficient market function and price discovery are not compromised.

http://www.airlines.org/News/Releases/Pages/News_01-14-11.aspx

[villager]

1. No. Alas. n/t

[Zoeisright]

2. Chris Hayes is one smart guy.

And this needs to happen.

[kenny blankenship]

3. What- and banish the entrepreneurial spirit our President values so highly?

Ask yourself What Would Reagan Do? That's what will be done, on Earth as it is in Heaven, forever, Amen.

[Aerows]

4. This is what happens when actual hedge funds

aren't controlled by people hedging, and all the money belongs to the people at the top. Small business owners, who live in YOUR community, and employ YOUR family members generally care.

Some person making $20 million a year? He doesn't know you, and thinks he's just grand because he gives his servant $100 for Christmas.

[Fire Walk With Me]

5. Assholes getting rich off the regular guy.

[Ikonoklast]

6. Regulators can solve this one easily.

Make every hedger in commodities show proof that they can take end delivery for whatever commodity it is they are speculating in.

Airlines, trucking companies, and railroads hedge fuel prices, but they also take delivery.

Farmers and food processors hedge wheat, corn, soybeans, etc, against market swings, but they, too, can take delivery.

Show proof you have the capability to store ten thousand barrels of oil upon delivery behind your mini-mansion, and you, too, can speculate in the petroleum futures market.