7-28-09 by dugan
Last fall, the Bush administration said all that business with oil hitting $147 a barrel and gasoline at over $4.00 a gallon was just supply and demand at work. Today–big oops! The Obama administration, politely calling the report’s data "deeply flawed," said it will issue a revised report in September saying speculation did indeed driver the wild price roller coaster. It’s a good indication that the Commodity Futures Trading Commission will finally put some brakes on energy speculation.
From the WSJ.com story:
The Commodity Futures Trading Commission plans to issue a report
next month suggesting speculators played a significant role in driving
wild swings in oil prices — a reversal of an earlier CFTC position
that augurs intensifying scrutiny on investors.In a contentious report last year, the main U.S. futures-market
regulator pinned oil-price swings primarily on supply and demand. But
that analysis was based on "deeply flawed data," Bart Chilton, one of
four CFTC commissioners, said in an interview Monday.The CFTC’s new review, due to be released in August, adds fuel to a
growing debate over financial investors who bet on the direction of
commodities prices by buying contracts tied to indexes. These
speculators have invested hundreds of billions of dollars in contracts
that were once dominated by producers and consumers who sought to hedge
against oil-market volatility. …CFTC commissioner [Bart] Chilton — who was appointed by Mr. Bush and
now awaits confirmation of his reappointment under Mr. Obama — said
the data the agency gathered was incomplete, with some players
providing partial or no information.Mr. Chilton dissented from the 2008 CFTC report, saying the agency’s
conclusions didn’t go far enough. He expressed doubt about the amount
and type of data received, which he called limited and unreliable. "We
didn’t have all the information we should have," he said. "And we gave
it to Congress anyway, and we spun it."
The Bush administration did all it could to quash critics large and small–including Oilwatchdog–who pointed out last year that there was no shortage of oil and demand was shrinking, along with the economy. And that energy prices were deepening the economic crisis, from family budgets to job loss to airline bankruptcies.
Now, with a new leader at the CFTC, reformed free-marketeer Gary Gensler, the administration is definitely talking the talk of regulation. And after a first round of hearings today on market regulation, it should soon be walking the walk.
Some of today’s testimony was the clearest I’ve ever seen on the issue. Most notable was Ben Hirst of Delta, speaking for the airline industry and asking for tough regulation to cut the power of hedge funds and others who only speculate on price, with no intention of either selling or buying actual oil. As Hirst put it:
[Increased oil price] volatility has been associated with a massive increase in speculative investment in oil futures. A recent study by the Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and Governmental Affairs noted that over the last six years, financial institutions have aggressively marketed commodity index funds, which are heavily weighted to oil futures, as a way for hedge funds, pension funds, and other investors to diversify portfolios and speculate on rising commodity prices. The study noted that the total value of investment in commodity indexes has increased tenfold since 2003, from an estimated $15 billion in 2003 to around $200 billion in mid-2008. During that period, the volumes of oil futures traded on the exchanges quadrupled, despite the fact that, over the same period, global demand for physical barrels of oil remained virtually unchanged. This increase in speculative activity is closely correlated with the increased volatility of oil prices, which has caused so much harm.
So much harm, indeed. It can’t be undone, but if the financial industry doesn’t bury Gensler before he can act, a rerun can be prevented.