Congress' current favorite definition of an Enemy of the State: anyone who’s using his or her money to speculate in oil -- as opposed to those who invest to get it out of the ground for sale, or those whose money goes to pay for it at the Quickie Mart.
Both the House and the Senate have previously waded into the causes and effects of record energy prices, but this week on Capitol Hill it’s looking like open season on the speculator ranks in oil and other commodities. Four different congressional committees are taking up the question of why oil is so high -- and two of the committees are specifically looking for ways to limit the influence of speculators (some of whom insist they're really long-term investors, but no matter).
And conveniently for Congress, crude is refusing to come down on its own, closing at $136.74 a barrel Monday, not far from its recent peak of $138.54 on June 6.
Earlier Monday, speculators were skewered at a hearing of the House Energy and Commerce Committee, where Chairman John Dingell (D-Mich.) declared, "Energy speculation has become a growth industry and it is time for the government to intervene."
If you have the time, I recommend perusing the witnesses' testimony -- both the anti-speculator testimony and the comments of those who defended the speculators. You can find it all here.
The best overall roundup from the Dingell hearing may be this one, from MarketWatch.com. It begins: "The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress."
Do you believe it?
In the last few weeks I’ve read nearly everything I could find on the issue of the possible investor/speculator influence on commodity prices, and here’s my unsatisfying conclusion: You can’t prove unequivocally that they are responsible for a big chunk of the price run-up in oil and other raw materials -- nor can you prove that they're having no real influence.
Of course fundamental supply and demand issues are largely behind record oil prices; the market fears a shortage, if not now, then later. But every asset bubble has a fundamental grounding. And in every bubble, it’s inevitable that buyers feed on one anothers' bullishness. Why shouldn’t that be true of the current wave of investor/speculator interest in commodities?
Whether Congress would just make things worse by intervening in markets is the question now. Speculators' presence makes markets more liquid. Kick too many of them out at once and you risk more volatility -- and perhaps even higher prices. You just don't know.
Here's what's on the Capitol Hill calendar the rest of this week:
--On Tuesday, the Senate Homeland Security and Governmental Affairs Committee, chaired by Sen. Joe Lieberman (I-Conn.), holds a hearing to discuss legislative options for "ending excessive speculation in commodity markets." I previewed the hearing here last week.
--On Wednesday the Senate Small Business and Entrepreneurship Committee will hold a hearing on home heating oil prices.
--On Thursday, the topic of a hearing of Congress’ Joint Economic Committee will be: "Oil Bubble or New Reality: How Will Skyrocketing Oil Prices Affect the U.S. Economy?"
Isn’t it a little late to be wondering about that?
Photo: Balloons attached to cars at a car dealership sway in the wind near a Shell station in San Bruno, Calif. Paul Sakuma /Associated Press
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While I believe in keeping internet posts civil, the hearings are complete bulls--t. Congress is simply looking for a straw man to knock out. Even if a market as large as oil can be substantially inflated by speculation - very unlikely - they ignore the obvious. People are lining up to pay for oil derived products even at $125+ / barrel. Rampant waste continues, yet the country buys the product at the same rate as before. While buyers are willing to pay 125 or 140 barrels, sellers will be willing to accept their money. The hearings have nothing to do with controlling the price of oil; they are pandering to a subset of the population that believes a mysterious "they" are witholding their candy allowance/natural right to cheap gas, and they'll continue their tantrum until someone pays attention.
Gotta go, I gotta grab my 1.5 ton vehicle to move my 200# posterior home from work so I can crank up the AC. I can't walk or bicycle, that's just so.... trash. Now gimme my cheap gas!!
Posted by: Robert Baldwin | June 23, 2008 at 09:12 PM
Speculation has played an even bigger part in the price of a bbl of oil since 2000. That's when the "Enron" loophole, that allowed unregulated OTC trading to take off, was enacted. Added to that is that increased focus on commodities as a hedge against inflation (dollar devaluation) and alternative investment for investment bankers and hedge fund managers after the collapse of housing and decline in the stock market. The institution are desperate for investment performance for survival and are feeding off each other and market fears to drive of the value of their commodities funds in lieu of the collapse in other markets. Added to this is the unending supply of cheap dollars from the Fed (inflationary actions) which are being directed into this funds. Look at the rapid up tick in oil since the Feds panicked lowering of the Fed funds rate earlier this year and opening of the lending window to non-commercial banks. The Fed, under the approving watch of the administration, is financing the major US investment banks with cheap tax dollars so they can speculate in commodities and drive earnings off the increased cost of these commodities. Energy user at home and abroad are restocking the coffers of these institutions, through increased cost of these commodities, to prevent their collapse. Bailing out the banking community is probably a good idea, however the method chosen is questionable at best. Direct relief to the banking community, matched with increased regulation and oversight and repeal of the "Enron" loophole, is what's required. The deregulation of the banking and investment community over the past 20 years has gone to far. Common sense, not greed, needs to be the rule of the day.
Posted by: Chas | June 23, 2008 at 09:46 PM
Its not oil futures speculation that is the problem. Its the fact that the margin requirements are so small. Only being required to cover your purchase with a few percent of its total value means that a relatively small increase in the price of oil produces a extremely large return on investment. How about increasing margin requirements so that they approach what is required for trading equities? Low margin requirements fueled the stock market speculation of the 1920s. This contributed to the stock market crash, when investors couldn't cover their margin calls. Why should oil futures be any different!
Posted by: Ken | June 23, 2008 at 10:13 PM
When the economy melts down in early 2009 you can blame Phil Gramm and the Commodity Futures Act of 2000. Only the Wall Street lawyers who wrote knew what was in it. It was passed as a rider to an appropriations bill just before Christmas 2000 to help Enron game the energy market in secret.
Wendy Gramm was the former head of CFTC and later joined the Board at Enron. Hmmm. Phil is now Vice Chairman of UBS Investment Bank and UBS purchased what remained of the Enron Trading...Hmmm
Although Enron imploded it set an example for Wall Street investment banks, hedge funds, and the commodity speculators and to follow. Keep it secret. Ice,Ice, Baby!
Posted by: Matt Keefe | June 23, 2008 at 10:54 PM
I would argue that it doesn't matter if these prices are driven by speculators or actual demand. If prices are driven by speculators then prices supply should expand and wreck their positions.
Speculation is a self correcting problem. Look at California's real estate bubble,speculators simply built too much real estate and the price came down.
The financial amounts the House and Senate are talking about lilipitian on the order of several hundred billion dollars, by comparison Fannie and Freddie alone have issued 7 trillion dollars worth of mortgage backed securities, which are an order of magnitude greater than anything going into these commodity pools. These monies are comparatively speaking small change.
Of course who's fault is it that we have so much money floating around, the US Fed. For having an easy money policy that's resulted in 10-15% growth per annum.
If these commodity investments are really on the order of 200-300 billion, this is about twice as much as the Fed or ECB would put into their respective banking systems in a week under a stressful financial situation. So I would argue that compared to how truly valuable these commodity markets are they're comparitively undercapitalized.
Looking at global liquidty situation its hard not see commodities as being underpriced. They're irreplacable and a vital part of day to day life. I mean how people MUST have a home in O.C. or West LA versuses Odessa Texas. On the other hand people must have food and oil,regardless of whether they live in West LA or Odessa Texas.
In this case I think the House and Senate seems to be missing the forest for the trees. The trees are the high oil prices however the forest is the dollar based on oil system. When companies trade in oil futures they do so in dollars because that's what the contracts are quoted in.
However if we decide to initiate these regulations to limit funds flow into our markets and they actually succeed then we are in trouble. People will take their money elsewhere and get an oil contract based on Brent instead of WTI.
The world is an international place and if these new contracts happen to be denominated in Euros then the US is going to have BIG problems. Right now we have a sweet deal. We give the Russians and Arabs dollars and we get oil. Of course the Russians, Arabs and Chinese really can't buy anything useful with those dollars, except for Treasuries or Mortgage Backed Securities(which I'm sure everyone in California's knows is such a good deal with the "hot" real estate market).
These foreigners will inevitably realize why do we want dollars when we don't buy anything with them? Or can't buy anything with them,I.e. Dubai Ports and CNOOC.
If we push oil buyers (I am including speculators in this group too) out of New York then they will take their marbles and go elsewhere and if other people start offering contracts in Euros instead of dollars we're going to actually need to accumulate Euros to buy oil. This of course is a troubling prospect for a country with a 5-6% trade deficit.
Paying 5-9 dollars for gas is a nuisance paying 3-6 Euros a gallon is going to destroy the United States.
Posted by: Alex | June 24, 2008 at 12:40 AM
I'm surprised the government and the media have not focused on a major way to reduce gasoline consumption, which is merely to slow down a little bit. People don't really have to drive at 70 MPH.
Posted by: Marky | June 24, 2008 at 02:01 AM
Some of the people buying oil to make a profit if the prices rises are investors, not speculators. But longterm investors in oil are even worse than speculators, they plan on holding the oil off the market for a longer time. Or is there a flaw in this logic?
Posted by: newageblues | June 24, 2008 at 03:44 AM
There are some studied and insightful comments here...with the exception of those on increasing futures margins. Equity and futures markets are different animals, and "speculator" is not a boogie man in futures but rather an integral cog in the wheel that is price discovery. I have been a futures speculator for 45 years...why am I not hearing anything of China's and India's participation in the oil market? I'm not denying excessive speculation...but I can't precisely define it..and I sure as hell can't quantify it.. because all raging bull markets are grounded on facts that precipitate the move. If a commercial user of oil normally hedges, say, 100 contracts..but has come to believe supply/demand/price projections indicate an extraordinary future situation so he buys 200 contracts instead of 100....is he speculating with 100 contracts? And, speculators are on both sides of the market...are there losers in these markets? Who loses in bear markets? The problem causing the great hue and cry against speculation is that very little of the public understand futures markets and politicians need a scapegoat. For the most part, Americans are for "free markets", less government, individual choice, etc...until their pocketbook is affected. You cannot have it both ways.
Posted by: martscan | June 24, 2008 at 08:02 AM
It is unlikely speculation has much effect on oil prices, although it certainly has some effect. It is no secret that oil is running out, and the remaining supplies are the most expensive to extract (twenty years ago it took 1 KJ of energy to pump and refine 100 KJ worth of oil, today 1 KJ gets you 15 KJ worth of oil). It also doesn't help that the dollar has lost a lot of its value. All imported products are more expensive, including oil.
I think the biggest knock on speculators is that people don't like to see someone profiting from someone else's pain. That may be distasteful, but it is part of capitalism.
Posted by: Brian | June 24, 2008 at 08:46 AM
newageblues:
Yes, there is a flaw in your 'logic.' Futures trading involves the buying and selling of a piece of paper..or an entry in a computer. The physical, spot, commodity is NOT transferred as you would expect the word 'market' to imply, EXCEPT at the expiration of the delivery month where sellers post notices of intent to deliver the actual and the oldest buyer of that contract is in line to receive the actual. However, 99+% of contracts are simply offset by liquidating the position, i.e., sellers buy the # of contracts they have sold short and buyers, longs, sell their contracts. And, particularly in the last few years, futures prices don't necessarily converge with cash, spot, prices at contract expiration..as one would expect..from an arbitrage standpoint if nothing else. If a farmer in Edgar County, IL sold, say, 25,000 bushels of December corn, 5 contracts, at $5.40/bu..he is short in his futures account. After harvest, if corn is at $5.80/bu he has a $2,000 loss per contract, $10,000 total in his futures account. However, he takes his corn to his local elevator and normally will receive approximately $0.40/bu more for his actual corn. He liquidates his futures position with a keystroke or a phone call. His cash account increases by $10,000 while his futures account loses $10,000, he effectively pushes and receives his hedge price. This works conversely for, say, a user hedge such as a baker or a flour miller. In the interim of his placing the hedge and lifting the hedge, other hedgers' and speculators' trading activity determined the prices based on changing supply/demand, weather, acts of God, wars, etc., etc. This could be any physical commodity.
Posted by: martscan | June 24, 2008 at 09:03 AM
SHAKE THAT MONEY TREE, Dingell! First, Congress takes lobbyist money to ALLOW them to aggressively speculate. Then Congress gets worried that voters are 'pixxed off' before the election, and now, want MORE lobbyist money, to hold off closing the loop holes and 15% tax rate on all that profit the speculators of (can you say 'WALL STREET' again?) have extorted from American families. Congress is a parasite that thrives on peoples' BLOOD... and Wall Street BLOOD MONEY. Let's FIRE the sons of bushs in November.
Posted by: GIMME A BREAK! | June 24, 2008 at 09:30 AM
Isn't this the same Michigan Congressman who for years fought against improvements in gas mileage standards for motor vehicles because he thought it would hurt the US car companies and auto workers? Washington should be careful about scapegoating anybody for our oil problems. Maybe John Dingell should be blaming himself rather than some mythical speculators. Would the speculators ever be pictured as blond haired, blue eyed aryans? More likely, they would caricatured as people with dark features and hooked noses, or perhaps people with slanted eyes. The US is no longer the world's dominant supplier of oil, as it was until about 1971. Unfortunately, it now consumes far more oil than it produces. Too bad most of the world's oil supply is controlled by national oil companies that are quite willing to limit their oil production for a variety of reasons. We tried invading Iraq for its oil, but that strategy only made things worse. Get used to paying higher prices for oil.
Posted by: Rocky | June 24, 2008 at 11:16 AM
Every time a HEDGE FUND DEALER gets in trouble and that's quite often, they have a habit of changing their name from HEDGE FUND DEALERS to OIL SPECULATORS. Also the instrument they use are various forms of DERIVATIVES--swaps, options, tigers, and many others. The object is to confuse the public. They also hate any regulations. They brag about "free enterprise" but when they do get in trouble, they act like real hippocrits such as a government bailout of Bear Stearns and many others. The closing of the ENRON LOOPHOLES would be a great start. There are a number of books out on this subject such as "Free Lunch" by David Cay Johnston. We should also reinstate the Glass-Stegall Act which the lobbyists worked so hard to kill. Even the Sarbanes-Oxley Bill which was voted overwhelmingly in the Senate is being ignored. It proves that if you are a lobbyist with a lot of money what one can get done and who you can buy off. That's why the middleclass is disappearing and the billionaires listed in Forbes magazine are getting bigger and bigger every year. You would think they would have some obligation and want to contribute to our society and pay their fair share on income taxes like President Franklin Roosevelt stated, "Taxes should be based on ability to pay." They shouldn't go offshore to Bermuda and the Cayman Islands to escape paying federal income tax.
Yours truly, Disgusted Middleclass Taxpayer, LaVern Isely
Posted by: LaVern Isely | June 24, 2008 at 01:09 PM
martscan: I don't understand why it matters whether the "physical commodity is transferred" or not. It's still being withheld from the market. If your argument is that it all balances itself out eventually when the speculators and investors sell, that doesn't take into account the pain inflicted in the meantime. Just like the real estate bubble, the markets get carried away if left unregulated, and vulnerable people get devastated.
Free market fanatics have gotten their way time and again since 1980, but they've racked up terrible budget deficits and created bubble after bubble. The real estate bubble and energy/food speculation have devastated many people's lives.
Posted by: newageblues | June 24, 2008 at 01:41 PM
newageblues:
It matters a great deal that the physical commodity is not actually transferred ACCORDING TO THE SPECIFICATIONS OF THE CONTRACT, and futures trading has absolutely nothing to do with the traded commodity being "withheld from the market."
If the oil futures contract, for example, calls for delivery in Tulsa and the futures' seller's oil is in Los Angeles, you can truck or pipeline 1,000 bbls of the grade necessary to satisfy the contract's specs or you can liquidate your short position by buying a like amount...and selling your oil locally. If the wheat contract calls for delivery in a bonded facility in Chicago or Houston..a Kansas farmer can truck his wheat to the delivery points, or he can close out his short hedge on the futures mkt and sell his wheat locally. When a trade is made in futures, there is a buy and a sale and the 'open interest' is 1. Let's imagine that the entire cash, actual physical wheat market hedged on the exchange is 1. If 4 speculators..or hedgers (commercials), funds, or anyone else, each trade 1 contract..the open interest is 5. As the contract approaches expiration, everyone liquidates, offsets, their position and the open interest drops to -0-. The size or volume of the physical market wasn't affected. In this simple illustration the futures mkt was 5 X the cash mkt and nothing was withheld from the cash mkt. The only way futures can be utilized to without product from cash mkts would be to take delivery of the commodity at the expiration of the contract month, pay the full cost of the commodity (1000bbls crude X $130/bbl=$130,000, plus storage, handling, insurance, etc). Those wishing to continue holding a long position simply sell the expiring contract month and buy a more distant, or the next most current month. If you want govt to alleviate "pain" in bull mkts, what is govt's role in bear mkts? No one ever said life is fair.
Posted by: martscan | June 24, 2008 at 03:58 PM