Subject: [big campaign] New Huff Post from Creamer-Time for Financial Regulators to Limit Speculation in Oil Market
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Date: Fri, 13 May 2011 09:00:42 -0400 (EDT)
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Time for Financial Regulators toLimit Speculation in Oil Market
 
     The bigfluctuations in the price of crude oil over the last several weeks gave freshevidence of the ever increasing influence of speculators on the price every dayAmericans pay for gasoline.  It is longpast time for the Commodity Futures Trading Commission (CTFC) to limit theinfluence of speculators on the oil market – and the pocket books of Americanconsumers.
 
     Big price swingsshow just how little the major fluctuations in the oil market track theunderlying fundamentals of supply and demand. Those fundamentals did not provide any justification for a ten percentdecline in prices that occurred last week – any more than they justified theearlier 25% plus run up in prices that has resulted in $4.00 to $4.50 pergallon gasoline across the United States.
 
     Only one thingchanged to cause last week’s sell off in oil future: speculators decided thatoil prices had reached their near-term peak and it was time to take massive profits.
 
     Some Wall Streetinvestment banks have been saying since mid-April that the oil market was aboutto reverse.  Reuters reported on April 11that:
 
     “Long-term commodity bull Goldman Sachswarned clients on Monday to lock-in trading profits before oil and othermarkets reverse, with the bank’s estimates suggesting speculators are boostingcrude prices as much as $27 a barrel.”
 
     The speculativebubble in oil prices that has driven up gas prices this Spring has costAmericans billions of dollars – money that goes directly into the pockets ofspeculators, multi-national oil companies and the bank accounts of royalfamilies in countries like Saudi Arabia and Bahrain. 
 
     But speculativebubbles are not inevitable if commodities markets are properly regulated.  There are two distinctly different types ofinvestors in commodities futures. Business that produce or use commodities – like airlines, or truckingfirms that consume large quantities of fuel – use futures markets as hedgingstrategies to protect themselves from price volatility.  Their goal is to lock in a price range forcritical inputs – or, in the case of farmers, for the products they sell.  That allows them to invest and produce with theconfidence that they can predict their costs or product prices.  That kind of predictability is enormouslyhelpful at encouraging them to make the investments they need to plant theircrops, buy new airplanes or invest in new plant and equipment.
 
     Financialspeculators, on the other hand, don’t produce anything.  They are gamblers pure and simple.  They don’t invest in commodity futures tolock in a price or cost.  They make moneyon the fluctuations in commodity prices. They place bets that the price will go up or that it will drop.  So they benefit when prices arevolatile.  They benefit from speculativebubbles.  They bid up the price of oilwell above the supply and demand fundamentals, since they are simply bettingthat someone else will keep buy more and more oil futures and the price willkeep going up.  As soon as the bubblebursts and the price turns, the smart speculator reverses his positions – takesprofits and bets against the market – accelerating the market’s decline. 
 
     Mats Olimb and Tore Malo Ødegård  ofThe Norwegian University of Science and Technology, published as study in 2009investigating the relationship of speculative interest in commodity markets andprice volatility.  They describe theeffect of speculation this way:
 
The concern is that if thespeculators are dominant in the market, and a speculative euphoria takes hold, self-reinforcingprice cycles may take place, where speculative flows of money drive prices andthese price movements can attract more speculative money. The result would behigh volatility and uncertainty for physical producers and consumers.
 
     The more purespeculators enter the market place, the greater the impact of this puregambling on market prices. And over the last twenty years the percentage of purefinancial speculation in commodity markets has soared. 
 
     The Olimb-Odegardstudy finds that speculative interest in crude oil markets has doubled, from18% to 36% from 2003 to 2009.  Theyconclude that, “there is a significant relationship between price movements andspeculative positions in crude oil.”
 
     Accordingto Reuters, Goldman Sachs hasestimated that “ every million barrels of oil held by speculators contributedto an 8-10 cent rise in the oil price.” Reuterscontinues:
 
     TheU.S. Commodity Futures Trading Commission said that as of last Tuesday (April5), hedge funds and other financial traders held total net-long positions inU.S. crude contracts equivalent to near record 267.5 million barrels. 
 
     Using Goldman’s estimates, that indicatesthe total speculative premium in U.S. crude oil is currently between $21.40 and$26.75 a barrel, or about a fifth of the price. 
 
    Traders and analysts have cautioned that speculative bets can quicklyunwind, dragging prices lower.
 
     At yesterday’s Senate hearing featuringthe CEO’s of the five top oil companies, Rex Tillman, Exxon’s CEO, confirmedthis analysis.  In answer to a questionfrom Senator Cantwell (D-WA) he said that if pure competitive forces set themarket price of oil it should settle at the marginal cost of producing the nextbarrel of oil – which he indicated was now between $60 and $70 dollars abarrel.  Oil closed yesterday at justover $98 per barrel, so if he is correct about the marginal cost of production,speculation is currently adding from $30 to $40 to the price of oil.
 
     Over the long haul, oil prices will, ofcourse, continue to rise since hydrocarbon fuels will be in shorter and shortersupply.  Their availability is finite,and world demand continues to increase – even as demand for gasoline in theUnited States has actually experienced a decline. 
 
     That is precisely why the Obamaadministration’s focus on new clean energy sources is so critical to America’slong-term economic future.
 
     But short-term bursts of gas prices havevery little to do with these long-term trends.  Turmoil in the Middle East has had very littleimpact on current global oil supplies and mainly had an effect of creating morespeculative fervor.
 
     To limit the impact of pure speculation onour economy, a voices ranging from the progressive Americans for FinancialReform (AFR) to the Air Transport Association, have called on the CommoditiesFutures Trading Commission to issue rules (which it has the power to do) to capthe total value of speculative positions in any commodity market.  This would place limits on the percentage ofthe market composed of pure speculators, as opposed to businesses (likeairlines and farmers) who buy futures to hedge their risk
 
     Currently the CFTC has proposed a rulethat would limit any one trader’s spot month position to 25% of the totalfinancial interest in a commodity.  Thatwould prevent any one trader from cornering a commodity market, but it wouldstill permit total speculative interest to drive markets and drown out thelegitimate business related hedging interests. 
 
     The story of the recent oil price run-up isjust one more indication that the growing financial sector is a cancer on theAmerican economy that must be brought under control.  Remember the gang that speculates in oil pricesdoes not produce anything of any social value. They are professional gamblers.  They are simply parasites on the economy thatsiphon off goods and services made by people whom actually produce things for aliving.  They often make literallybillions for themselves in the process while the incomes of everyday Americanshave stagnated. 
 
     The speculators and Wall Street banks hadtheir power reigned in by the Obama Administration’s Wall Street reform billthat passed Congress last year.  Now theyare doing everything they can to prevent it from being implemented in anaggressive way by regulatory agencies.  
 
     Everyday Americans have to insist on anend to the speculative orgy. The priorities and values reflected in theAmerican economy must once again reward hard work and innovation – notspeculation and greed. 
 
Robert Creamer is a long-timepolitical organizer and strategist, and author of the book:  Stand Up Straight: How Progressives Can Win,available on Amazon.com. Followhim on Twitter @rbcreamer.

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