Oil speculators and free-market politics

While politicians continue to blame high oil prices on surging demand in India and China, more evidence emerges of the role of speculators and the way in which Governments hidebound by free-market ideologies have contributed to the current situation.

Writing on Alternet, Pam Martens examines the role of Philbro, a publicity-shy American company that has operated in the commodities market for some years.  What is fascinating about this article is the expose of how the regulatory authorities in the US effectively abdicated their responsibility, allowing oil and other commodities to be traded outside the usual regulatory regime.  It shows that venerable institutions like the Federal Reserve have proved to be easy pickings for corporate lobbyists, and that big oil can all to easily get its way.

There’s a chilling quotation in the piece from Dr Mark Cooper of the Consumer Federation of America, testifying before the Senate Committee on Commerce, Science and Transportation on 3 June this year:

“The speculative bubble in petroleum markets has cost the economy well over half a trillion dollars in the two years since the Senate [hearings] first called attention to this problem. Public policies have made these markets the playgrounds of the idle rich, while consumers suffer the burden of rising prices for the necessities of daily life. We have made it so easy to play in the financial markets that investment in productive long-term assets are unattractive. The most blatant mistake occurred when Congress allowed the Commodity Futures Trading Commission to forego regulation of over-the-counter trading in energy futures. Because there is no regulation of this huge swatch of activity, regulators have little insight into what is going on in energy commodity markets. Large traders who trade in commodities in the U.S. ought to be required to register and report their entire positions in those commodities here in the U.S. and abroad. If traders are unwilling to report all their positions, they should not be allowed to trade in U.S. markets. If they violate this provision, they should go to jail. Fines are not enough to dissuade abuse in these commodity markets because there is just too much money to be made.”

It provides an all too plausible explanation for how the rise in oil prices fails to reflect the underlying fundamentals. But there is a more fundamental question here about when politicians in the West are going to stop talking about soaring demand from India and China, and are going to start examining the reality of the free-market ideology they expound.  Martens is scathing about the ability of Congress to spot what is going on in front of its face; perhaps the shock of contemplating the impact of their ideology is too severe to contemplate.

I don’t doubt that, in the interests of the environment, demand for fossil fuels needs to fall, and the price of oil needs to reflect the externalities of environmental damage.  But leaving oil prices and oil supply in the hands of speculators will do nothing for the environment, or for more general economic and social sustainability.

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2 thoughts on “Oil speculators and free-market politics

  1. I would expect nothing more from a liberal. Blind ideology. No facts, no data, no empirical evidence. Just pure opinion stated as if it were a fact. Just quoting testimony before Congress doesn’t mean that the testimony is factual. You conveniently omit all the contrary testimony in a selectively opinionated manner.

    Often, the “blame-the-speculators” crowd will cite the existence of large funds as a priori proof that they cause prices to increase. This is like saying that because one sleeps in the garage, one must therefore be a car. WRONG! The fact is that coincidence is NOT causality.

    All the data, all the facts, and all the empirical evidence suggest that speculators are not the cause of high energy prices.

    No credible analysis suggests that China and India are the SOLE causes for the rise in crude oil. There are numerous reasons, all of which together represent not just one or two, or even three or four, variables contributing to higher fuel prices. They are a perfect storm that almost guarantee high prices for energy.

    Only two sources have factual data — the CFTC and the futures exchanges. Both have repeated released the data the indicate that speculators have not been the cause of high fuel prices. They have repeatedly used the facts and the data to disprove the OPINION of Mark Cooper of the CFA who you quoted. Why did you not quote THEM? They have the data! Why do you ignored the facts and the data? We both know it is because the facts don’t support your opinion.

    During the past year, speculators have been reducing their size and positions in the market, while prices have skyrocketed. The commercials who take physical delivery and use the oil in their products, have increased their presence. That’s the fact, and it doesn’t support the opinion that speculators cause high prices.

    Speculators are outnumbered by a factor of 5:1 by commercials in the crude oil markets. Of those 20% who are speculators, the CFTC and exchange data indicate that at any given time, about half the speculators are short. Thus, the speculators who are long represent only about 10% of the market. Hard to manipulate the market with such a small position, isn’t it? But that’s the fact.

    The fact is that the futures markets are already amazingly transparent, despite OPINIONS that they aren’t. All companies in the market of a certain size or larger must already file various reports, making their size and positions in the market very clear. This data is gathered and published weekly by the CFTC. That’s the fact.

    There are more facts, but somehow, regardless of the facts, I suspect that those who ignore those facts won’t really care that the facts and the data don’t support their OPINION.

    The fact is that one of the variables, in addition to the China/India factor, is the blunt coercive banning by a liberal-controlled U.S. Congress, of additional domestic production of increased capacity in the U.S. Government policy is a factor that, unlike speculators, IS contributing to higher oil prices. It is not coincidental that over the past two years, during which time such policies have been amplified, crude oil prices have risen, which domestic oil production continues to fall.

    It is also a fact, as stated by a few shameful but honest liberal policy-makers, that one of their methodologies for imposing their Global Warming Inquisition, is to block additional production with the intent that it will drive prices higher and speed the transition to renewable forms of energy production. That’s a fact. This is a blunt, coercive, and sickeningly shameless was to control the American people.

    The fact is that another variable — gross and unbridled overspending supported with Kenesian economics and bloated M3 money supply creation — is devaluing the U.S. Dollar and inflating the price of crude oil and other commodities. When those commodities are priced in the world markets in Dollars, and those Dollars are being devalued by devastating monetary policy, prices will continue to go higher. They HAVE to! Both Republicans and Democrats in Washington are equally responsible for this contributing factor to higher prices.

    The fact is that this year, Congress has mandated that 1/4 of all corn production in the United States MUST be used in ethanol production. When 1/4 of the larger agricultural crop in the world is diverted into one use by congressional fiat, it has far-reaching ripple effects. For example, as farmers convert more and more acreage to corn production because of the higher prices, less acreage can be used for production of wheat, tomatoes, potatoes, and all other agricultural food products. That causes food inflation, not just corn inflation. That’s the fact!

    These three causational factors, interestingly enough, were created by Congress. Congress is perhaps the single largest causational factor in creating higher oil prices. But since when does a politician take responsibility for inflation — or anything else, for that matter? Thus, they point the finger of blame elsewhere, because they know that THEY and their policies are the true causes. By distracting the finger of blame from themselves, they protect what they really want — POWER. They are more interested in power and party, than in helping the American people become energy self-reliant.

    I could go on and on, but frankly, it’s time to trade. Time to make a living.

  2. Thank you for commenting at length. Two quick comments:

    First, the question – asked, among others by Anatole Kaletsky in the London Times (not a liberal paper by any means – about the fundamentals. How can the extreme volatility in price rise be explained when the fundamentals remain the same? Isn’t this exactly the sort of thing that happens at the top of a speculative bubble?

    Second, I take the point about the long traders being no more than 10% of the market. In a volatile market, that may be enough – the instability of the UK housing market owes much to the buy-to-let speculators, who control a lot less than 10% of the stock.

    Finally, from the perspective of Europe (and in particular the relative fiscal stability of Euroland) Congress looks anything but Liberal-controlled, and spending decisions by Congress seem to me to have much less to do with any Keynsian rationale than the politics of the pork barrel.

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