It has been a long time in coming, but finally the Commodity Futures Trading Commission voted along party lines to impose limits on oil speculation. This could reduce the price of gasoline and heating oil. Democrats voted to reduce speculation, Republicans voted to continue the practice unabated.
The Dodd-Frank Bill passed by the Democratic Congress to prevent the abuses by Wall Street and banks that caused the 2007 Recession required the Commission to put limits on oil speculation as well. Repeal of Dodd-Frank is a favorite one-liner of Republican Presidential candidates.
Speculation raises cost of oil without assign any value
Speculation in oil futures by commodity traders and Hedge Funds adds up to 30% to the cost of gasoline according to many experts. The huge gas price spike last spring was due almost entirely to speculators. The fact that speculation is causing gas prices to rise artificially has been supported by OPEC and Exxon’s CEO as well as government studies.
What happens is that commodity traders who own no oil wells, no refineries, and do not operate any fleets buy oil at the market price, which is the price set by the companies that drill for and extract the oil. Then they hold the stocks off the market until they can increase the price for a profit. It is the old buy low sell high practice. This practice adds up to 30% to the cost of a barrel of oil without adding any value to the paper barrel.
Regulations a start; Commission could have done more
The divided Commission could have done more, but could not get consensus due to Republican opposition and extensive lobbying. “While I'd have an even tougher rule in many respects if I were the only author, this is nonetheless a very strong, needed and imperative rule to ensure more efficient and effective markets devoid of fraud, abuse and importantly, manipulation,” Bart Chilton, a Democratic member of the five-person CFTC said in a statement reported by Ben Geman in The Hill.
The rule sets limits on contracts for oil, natural gas and two other energy contracts, as well as a slew of agricultural and metals contracts. The rule sets federally enforced limits, for the first time ever, on the amount of concentration anyone may control in energies and metals,” Chilton’s prepared remarks state.
Chilton said that there have been cases where one trader hold “30, 35 and even 40-plus percent of a market. That can be, and I believe has been at times, manipulative. This rule will put a stop to that.”
Senator Bernie Sanders (I-VT) has long advocated regulation to stop speculation in oil futures. He thought the Commission could have done more to clamp down on this practice but noted that they can tighten the rules in the future. “Under this rule, a single Wall Street speculator will still be allowed to hold positions equal to 25 percent of the physically deliverable supply of crude oil, gasoline, and heating oil. That’s not enough,” Sanders said.
Republicans on the committee see it differently. Republican CFTC members Jill Sommers and Scott O’Malia opposed it. Sommers said she’s not opposed to limits per se and noted the regulators have set limits in some markets for years.
Sommers expressed several concerns with the rule, including fears that exemptions for “bona fide hedgers” — that is, companies such as utilities and manufacturers that use trading markets to manage price risks — are too narrow. More broadly, she said the CFTC is “setting itself up for an enormous failure,” she said.
Even one Democrat who voted for the measure voiced concern that it would not reduce gas prices. Commissioner Dunn said “To be clear, no one has proven that the looming specter of excessive speculation in the futures markets we regulate even exists, let alone played any role whatsoever in the financial crisis of 2008. After we implement position limits, in all likelihood, the prices of heating oil and gasoline will not drop precipitously as some have strongly suggested.”
Saudi Arabia has told the United States for years that speculators are artificially influencing the global price of oil. The CEO of Exxon told Congress this spring that speculators were running up the prices artificially without adding value.
Clearly, traders and hedge funds will try and find away around the regulation, but it is a start.
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