Around this time last year, crude oil futures were just coming off their $147 per barrel highs, companies were scrambling to develop or use alternative fuels, we were headed into a presidential election and oil speculators were being blamed for everything short of global warming. What a difference a year makes. As I write this, oil is hovering around $70 a barrel, alternative fuels are almost an afterthought as companies and governments (i.e. BP, Brazil) find huge new crude oil deposits, and the election is over. But one thing hasn’t changed: oil speculators still are serving as the whipping boy for high energy prices and more.
As you’ll see in our energy outlook (“Crude correlations and what comes next,” by Associate Editor Christine Birkner), prices probably will be flat to lower for the near term, and potentially into next year. This could change if a global economic recovery kicks in and energy demand grows. Unless, of course, oil speculators wave their magic wands and eliminate the impact that supply and demand has on prices.
Today a wire story noted that several congressmen sent Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler a letter “strongly” urging him to “act quickly to adopt new rules that prevent financial speculators from wreaking havoc on our economy.” Specifically, the congressmen support, in their words, “strict aggregate position limits across all energy products and markets for all index traders, swaps dealers and proprietary traders with limited exemptions for legitimate commercial hedgers with physical holdings” and “strong transparency requirements on all ‘over-the-counter’ (OTC) markets and requiring all OTC contracts to clear through a CFTC-regulated [sic] by invoking the commission’s emergency authority to events that prevent ‘the market from accurately reflecting the forces of supply and demand.’”
The two congressmen leading this charge are Maurice Hinchey (D-NY) and Bart Stupak (D-Mich), followed by 18 other congress people. Frankly, I don’t find their requests so off the charts; having covered this business for years, I admit to thinking all commodity futures contracts had position limits, that is, hard position limits. It surprised me that energies didn’t. When I asked my friend the oil speculator why there weren’t limits, he responded with a shrug and said the market was so big they didn’t think limits would ever be needed. Apparently Amaranth’s doings weren’t a red flag.
Even the requests for strong transparency in all OTC markets and for requiring clearing through an exchange clearinghouse aren’t that bold and likely will be adopted, despite resistance from the OTC market players.
My disdain for these congressmen is not with them supporting actions that pretty much are going to be put in place anyway, but with their letter that single-handedly puts the economy’s failure on the back of the lowly oil speculator. Hinchey is from New York, Stupak from Michigan. Surely these gentlemen understand that industries in their states truly wreaked havoc on our economy and got government handouts despite it. The institutional greed on Wall Street is well documented and almost collapsed the financial system. The Neanderthal U.S. automobile industry continued to build gas guzzler cars that held the United States hostage to the whims of oil producing countries. Surely these congressmen must understand that these industries — for a fact — impacted our economy. Whether oil speculators had much or anything to do with taking crude oil to new highs even the regulator still hasn’t determined — and may never.