President Obama announcing his proposal (Source: Bloomberg)
Speculators are back in the political crosshairs. President Barack Obama today asked Congress to spend an additional $52 million to bolster the government’s ability to supervise the oil market. He proposed larger penalties for market manipulation and giving the Commodity Futures Trading Commission (CFTC) the ability to increase contract margins.
“We’re tackling issues of supply and demand, even as we’re looking at the long term, in terms of how we can structurally make ourselves less reliant on foreign oil,” Obama said in a statement from the Rose Garden. “We still need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil.”
The plan would give regulators the ability to increase margin requirements, something exchanges currently set. CME Group took issue with this in a statement released following the speech. “The Administration’s proposal to use margin requirements to control cash prices is misplaced. The Administration must recognize that exchanges, as the operators of regulated energy markets, are in the best position to monitor volatility and manage margin requirements. Margins are based on volatility and cannot be used to manage cash prices,” it said in a statement.
Congress had proposed similar measures following the spike in crude oil to near $150 per barrel in 2008 but they were never adopted.
CFTC Chairman Gary Gensler expressed support for the President’s proposal. “The recent increase in prices of gas at the pump affect every American family. It is but another reminder that markets need to be transparent, competitive, and free of fraud, manipulation and other abuses,” he said in a statement. “Furthermore, as markets include both hedgers and speculators, it is critical for market integrity that no single speculator is able to obtain an overly concentrated position.”
The issue of whether speculators in the futures market in general, and long only commodity investment products in particular, are the cause of higher energy prices has been debated since crude oil made all time highs in the mid-2000s but there has been no clear evidence to support it. However, many in Congress blamed speculators for higher prices and provisions in the Dodd-Frank Act required the CFTC to set speculative position limits in energy markets. Those limits were passed in October but have not yet gone into effect.
In the past, CFTC officials in supporting such measures have been careful to point out that the Commission is not a price setting agency. There was no such caution today.
CFTC commissioner Bart Chilton, a longtime advocate of limits, praised the president's proposal. “It is critically important that we kick-start the bureaucracy and get speculative position limits in place, now," Chilton said in an emailed statement. "We have been turning procrastination into an art form by not doing what Congress and the President clearly told us to do.”
Industry professionals were quick to defend the markets and speculators. Phil Flynn, an energy analyst at PFGBest, called the attack on speculators “the most dangerous economic myth since the idea that everybody should be able to afford a home.”
He consistently has defended speculators, asserting they have an important role to play in the market. “When we talk about speculators, people don’t realize what speculators actually do. They are assuming the risk and creating liquidity,” Flynn says. “And let’s face it, the risk to oil supply has been heighted dramatically over the last few years.”
Others have pointed out that government officials have been quick to blame speculators for higher prices in oil, but failed to recognize their role in other markets. “Natural gas prices are near all-time lows; should we applaud speculators for that?” asks Stanley Haar, principal at Haar Capital Management.
He calls the President’s proposal “totally off-target” and says it actually is worse than doing nothing at all. “This gives the impression of doing something to lower energy prices when in reality it will do nothing,” he says.
Much of the $52 million proposal would go toward bolstering CFTC market surveillance and enforcement. Haar says this would be “throwing more money down the drain.” He has been vocal in his criticism of the CFTC following the Oct. 31 bankruptcy of MF global. “The best part of Obama’s speech to me was when he talked about needing ‘more cops on the beat.’ These people haven’t done their job in the past. They did nothing to stop or solve the MF Global problem,” he says. “It doesn’t have the will to use the money it already has, why give it more? I would ban the whole CFTC and use the money for deficit reduction.”
Ultimately, Flynn called today’s proposal just more political positioning. “President Obama is trying to raise an issue for political purposes on rising gas prices,” he says. “This is just another political red herring. It probably won’t go anywhere; Republicans are not going to go for this.”
