Controversy over oil speculation heats up again

I can’t believe it’s been nearly four years since we’ve held a discussion on Water Ways about how commodities markets may affect the price of gasoline at the pump.

I guess I’ve been watching and waiting for something to happen. Well, a couple weeks ago, Washington Sen. Maria Cantwell began stirring the pot again.

Here’s what she said during a March 29 hearing of the Senate Energy and Natural Resources Committee:

“I definitely believe that we should get these asset class investors out of this market. Saying that we are going to allow a bunch of investors to treat the commodities market like they want to treat the rest of Wall Street from a securities and investment perspective I think is the wrong idea for commodities, something particularly as vital as gasoline.”

In a press release, Cantwell noted that in February various commodities index funds held positions in NYMEX crude oil contracts equivalent to 233.9 million barrels of oil. If each million barrels of speculation adds 10 cents to the price of crude, as suggested by a Goldman Sachs analysis, then recent speculation could be driving up the price of oil by $23 a barrel. That translates to about 56 cents per gallon more at the pump, according to the release.

In the latest development today, President Obama released a “fact sheet” and a five-point program for dealing with oil speculation. Here’s what he proposes:

  1. Request Immediate Funding to Put More “Cops on the Beat” Overseeing Oil Markets: The President is calling on Congress to pass an immediate increase in funding to support at least a six-fold increase in the surveillance and enforcement staff for oil futures market trading at the Commodity Futures Trading Commission (CFTC).
  2. Fund Critical Technology Upgrades in the Oversight and Surveillance of Energy Market Activity: The President is also requesting that Congress provide the CFTC funding for critical IT upgrades to strengthen monitoring of energy market activity.
  3. Substantially Increase Civil and Criminal Penalties for Manipulation in Key Energy Markets: The President’s proposal includes a ten-fold increase in maximum civil and criminal penalties for manipulative activity in oil futures markets. These heightened penalties will make sure that penalties reflect the seriousness of misconduct.
  4. Empower the CFTC to Raise Margin Requirements in Oil Futures Markets: The President is also calling on Congress to act immediately to give the CFTC authority to direct exchanges to raise margin requirements to address increased price volatility or prevent excessive speculation or manipulation. This authority will help limit disruptions and reduce volatility in oil markets.
  5. Take Immediate Steps to Expand Access to CFTC Data to Better Understand Trading Trends in Oil Markets: These executive actions will allow additional analysis of CFTC’s data to look for patterns and better understand trading activity in energy markets.

The “fact sheet” also includes a description of steps already taken to oversee energy markets, including the Wall Street Reform Bill and administrative actions.

Frankly, the reason I’m so interested in this issue is that the price of oil can drive hasty decisions about development of oil reserves and changes in the method of transport, as we have seen the past two years. These effects inevitably spill over into impacts on the environment, including potential damage to our waterways.

To be fair, various experts have weighed in on both sides of the question about how much the price of oil is related to speculation on oil futures. Some argue that the government cannot manage speculation because it is fundamentally tied to price and demand. They say that when government puts its heavy hand into the marketplace, the consequences are never good.

Here are some past Water Ways posts that have looked at this issue.

Learning the ins and outs of oil speculation, July 16, 2088

Researcher finds manipulation in oil markets, Aug. 6, 2008

Energy issues are heating up in Congress, Sept. 9, 2008

What’s all this talk about oil speculation? Sept. 16, 2008

Financial meltdowns, oil speculation and politics, Sept. 20th, 2008

The following video is from a March 29 hearing of the Senate Energy and Natural Resources Committee. In it, you’ll see Sen. Cantwell questioning Daniel Yergin, chairman of the consulting firm IHS Cambridge Energy Research Associates. But don’t look for many answers from Yergin. It appears that Cantwell’s office posted this video because it gives Cantwell a chance to outline her position.

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