Speculating About Speculation

Oil prices 1996-2008 (not adjusted for inflation)Image via Wikipedia
Thinkin Out Loud…

I’m just thinking out loud here… wondering about the rising/falling/rising price of oil lately. It was just weeks ago that the price at the pump was nearing a doubling of last year’s price.

I came across a nice piece with an interesting discussion about the impact of the futures market on the price of oil. The whole thing is well worth the time spent reading it, comments included.

I’ll try to tease you into going there with the bit below. Click on through to MotherJones to read the whole thing. All emphasis mine.


“…futures market regulation went to hell. Under the “Enron loophole” pushed through by Gramm in 2000, energy futures were allowed to escape all federal and state regulation. Gramm embedded that loophole in a surprise 262-page rider, drafted at the behest of Wall Street and Enron, in an 11,000-page appropriations bill on a Friday evening two days after the Supreme Court handed down its Bush v. Gore ruling and as Congress was rushing home for Christmas. In a separate bit of absurdity, in January 2006, the Intercontinental Exchange (ice) of Atlanta, which trades benchmark US oil futures (West Texas Intermediate or wti), came to be treated by the cftc as a British market (the “London loophole”) so that US regulators do not even track what is going on. (Even more surreal, the cftc was going to allow trades of US oil futures on terminals located in America to be “regulated” in Dubai; political pressure put an end to that idea in July.)

Worse still, Gramm’s Commodity Futures Modernization Act of 2000 also opened the way for growth in deregulated “credit default swaps”—a way in which financial institutions “insured” that bad loans would not cause them losses. This, combined with other deregulatory moves by the cftc, broadened the “swaps loophole,” an enormous backdoor into the commodities markets, basically permitting speculators making bets off the commodities exchanges to be treated as “commercial interests”—like say, farmers—and hence avoid the scrutiny (including limits on the size of their bets) normally applied to financial players. Thus today, when officials like Treasury Secretary Henry Paulson say that speculation is not a factor in the commodity markets, they’re not counting hedge funds and investment banks as speculators—even though that’s what they really are.

According to Senate testimony on June 3 by Michael Greenberger, who used to head the cftc’s division of trading and markets, if swaps were properly labeled, about 70 percent of the oil futures now traded on the New York exchanges would be deemed speculative, not commercial, and subjected to a high degree of regulatory scrutiny.
Index speculation investments have risen from $13 billion to more than $250 billion since 2003.


With that last sentence in your mind, look again at the chart in the upper right of this post. See how the price of oil has risen in step with the ‘speculation investments’? Click on the chart for a larger version.

I am Jon, and like I said, I’m just speculatin’.

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