No More Oil Bubbles
New U.S. regime committed to taming commodity markets
Senate investigators acknowledged the conventional wisdom, voiced by financial witnesses who testified at committee hearings in Washington, that inflated prices could be blamed on a fear factor or “risk premium.” This was a bet by oil traders that at a time of rising Asian demand, global supplies were vulnerable to disruption by Gulf of Mexico hurricanes and political conflicts in the Middle East, Africa and South America.
But the oil spike was not all politics, the investigators found. “Over the past few years, large financial institutions, hedge funds, pension funds and other investment funds have been pouring
billions of dollars into the energy commodities markets – perhaps as much as $60 billion in the regulated U.S. oil futures market alone – to try to take advantage of price changes or to hedge against them.” That estimate covered only the early part of the oil bubble. Money kept gushing into the commoditymarkets, critics told followup Senate committee hearings as prices soared to triple-digit highs.
Even the Washington experts admitted: “It is difficult to quantify the effect of speculation on prices.” But trading in oil as a financial asset by money managers, with no roles in producing or consuming the tangible commodity, could be responsible for more than one-third of its price, the report said.
The flood of investor cash into paper barrels lured industry into speculation too, further inflating the price bubble. “Speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage,” the Senate committee observed. “A refiner will purchase extra oil today, even if it costs $70 a barrel, if the futures price is even higher.”
Obama’s commitment to prevent more oil price spikes – and protect industry stability as well as consumer wallets –focuses on closing a gap in financial regulation known as “the Enron loophole.” This is legislation that a Republican-dominated U.S. Congress enacted in 2000 at the request of the ill-fated Houston energy empire the bill was named after. The provision exempted financial oil, gas and power traders from disclosure and policing requirements of the U.S. Commodity Futures Trading Commission.
Republican-appointed CFTC chiefs defended their approach to the last and set the stage for a hot debate over oil speculation. Barely a week after Obama’s election victory, the agency’s acting chairman, Walter Lukken, told a traders’ convention in Chicago that the old Republican regime did enough to study and narrow the Enron loophole. But Lukken was appointed by Bush and leaves the CFTC after Obama and the Democrats take charge. Oil traders will soon learn whether they face a new broom in the White House.
A breakdown of the crude oil and natural gas open interest tracked by the commodity futures trading commission shows a shift in trading on the nymex since 1998 with a significant increase in the past two years.
Send letters to letters@albertaoilmagazine.com
Pages: 1 2
Issue Contents
Entries