As several news reports have indicated, the notion is gaining steam that speculation in the U.S. commodities market has had an inflationary effect on oil prices. The current conventional wisdom is that 70% of the oil trades are made by financial players. If commodities speculation has taken center stage, the spotlight is on loopholes such as the notorious “Enron loophole” opened by Phil Gramm and the Republican congress in 2000, which allowed commodities trading to go on without regulatory scrutiny on so-called “dark markets.”
the Commodity Futures Trading Commission is the regulatory body responsible for overseeing US trading in oil futures. Interestingly, the CFTC’s recent fact sheet on speculation suggests that the 70% number being kicked around includes so-called swap dealers, the market makers in the commodities market. CFTC will report to congress by September 15th on the true effect of commodities speculation. Interestingly, the CFTC’s fact sheet only comments on trades made on the New York Mercantile Exchange (NYMEX). It makes no mention of other exchanges such as the Intercontinental Exchange (ICE), a trading firm registered in London but headquartered in Atlanta, whose regulation the CFTC has ceded to Great Britain.
In testimony to the House Energy and Commerce Subcommittee on Oversight and Investigations, former Clinton Administration CFTC chairman Michael Greenberger (now at the University of Maryland School of Law) claims that ICE accounts for 30% of trades in West Texas Intermediate (WTI) crude oil, and that Dubai Mercantile Exchange (DME) in affiliation with NYMEX would also be able to trade WTI oversight-free according to a recent CFTC no-action letter.
The CFTC under the Bush Administration appears to be playing word games here. Sure, in the market they regulate (NYMEX), there may not be a meaningful impact from speculation. What impact does unregulated trading have on the Intercontinental Exchange? Do we even have the data to know? What impact would an unregulated DME have? Greenberger’s testimony is a scathing rebuke of the current CFTC’s behavior in the current market.
Given the current economic conditions, the coming scarcity of fossil fuels, and the impact of fossil fuels on our climate, we need to take action that is strategic for the short term and the long term. So here are a few ideas that might help us do just that:
First, close the Enron loophole. While we’re at it, let’s close the London/Dubai loophole, and the Swaps Dealer loophole. Energy commodities trading in the United States should occur in the full light of day, and the CFTC should not cede jurisdiction. We need the ability to measure the effect of speculation on the cost of energy. Allow (or should I say command?) the CFTC to gather the data they need to understand that effect. Why? (Meaningful) data is good. Any business person will tell you “you can’t control what you can’t measure.” Plus, anyone with a legitimate reason for investing in energy commodities will continue to do so under regulatory conditions. Demand for energy will not decrease, and the natural market forces of supply and demand will not be hurt by data collection. If speculation is affecting cost without adding real value to the supply chain, then it is taking value out of other markets, which is not in the public interest.
In his Jun 23rd testimony, Greenberger endorsed the Prevent Unfair Manipulation of Prices Act of 2008 as a means of closing these loopholes. Congressman Bart Stupak’s act was introduced in both houses of congress (as H.R. 6341 and S.3185) on June 24th.
Second, Don’t take away tax breaks for big oil. Instead, repurpose them to create incentives for anyone willing to invest in clean energy research and development. We don’t need to take away windfall profits from big energy companies, as long as they put that profit to forward-looking use. We all know that fossil fuels are a finite resource. We must put the power of the purse to use in crafting an end-game strategy that allows the global economy to grow and prosper in a post-fossil fuel world.
