Nearly eight months ago, when oil was selling for “only” $90 a barrel, I wrote that “something funny is going on” in the oil trading markets.
Here’s the specific suspicion I expressed in the Oct. 26 column: “It appears increasingly obvious that oil prices are being pushed into the stratosphere by speculators in a lightly regulated global trading market that has grown by leaps and bounds.”
The day before, oil had closed at a then-record $90.46 a barrel in futures trading on the New York Mercantile Exchange. Since then, to my astonishment, prices have jumped more than 50 percent, nearly touching $140 at one point before recently receding moderately.
With the average U.S. gas price easily exceeding $4 a gallon, millions of Americans have reacted by buying smaller, more fuel-efficient cars and cutting discretionary driving to a minimum, but sky-high oil prices persist.
In October, I called for “stronger oversight and regulation of energy markets” and urged strengthening the Commodity Futures Trading Commission, which oversees trading of contracts in oil and other commodities. Since then, the CFTC has taken some steps to tighten regulation at least moderately. But it hasn’t gone far enough.
An excellent article by Kevin G. Hall of McClatchy Newspapers last week (”How market speculators may be driving up oil prices”) helped explain the problem. Hall queried Michael Greenberger, a University of Maryland law professor who formerly directed trading and markets for the CFTC.
Greenberger said speculators can drive up oil prices “because they’re allowed to trade in the U.S. in futures markets not overseen by U.S. regulators. Therefore, they are free to dominate these markets by taking huge positions within them. And there is an additional fear that, because of a lack of oversight, they may be engaging in manipulative practices — i.e., wash sales and false reporting that would be barred in a regulated environment.”
Greenberger described a wash sale as “a prearranged trade between two or more parties in which there is no economic risk and the sole purpose of which is to give the appearance that the price of a commodity is going higher or lower in a way that does not reflect supply and demand.”
The principal market outside of direct U.S. supervision, he noted, is the Intercontinental Exchange, dubbed ICE. What’s needed, he said, is “a thorough investigation to determine precisely what is happening on the Intercontinental Exchange, including who key traders are and the positions they are taking in these markets.”
The CFTC has taken some limited steps toward tighter regulation of ICE, an Atlanta-based corporation that has been regulated by the United Kingdom because it bought a British petroleum exchange in 2001. But Greenberger insists that the CFTC should exercise its powers to “bring ICE under full U.S. regulatory oversight.”
Given today’s situation, that sounds like a fabulous idea.
Traditional market forces
I have no trouble with legal operation of futures trading markets and businesses using them to hedge against potential swings in commodities prices. But today’s oil prices seem far out of kilter with the traditional market forces of supply and demand, which would appear to dictate prices of no more than $100 a barrel and perhaps considerably less.
Did you realize that we’re now paying about four times as much for gasoline as we did in late December of 2001, when the average price for regular gas in Texas was (can you believe it) $1.01 a gallon?
I guess it’s nice that a few oil speculators are getting filthy rich. But it’s a shame that most of America’s 304 million people are suffering the negative consequences through soaring prices for gas, food and other essentials.
As I wrote in October, “something funny is going on” in the oil markets. So why haven’t President Bush and Congress done something about it?
X Jack Z. Smith is an editorial writer for the Fort Worth Star-Telegram. Distributed by McClatchy-Tribune Information Services.