Speculators Blamed for Oil Price Spikes

McClatchy Newspapers
July 28, 2009

The chairman of the Commodity Futures Trading Commission signaled Tuesday that his agency is likely to limit financial speculators' ability to drive up prices for oil and other fuels.

Excessive speculation, suggested CFTC chief Gary Gensler, drove the price of oil to a record $147 a barrel a year ago, making it unnecessarily more expensive for Americans to heat their homes and fuel their cars.

"I believe we must seriously consider setting strict position limits in the energy markets," Gensler said at the start of a public hearing to consider limiting the number of contracts that an oil trader can hold.

Gensler's comments mark a stark shift from the Bush administration's view. When a Republican headed the CFTC last year, the agency concluded that market forces of supply and demand, not financial speculators, drove record increases in energy prices. However, Gensler and at least one other commissioner, Bart Chilton, think that speculation, at a minimum, drove the price of oil higher than it would've gotten otherwise.

Investors, many of them big pension funds working with Wall Street investment banks, poured speculative money into futures, or contracts for future delivery. This inflow, as much as $300 billion, appears to have pushed prices to record levels, and helped them rebound again during the past six months from their winter lows.

Testifying Tuesday before the CFTC, representatives from utilities, the airline industry and petroleum marketers all called on the agency to restrict Wall Street speculators to prevent a return to last year's price volatility.

Allowing such a return would have "serious impact on the national air transportation system and the economy," including airline bankruptcies or mergers, warned Ben Hirst, general counsel for Delta Airlines, testifying on behalf of the Air Transport Association.

Gensler signaled that the question of limits on speculative investment isn't a matter of if but when. "As we move forward in considering position limits, I believe that we should apply consistent, across-the-board regulations to all futures market participants," Gensler said, noting that the agency, and not individual exchanges, should set the new limits. "With competing exchanges, regulations must be applied equally to similar contracts in different markets. The CFTC is in the best position to apply limits across different exchanges, and we are most able to strike a balance between competing interests and the responsibility to protect the American public."

The CFTC is also weighing whether to take back exceptions granted over decades to big Wall Street powers such as Goldman Sachs and Morgan Stanley that allow their investments in energy contracts to be regulated as if they were airlines or refineries, free from limits on the number they can buy.

Commercial fuel users are exempt from position limits because they actually take delivery of the product. Wall Street firms, which don't take delivery, received the same exemptions, first from the CFTC and later from commodity exchanges, on the grounds that they needed to hedge against risks that they've taken through private bets on the price of oil.

These private bets are called swaps. The swaps market dwarfs the regulated futures markets. Lack of transparency in these markets, and uncertainty about who actually owes what to whom, has amplified the global financial crisis.

"It became more apparent to me today than it ever has before that the agency should be the one to grant hedge exemptions," Chilton said in an interview. He noted that exchanges have incentives to grant exemptions to big players who bring more trading volume, and thus profits, to the exchanges. "Our job is to protect consumers and ensure these markets are working effectively and efficiently."

Executives from Goldman Sachs and Morgan Stanley are slated to testify Wednesday before the CFTC. They've denied that the flood of investment they helped direct into commodities drove up oil prices, arguing that global concerns about inadequate oil supplies explain the run-up.