Betting on the Future

On May 11, a group of 17 Senators sent a letter to the chairmen and commissioners of the Commodity Futures Trading Commission (CFTC), urging the agency to immediately step in to stop speculation in the oil and energy futures markets. The CFTC was authorized by the recent Dodd-Frank bill to undertake rulemaking that would impose position limits to curb excessive speculation in a number of commodity markets. At present none of the proposed rules have been finalized, and the group of Senators, including 15 democrats, Susan Collins (R-ME), and Bernie Sanders (I-VT) demanded that the agency put forward a plan by May 23.

Oil prices have been swinging wildly in just the past 10 days, going from a high of $115/barrel on May 2 to $96 today.

According to Senator Ron Wyden, ”The wild fluctuation could only be the result of rampant oil speculation, plain and simple.” The view that’s emerging is that financial speculation caused a spike in gasoline prices that was unrelated to the supply, which in turn makes gasoline unaffordable to consumers and reduces demand. In light of that dynamic, the argument that volatility always decreases prices is reduced to an ideological claim that puts an economic model over the economic reality. These price increases put a massive burden on consumers who need gasoline to get to work or for whom energy costs are a large portion of their monthly budget.

The Obama Administration also recently expressed its disfavor with oil speculators. Obama has blamed speculation for disrupting gas prices in the past, and in April of this year, Attorney General Eric Holder announced the formation of the Oil and Gas Price Fraud Working Group that would conduct investigations into price manipulation. In an April, 29 letter to President Obama, Senator Bernie Sanders went further in urging the executive to put public pressure on the CFTC and called for the resignation of any CFTC commissioners unwilling to impose the position limits called for under Dodd-Frank by January of 2011. Astonishingly, a number of Republicans have voted recently for an additional 18-month delay on implementation.

Oil speculation is not the only commodity speculation that’s gotten out of hand in recent months. I wrote previously about the food bubble, and Foreign Policy Magazine recently ran several articles on spiking food prices. Excessive involvement by financial institutions in a number of commodity markets has thrown off the traditional supply-and-demand function. Starbucks CEO Howard Schultz recently stated that financial innovations had caused disruptions in the end-user coffee market as well:

“I’ve been in this business for 30 years. I can tell you unequivocally with every coffee farmer and resource that we talk to in which we have decades of relationships, we cannot identify a supply problem in the world where we’re buying coffee. So one question is, ‘why are coffee prices going up?’ and in addition to that, ‘why is every commodity price going up at the same time?’ Why is cotton, corn, wheat, why? And I think what’s going on is financial engineering; that financial speculators have come into the commodity markets and drove these prices up to historic levels and as a result of that the consumer is suffering.”

Many of the commodities regulated by the CFTC–most notably food and energy–are politically extremely votatile. And for the sake of the wider economy, increased regulation of futures trading really shouldn’t wait until oil hits the $6 per gallon that some economists are predicting by the summer’s end.

Photo Credit: Ben Lunsford