Yesterday, the U.S. Senate voted unanimously, 94-0, to allow debate to proceed on the controversial “Stop Excessive Energy Speculation Act.” The bill itself presents no evidence of “excessive energy speculation” in oil futures markets. It simply assumes the facts.
In truth, many politicians and analysts are simply speculating that the cause of high oil prices might be due to oil futures traders. It is not. As ALG News has consistently reported, prices are soaring due to a combination of tight supplies, increased demand, and a weak dollar, all factors that investors take into account when trading oil on the commodities markets.
Blaming market speculators is akin to blaming the messenger. In this case, the message is price discovery. Further regulating the commodities futures markets is not going increase supply, curb demand, or strengthen the dollar, and as such, will not reduce prices one iota. What it will do, however, is muddy the market’s method of price discovery.
According to the Futures Industry Association, “[T]he bill has many provisions that would amount to liquidity-robbing, regulatory overkill. We fear that those provisions would undermine the bill’s own transparency goals, make hedging more expensive, drive energy market activity overseas and hopelessly complicate the regulatory mission of the Commodity Futures Trading Commission.”
Believe it or not, it gets worse. According to Securities Industry and Financial Markets Association, this bill may actually cause prices to increase:
“Oil prices reflect the forces of supply and demand. Without increasing supply or reducing demand, higher prices are inevitable. And the most important fact in the debate over higher oil prices can be summed up in one statistic from the International Energy Agency:
“In 2007 global demand for oil was 86 million barrels a day; the global supply of oil was 85.5 million barrels.
“When demand exceeds supply higher prices result. In fact, commodity prices have been rising around the globe in a wide number of commodities due to growing economies in developing countries. This is true even in markets where there are no widely traded futures contracts, such as steel and iron ore. Even onions, which are banned under US law from being traded on futures markets, are up 300% this year.
“Derivatives actually help reduce the cost of energy. They are used by companies to manage the risk of rising prices. In order to protect themselves against this price risk they enter into derivatives contracts, which pass that risk onto buyers who are more willing or able to manage that risk. Without these buyers companies would have no choice but to pass higher prices onto consumers. In fact, this is exactly what has happened to some US businesses; as reported in a June 12, 2008 article in the New York Times entitled European Airlines Reap Benefits of Oil Hedging:
‘The ability to lock into fixed fuel prices months ahead of time — called hedging — can help offset these rising prices. But with the exception of Southwest Airlines most United States airlines are less hedged than European ones.’
“Rising oil prices are a deep concern to all Americans. Those prices can be lowered by increasing supply or reducing demand, or both. But harming the ability of companies to manage rising oil costs through derivatives won’t lower prices. It will mean prices are passed on to consumers. That’s bad for business, bad for the economy and bad for America [emphasis added].”
In other words, when it comes to commodities, futures markets are essential to ensuring price stability. Limit the futures markets, and Congress will have limited market liquidity, which is a lot like limiting the supply, which will in turn raise prices.
So, why would Republicans, who profess to want to reduce energy prices, ever go along with this lemon?
Here’s the pseudo-“lemonade”: According to Reuters, “Republicans may still block a vote on approving the bill unless amendments are added to increase U.S. oil production, such as expanding offshore drilling and developing oil shale fields in the West.”
That might be worth considering, except for all that proceeded it. It is simply demented that Congress is seeking to curb futures markets that nobody has presented any evidence is illegitimately “raising” the price of oil. Instead, the very associations that trade in those markets are warning of further price increases by restricting those markets.
Moreover, the factors that are causing prices to increase are the things that Congress ought to be first addressing, and should be discounted before one starts accusing traders of market manipulation. Why not try increasing oil and gasoline supplies and strengthening the dollar first? Those same speculators that everyone is blaming now would be speculating that the price of oil would drop. Then they’d be everyone’s best friend.
Republicans ought to be pushing for increased oil exploration on its own merits without any strings attached. They also ought to filibuster this bill and stay on the floor demanding that evidence be presented to support the claim that there even is any “excessive energy speculation.”
Until then, don’t kill the messenger.
