Analysis: Obama’s Taskforce Faces Tough Job Identifying Illegal Commodity Speculation
A new taskforce set up by Barack Obama to root out illegal activity by commodity market speculators will find it tough identifying unlawful activity. Many believe regulation is needed to reign in the effect of rampant speculation. (image: wallstreetpit.com)
Motorists are forking out a small fortune to fill up their cars and homeowners have just weathered a bitterly cold winter paying record heating oil prices. As concerns about soaring crude prices grow, President Barack Obama has announced a taskforce to root out illegal manipulation of commodity markets by profiteering speculators. But what unlawful activity is the taskforce likely to uncover?
Sadly for cash-strapped motorists, heating oil customers and dealers, the answer is probably not much.
Though many commentators believe Wall Street speculators playing the commodities markets are responsible for artificially driving up the price of oil, their actions are probably within the law. Oil markets were opened up to big investment banks and hedge funds in 2000 through the Commodity Futures Modernization Act. Since then, those financial institutions have been allowed to buy and sell oil futures contracts – essentially bidding on whether oil prices will go up or down. This exposed world markets to massive investment funds of managed money.
Prior to the 2008 financial crisis, many of these funds were investing in mortgage markets, helping to inflate the housing bubble that eventually burst and set off the crisis. After mortgages went bad, big investment banks looked for new, low-risk investment options. Oil – the energy commodity that drives economic activity – was bought up in huge volumes, driving up prices.
Then, as the US Federal Reserve looked to stimulate economic activity to encourage growth, it dropped interest rates to virtually zero, allowing banks and other financial institutions to borrow more easily and fund investments in oil. As economic activity increased, the price of oil trended up.
So Obama’s taskforce will now try to “root out” illegal activity. But it’s unlikely to have much luck. The problem is not speculators breaking the law, it is shrewd traders working within a largely unregulated system to make big profits, which in turn drives up gasoline and heating oil prices. What is needed is better regulation of the commodity markets to prevent oil prices spiking unpredictably on the whim of traders.
The Commodity Futures Trading Commission (CFTC) has been given the power to set “position limits” on major traders, whose huge financial bets can skew global oil prices. But those regulations have been delayed amid fierce opposition from the powerful financial sector, which has spent nearly $30 million lobbying Congress this year alone.
If the Obama administration is serious about bringing down the cost of oil and controlling the effect of rampant speculation, ensuring the CFTC implements the new regulations as mandated is a good bet. Although a direct link between higher oil prices and big money speculation has not been conclusively proven, many believe that position limits and other regulations would at the very least reduce oil price volatility.
But who or what constitutes a speculator?
Writing for WallStreetPit.com, Bruce Krasting suggests that much like big investment banks, countless American heating oil users are speculators as well.
Is the homeowner who pre-buys 1000 gallons of heating oil at a fixed price speculating, or simply hedging their financial risk? What about someone who invests in an energy futures fund but has nothing to do with making market bets?
“It’s not hard to find ways to make money in a rising energy market,” he writes. “The President and the [Attorney General] need to determine why folks like me are speculating rather than just blaming me for high prices.”
