HeatingOil.com’s Exclusive Interview with CFTC Candidate Sean Cota
Sean Cota (image: Cota & Cota)
Last week, Sen. Patrick Leahy of Vermont gave a full-throated endorsement to heating oil businessman Sean Cota to be the next commissioner on the Commodity Futures Trading Commission (CFTC) in the form of a letter to President Obama. The endorsement came at a crucial time for the heating oil industry—dealers and consumers have struggled with rapidly increasing heating oil prices in recent years, and new regulations under consideration by the CFTC offer the promise of lower, or at least less volatile, oil prices. Despite a recent mandate from Congress to enact new regulations on commodities trading known as the Dodd-Frank law, the CFTC is months behind on its task and faces serious political opposition to the proposed regulations.
Cota’s decades-long experience as the president and co-owner of his family business, Cota & Cota Oil, gives him intimate knowledge of the challenges facing heating oil dealers today. As a dealer himself, Cota also has years of experience with hedging and other activities in heating oil markets, and has repeatedly offered his point of view on the best way to implement the new market regulations outlined in the Dodd-Frank law to congressional committees and the CFTC itself. If appointed to the CFTC by the president when a seat opens up in June, Cota would require confirmation by the Senate to officially take up the position.
Following Leahy’s endorsement last week, HeatingOil.com contacted Cota, who gave the following exclusive interview.
Cota’s comments have been edited and condensed for the purpose of this post.
HeatingOil.com Managing Editor Josh Garrett: How long have you been in the heating oil business?
Sean Cota: Since 1977. I’m the third generation owner of Cota & Cota Oil, which I run with my brother Casey. I’ve also served as President of the New England Fuel Institute (NEFI), and sat on the board of the National Oilheat Research Alliance (NORA) and National Association for Oilheat Research and Education (NAORE). I’m the current chairman of the Petroleum Marketers Association of America (PMAA). On the market side, I’ve been trading energy futures since the 1980s , done some financial analysis, and worked with academics.
JG: In your opinion, was lax commodity market regulation a partial cause of the July 2008 oil price spike and the financial crisis that followed?
SC: In 2008, the securitization [repackaging and reselling financial products] of commodities was happening at the same time as in other markets, like housing. I remember waiting to testify before Congress around that time and hearing Big Money guys like George Soros talking about the problems in the housing market and CDSs [credit default swaps], and it made me break into a cold sweat. I thought it was just happening in energy markets, but it was everywhere. Then, like now, if we want to fix energy markets, we have to fix everything. Title VII of the Dodd-Frank law is a well-balanced attempt at a fix, but almost none of the rules in the bill have been implemented, and many still need to be written. What’s happening now is a similar situation to the one during the 2008 price spike. But the primary difference between then and now is that in 2008, there was a question about global supplies of oil: was there enough to meet demand? Today, there is no question that [the NYMEX oil delivery point at] Cushing is full, and the world supply is about 10 percent above world demand, even with the troubles in the Middle East and Libya. Another difference is the amount of speculative money in the oil market—there’s about 40 percent more now than three years ago. But in both cases we had and have unregulated, opaque markets, which trend toward market disequilibrium and cause boom-bust cycles.
JG: Senator Leahy’s letter recommending you for appointment to the CFTC to President Obama refers to you as a “Main Street businessman.” Do you agree with that characterization?
SC: I am a main street businessman that understands financial markets, and I’m not a Washington insider. I understand how these markets work, not just with energy but with agricultural and financial products as well, and I understand the financial instruments covered by Dodd-Frank. The market for those instruments is so huge, it’s scary: unregulated derivatives on the global market are worth about $600 trillion, with America’s share being about $300 trillion. Part of the reason is that in OTC [unregulated “over the counter”] markets, investors can put less money down—a market move of one percent results in a 100 percent return on investment. Who wouldn’t want to do that? The Dodd-Frank law is not anti-speculator, but it aims to bring some of those investments onto transparent exchanges, which will provide a balanced playing field for investors big and small. And smaller exchange-cleared markets do not have be bailed out by taxpayers, as the exchange guarantees trades.
JG: Ryan Grim at the Huffington Post calls the pro-reform group you are a part of, the Commodity Markets Oversight Coalition, “a powerful group of unlikely allies.” Do you consider the CMOC to be politically powerful? How does it match up against lobbying efforts by investment banks and commodity exchanges?
SC: Groups like CMOC have right on their side, which helps. They are not anti-speculator—they fully understand that speculators are critical to our markets. The members of CMOC have long used commodity markets to hedge—they know how the markets work, what the problems are, and how they should be regulated. But they are absolutely outgunned; the money that’s gone into Washington lobbying is staggering. The Petroleum Marketing Association of America (PMAA) looked at which lobbying firms in Washington were representing which side in the debate over regulation, and found that almost all of the firms involved are representing banks. But support for regulation is strong. This is not a partisan issue: the American Trucking Association, farmers, and other more conservative groups are on our side. These are not un-savvy people, they understand the markets.
JG: Do you think the position limits currently under consideration by the CFTC would be effective in calming energy markets if/when they are implemented?
SC: The position limits in their current form are too high to have any real effect. For starters, the CFTC needs to define what a physical deliverable is and use that as a base to set limits. Regulations need to be coordinated with foreign boards of trade to reduce the risk of investors moving to less-regulated foreign markets. Under proposed financial regulations regulators are requited to shut off access to foreign markets that do not have similar rules. That being said, lower position limits could have a short-term impact, but to really get markets under control, the CFTC would need to set rules and regulate the OTC swaps market (which makes up the majority of the commodity derivatives market) like they do traditional futures markets.
JG: If appointed by President Obama to the CFTC, would you accept the post? How would you approach confirmation hearings in the Senate?
SC: I would be honored if nominated and I would accept. I would approach my confirmation hearing by doing what I’ve always done: give an honest assessment of what I see and look at markets from everybody’s perspective. I would focus on commercial users, who commodities markets were created for. Speculators play an important role in commodity markets, but we need rules governing their activities so that they do not overwhelm these finite markets. In poker, if you have $1,000 but you’re sitting at a table of millionaires, you will never win, even if you play perfectly.
JG: Resistance to commodity market regulation and threats from congressional committees to deny the CFTC’s request for additional funding are the major obstacles to market reform. If you are appointed as a CFTC commissioner, how would you address those obstacles?
SC: The CFTC needs self-funding. The president has some money to fund the agency in his budget, but a small transaction fee makes a lot of sense. Crude oil-based financial products representing four times the world’s daily average consumption are traded every day. A transaction fee of just two cents per trade would provide the CFTC with plenty of funding. Using heating oil as an example, at the NYMEX price of $3.05 per gallon, one contract [1,000 barrel minimum x 42 gallons per barrel] of 42,000 gallons times $3.05 equals $128,000. So a two-cent fee on transactions worth $128,000 just to fund the CFTC—the idea makes sense.
