The last thing the energy market needs right now is a curb on speculators.
What's the next step -- limits on how many futures contracts you can buy?
Let's hope not, because the cure could be worse than the disease.
In the latest Congressional game of "pin the blame," that seems to be exactly the direction politicians want to go.
Earlier this week, Sen. Jeff Bingaman (D., N.M.) published
the Commodity Futures Trading Commission expressing concern that high energy prices might be caused by speculators.
That came on the back of testimony last week given to the
by Michael Masters of Masters Capital Management, who said such speculative interests were to blame. It also comes in concert with widespread calls for curbs on speculators.
"The emotional side of this is that oil prices have gone up and politicians are looking to blame someone other than themselves," says Adam Sieminiski, chief energy economist at Deutsche Bank in Washington, D.C. "Right now, it's speculators who are taking the brunt of the popular anger for high oil prices."
In the first place, it's not clear that commodity speculators have
to do with the problem at all.
And guess who says that: the government's own organization charged with overseeing the smooth and efficient operations of futures markets - the CFTC.
"To date, CFTC staff economic analysis indicates that broad-based manipulative forces are not driving the recent higher futures prices in commodities across-the-board," states
its written testimony to the Senate Committee on Homeland Security
published last week.
The CFTC confirms that nothing much has changed since then.
In particular, the report pushed back on assertions blaming index funds, instead saying, "price changes are largely unrelated to fund trading."
The report also points to record agriculture prices -- including those for durum wheat and hay, where there are no futures contracts - "and in markets with little or no index trading."
Markets where index trading is relatively heavy, such as live cattle and hog futures, have actually seen
Also important: speculators facilitate the efficient functioning of commodities markets.
"The markets for commodities are extremely small," says Jeff Christian, managing director of specialty commodities consulting firm CPM Group, and a veteran of the last materials boom in the 1970s. "If you were limited to the physical side, these markets would be too small to be relevant."
Put that in perspective. Oil is by far the biggest of the commodity markets and yet, at current prices, the value of the oil produced each day totals a mere $11 billion. Not much compared with the $162 billion traded on the
New York Stock Exchange
Commodity consumers and producers need the liquidity provided by speculators because they often rely on the futures markets to siphon off their risk. An oil producer such as
might look to lock in a portion of revenue for some of its output, while a food processor such as
Archer Daniels Midland
could seek to hedge its costs of buying grain.
The speculators pick up the risk of adverse price movement in exchange for the opportunity to make a profit. Take them away, and you harm the "natural" users of the futures exchange, the producers and consumers of the materials.
The question remains, of course, whether people who shouldn't be exposed to so much risk are participating in the markets, and could be harmed. But that's a separate (albeit related) issue.
Limits on speculation "could create an environment that causes a liquidity crunch, could distort prices and could drive liquidity into unregulated markets," adds CPM's Christian.
Like the debt-market liquidity crunch, which meant borrowers couldn't find willing lenders, this could mean hedgers won't find willing counterparties at a reasonable price.
That, then, undermines the other important role of futures exchanges: price discovery.
Mostly, Christian is skeptical about government's ability to stamp out speculation. He says the most likely outcome of position limits would be for risk-takers to find unregulated markets either in the U.S. or overseas.
With the current situation, there are certain limits on speculation and trading occurs in the most transparent parts of the market -- the ones regulated by the CFTC.
So, the people looking to restrict speculators want to assume speculators are guilty until proven innocent, restrict the ability of companies to conduct their business and limit the ability of citizens to try to make money in the markets.
I may be British, but that seems pretty un-American to me.