Eleutherian

I read a disturbing headline today (what else is new): US Agency May Impose Limits on Energy Futures. (Although its search engine lags behind Google, Yahoo! Finance is still a good source for quick financial headlines). The "US Agency" refers to the Commodity Futures Trading Commission (CFTC). Before I continue on this recent development, let's go over a little history.

Last summer (2008), Congress made a push to regulate (or in some extreme cases, eliminate) speculation in the oil commodity market. However, Congress was unable to pass the proposed legislation because oil prices dropped over $100, falling below $40 per barrel.

If Congress would have listened to the experts in 2008, they would have saved themselves the embarrassment of proposing pointless (and costly) legislation. The Wall Street Journal found 89% of surveyed economists attributed the rise in energy prices to "fundamental market conditions" driven by supply and demand. The Economist added:

There is no clear correlation between increased speculation and higher prices in commodities markets in general [emphasis added]. Despite a continuing flow of investment in nickel, for example, its price has fallen by half over the past year.

Jeffrey Harris, chief economist of the CFTC, has stated that the voices demanding increased regulation of oil futures trading are confusing the cause with the effect. It is likely that the rising prices are spurring the increased investment, rather than the other way around. In testimony before a House subcommittee, Mr. Harris stated:

Our studies in agriculture and crude oil markets have found that speculators tend to follow trends in prices rather than set them...Simply put, the economic data shows that overall commodity price levels, including agriculture commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand. These fundamental economic factors include increased demand from emerging markets; decreased supply due to weather or geopolitical events; and a weakened dollar [emphasis added].

Back to today's announcement, CFTC Chairman Gary Gensler (an Obama appointee) is allowing Congress, led by Senator Carl Levin, to influence the supposedly independent institution's mission. From the CFTC's website, "The CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets [emphasis added]."

However, Sen. Levin has chosen to ignore this mission, stating:

It is a relief to know that the Obama administration does not plan to stand by silently while inflated crude oil prices top $70 per barrel despite ample oil supplies and low demand. Excessive speculation is distorting prices, undermining our commodity markets and hurting our economic recovery.

The CFTC has previously stated that speculators do not set market trends. Senator Levin continues to confuse the cause with the effect. As such, since making his statement, the price of oil has dropped to a 5-week low of under $63 per barrel.

In 2008, the following predictions were made about the long-term price of oil:

Tim Evans, energy futures analyst at Citigroup's Futures Perspective: $60-70

Michael Lynch, President and Director of Global Petroleum Service at SEER: $60-70

Akira Yanagisawa, Senior Economist at Japan's Energy Data and Modeling Center: $50-60

J. Stephen Simon, Executive Vice President, Exxon-Mobil: $50-55

John Hofmeister, President, Shell Oil Co: $35-65

First two predictions via Reason, second three via Econbrowser.