Obama and 'Cracking Down on Excessive Energy Speculation'

[cplif]

re: friedo,
french mainstream news has been accusing airline hoarding/speculating for about 30% of peak oil prices, if the current drop is stable, the consequent windfall for those investors will be colossal.

[Digital_Stimulus]

@xtisme

…here is a GQ thread on oil speculation that may be interesting. Several good answers in there and perhaps one of the real expert 'dopers will wander in later to put in a more complete answer.

It’s only been 3 weeks, so I don’t think I’m raising a zombie thread.

There’s a 60 Minutes story on CBSNews.com today, Did Speculation Fuel Oil Price Swings? that’s pertinent, I think.

…
Yet when Congress began holding hearings last summer and asked Wall Street banker Lawrence Eagles of J.P. Morgan what role excessive speculation played in rising oil prices, the answer was little to none. “We believe that high energy prices are fundamentally a result of supply and demand,” he said in his testimony.

As it turns out, not even J.P. Morgan’s chief global investment officer agreed with him. The same that day Eagles testified, an e-mail went out to clients saying “an enormous amount of speculation” ran up the price" and “140 dollars in July was ridiculous.”
…
“From quarter four of '07 until the second quarter of '08 the EIA, the Energy Information Administration, said that supply went up, worldwide supply went up. And worldwide demand went down. So you have supply going up and demand going down, which generally means the price is going down,” Masters told Kroft.
…
It’s impossible to tell exactly who was buying and selling all those oil contracts because most of the trading is now conducted in secret, with no public scrutiny or government oversight. Over time, the big Wall Street banks were allowed to buy and sell as many oil contracts as they wanted for their clients, circumventing regulations intended to limit speculation. And in 2000, Congress effectively deregulated the futures market, granting exemptions for complicated derivative investments called oil swaps, as well as electronic trading on private exchanges.
…
The regulatory lapses in the commodities market that many believe fomented the rampant speculation in oil have still not been addressed, although the incoming Obama administration has promised to do so.

So, according to the traders themselves, speculation was a major factor in oil prices (supply up, demand down, yet prices rise? For a commodity? Really?). In addition, at least according to the story, there’s little to no regulation here – these trades are not done on an “open” market, but with absolutely no transparency whatsoever. (Note that I’ve used “open” in a non-standard way to reflect secrecy rather than exclusivity.)

As I said in a post above, the wiki article gave me little cause to question the operation of the futures market – my issue is primarily my aversion to “gambling”. But the 60 Minutes report indicates that the bulk of oil futures was exactly that – lemming-like psychologically-driven price swings that amount to gambling. That ended up pricing a commodity at more than 3 times the level it would’ve been if the price was determined simply through supply and demand (now trading at $40/bbl, got up to $140/bbl). Which would confirm, I think, that speculation in oil futures was a major factor in the market’s volatility.

Again, I don’t feel like I have a good grasp on futures, so I’m not really arguing one way or the other. But I have to ask: given the ramifications of oil prices on every aspect of our lives, is this not a problem? That is, is it worth accepting some “regulation” (at least on speculation) in order to stabilize prices over the short/medium term? (Which, if I do understand the role of hedgers, is why they’re in this market in the first place.) If so, what can/should be done? Would simply increasing the transparency of the market be enough? And finally, getting back to the OP, is the Obama administration likely to do anything about this?

[rock_party]

Another point 60 Min brought up: The futures traded that were actually being delivered (ie: to power generation , airlines, other companies that actually locked in future prices for actual delivery) were one in thirty…the rest were speculators. Or put another way, about 96% of oil futures were bought and sold by speculators.