Misguided US plan to curb oil futures speculation
Carl Mortished | June 26, 2008
THOSE pilgrim puritans are at it again, threatening to ban, regulate and smother all forms of risk-taking.
After adultery, booze, ciggies and online poker, North Americans have invented a new vice, and its home is the New York Mercantile Exchange.
Goaded by a pack of opportunistic US senators seeking to ride the wave of public rage about fuel prices, the Commodities and Futures Trading Commission is preparing a report on the role of speculators in the crude oil futures market.
Think about that for a moment.
The regulator of a market that enables investors to bet on future oil prices is to investigate the role that speculation, that is to say betting, plays in that market.
Commission chairman Walter Lukken is to report to Congress in September. This is what he might conclude: "We have investigated the behaviour of investment banks, hedge funds, pension and mutual funds in Nymex oil futures contracts. We have found that, without exception, these groups are using futures for the sole purpose of speculating on the price of oil. We therefore conclude that to prevent this nefarious activity we must shut down immediately the US light sweet crude futures market."
Even so, Congress is not waiting, and legislation is mooted that will deter oil futures trading.
Like smokers, investors will have to stump up much more money for their oily habit in the form of bigger margin calls, and some politicians want to ban "speculators" altogether.
Could someone please tell the congressional ninnies that the purpose of a futures market is to make bets -- to speculate -- on outcomes to mitigate the risk of a bad price or to profit from a good one.
It is absurd to distinguish a commercial investor, for example, an airline insuring against an increase in the cost of jet fuel, from the "wicked" speculation of a pension fund that bets on oil prices rising or falling. Every investment is commercial and a fund has as much commercial interest as any other business in protecting its other investments from the impact of rising oil prices.
This separation of investors into sheep and goats is futile.
Weekly reports from the commission on open interest in the light sweet crude market indicate that so-called commercial investors dominate activity. Commitments by commercial investors exceed those of the non-commercial by four to one. Among commercial investors, open interest is almost equally balanced between those holding long and short positions. There is a slight bias to long positions among non-commercial players, which might give some support to the notion that the banks and hedge funds tend to be bullish on oil.
They have enjoyed a winning streak for several years. Oil is not a tulip bubble or a dotcom boom. Every day 87 million barrels of oil are consumed, burned or transformed into other materials. Oil is essential to our lives, unlike tulip bulbs or the internet companies that had little revenue and no profits.
Oil is not a fashion. We need it as we need wheat -- more so because there is no alternative to oil.
If we worry that speculation is driving oil futures beyond supply fundamentals, there is a reality check in the daily trade of physical cargoes of crude.
Refiners and petrochemical companies compete for the cheapest crude of the best quality. Bids and offers for cargoes of Brent, Nigerian bonny light and Russian Urals crude are posted every minute on the Platts pricing service. If the oil futures price was seriously out of kilter with the underlying trade in oil cargoes, a canny oil trader could short sell the market and make a killing.
In other words, a bubble in oil futures would be swamped by crude oil overflowing from storage tanks. It would not last long -- certainly not for years of continuous price escalation.
The good thing about futures markets is that they offer a small angle on the unknowable world to come. That explains why some North Americans find it abhorrent.
The early British settlers who founded the Plymouth Colony were Puritans, fundamentalist Christians who believed in the absolute sovereignty of their god and the utter depravity of human beings, other than those destined for salvation.
It is a world view incompatible with financial markets, where the future is not ordained but random and chaotic, a place where bad things can happen to god-fearing people.
North American puritanism still bursts forth in moments of political and economic stress when libertarian capitalism confronts the moral straitjacket of the fearful and devout.
Congress wants to close the "London loophole", forcing that city's oil market to abide by US regulations on limits to trading. A nation consumed by fear of foreigners, puritanical self-doubt and effete introspection cannot be the standard bearer of global capitalism. It is left to Britain. It is a tough job, but someone has to do it.
The Times
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