WASHINGTON — Almost all the economists who are studying today's high oil prices think that financial speculators are helping to drive up those prices, but hard data are lacking as to whether they're a major factor, and if so, how big a factor.
Michael Greenberger thinks that speculation is a major factor, and he knows a lot about the complex global oil market. He directed the division of trading and markets for the Commodity Futures Trading Commission from 1997 to 1999. That body regulates the trading of contracts for future deliveries of commodities, including crude oil, called futures, which drive oil prices. Now a law professor at the University of Maryland, Greenberger told McClatchy why he thinks that financial speculation is driving up oil prices.
Q. How do speculators drive up oil prices?
A. Speculators are able to drive up crude oil prices today because they're allowed to trade in the U.S. in futures markets not overseen by U.S. regulators. Therefore, they are free to dominate these markets by taking huge positions within them to dominate them; and there is an additional fear that, because of a lack of oversight, they may be engaging in manipulative practices — i.e. wash sales and false reporting that would be barred in a regulated environment.
Q. What is a "wash sale" and how does it work?
A. That's a prearranged trade between two or more parties in which there is no economic risk and the sole purpose of which is to give the appearance that the price of a commodity is going higher or lower in a way that does not reflect supply-and-demand fundamentals.
Q. Who are these speculators? Do they have names and addresses?
A. I really cannot answer that with certainty because these unregulated markets are so opaque. Many say that Goldman Sachs & Co. and Morgan Stanley are primary traders on the principal market outside of direct U.S. supervision, the Intercontinental Exchange, otherwise known as ICE.
The whole point here is that we need transparency through a thorough investigation to determine precisely what is happening on the Intercontinental Exchange, including who key traders are and the positions they are taking in these markets. That transparency is provided regularly for those exchanges regulated directly by the CFTC.
Q. How much of today's record oil price is attributable to speculation?
A. There are many estimates being made by observers of these markets, economists and industrial energy consumers suggesting that the price of a barrel of crude oil could be anywhere from 25 percent to 100 percent in excess of what supply-demand market fundamentals would dictate. For example, OPEC has recently said that a barrel of crude should not be in excess of $70, and it has opened its own investigation into excessive speculation in these markets to find out what interests are causing the price to be almost double that.
Q. What about supply and demand fundamentals? Aren't they behind oil's rising price to some degree?
A. There can be no doubt that there is a supply-and-demand problem at work here. But many believe, including me, that there's a speculative premium that goes beyond what supply and demand factors dictate. And that's what could be drained with aggressive United States regulation.
Q. Can the Commodity Futures Trading Commission do something, and if so why hasn't it?
A. Thirty percent of the U.S. futures trading in United States-delivered West Texas Intermediate crude oil contracts is conducted by the Intercontinental Exchange. Despite the fact that that exchange is owned by an Atlanta-based corporation with trade-matching engines in Chicago, the CFTC insists that it (ICE) should be regulated by the United Kingdom. It takes this position because of the historical fact that the Intercontinental Exchange in 2001 bought a British petroleum exchange (the International Petroleum Exchange.)
The CFTC has the power to terminate its deference to British regulation of that Atlanta-based institution trading in the U.S. and controlling 30 percent of the major U.S. crude-oil contracts. They have authority to do so immediately and to bring ICE under full United States regulatory oversight.
(The CFTC announced Tuesday that it will condition ICE's access to U.S. contracts on its adoption of the same contract size limitations and accountability measures as apply within the United States. This is only a partial step toward the stiffer regulation that Greenberger calls for; it leaves overall regulation of the ICE under British oversight, which is less rigorous than U.S. regulation.)
Q. How does the absence of effective regulation of commodity trading compare to the stock-market excesses of the 1920s?
A. To the extent that the Intercontinental Exchange operates outside of U.S. limits and controls on speculation, there is very substantial evidence suggesting that United States futures trading on that exchange is akin to the unregulated trading in U.S. stocks in the 1920s. That comparison is aided by the fact that huge positions in these markets can be obtained by speculators with less than 10 percent margin.
(Margin is a requirement that a buyer of a security or commodity put down a certain percentage of the price of the transaction when executing a trade. A low margin requirement invites speculation, since an investor puts less of his own money at stake.
(Low margins were a cause of the 1929 stock-market crash. Since 1974, stocks have had a margin requirement of 50 percent set by the Federal Reserve. For U.S. crude oil futures contracts, margin requirements are generally below 10 percent and are set by market participants, not federal regulators.)
Q. Does either of the major presidential candidates propose to confront speculation?
A. The Obama campaign is examining this issue very intently. (The Obama campaign has reached out to Greenberger for information; the McCain camp has not. One of McCain's close friends and top advisers, former Sen. Phil Gramm, R-Texas, pushed through legislation that included deregulating energy futures at the behest of the now-defunct Enron Corp., which among other things manipulated futures prices.)
ON THE WEB
A June 17 Commodity Futures Trading Commission statement on new conditions on access to U.S. trading.
A May 29 Commodity Futures Trading Commission statement on its oversight.