Speculators have become the popular scapegoat for the recent surge in oil prices, and they’ve finally begun to attract some serious scrutiny from the Commodities Futures Trading Commission (CFTC). The WSJ reports that the CFTC has launched “a broad nationwide probe” into price manipulation.
The move sounds impressive, and will encourage populist class-warriors convinced that Wall Street traders are once again using financial voodoo to screw the little guy. But as the WSJ correctly points out, the announcement is a red herring, designed only to take pressure off the CFTC. In reality, there probably isn’t any kind of “broad investigation” underway (or much manipulation):
The CFTC’s announcement about its oil investigation suggested a single, broad probe that began in December 2007. But people familiar with its enforcement priorities say the agency is pursuing multiple oil investigations, and that many of them relate to one another. CFTC enforcement chief Gregory Mocek said the agency has about 60 manipulation investigations open in various commodity markets.
There’s no broad investigation because, simply put, there’s nothing to investigate. As the Economist points out, the notion that futures traders, who trade delivery contracts (paper barrels), can have any significant effect on the price of real barrels, is one of the most widely misunderstood concepts circulating in the financial media:
There is no clear correlation between increased speculation and higher prices in commodities markets in general. Despite a continuing flow of investment in nickel, for example, its price has fallen by half over the past year… investment can flood into the oil market without driving up prices because speculators are not buying any actual crude. Instead, they buy contracts for future delivery. When those contracts mature, they either settle them with a cash payment or sell them on to genuine consumers. Either way, no oil is hoarded or somehow kept off the market. The contracts are really a bet about which way the price will go and the number of bets does not affect the amount of oil available.
So when the CFTC promises us that it’s investigating oil markets, it’s being about as sincere as a parent who tells his child that he’s checking their closet for monsters.
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