Kenneth Medlock and Amy Myers Jaffe blame the Commodities Futures Modernization Act of 2000 for today’s oil market woes, and say the government should crack down on the non-commercial oil market speculators. (They say this in a new paper published by Rice University’s Baker Institute for Public Policy.)
When Bill Clinton made the CMFA a law, it “effectively cleared the way for more lax regulation of new oil risk management products,” Medlock and Jaffe say. Before it came into law only 20% of the action in the oil market was from non-commercial participants. Today it’s around 50%. These non-commercial players are affecting prices:
Generally speaking, speculators have been net long since the middle of 2003, just as prices began
to rise consistently year after year. So, as the market presence of noncommercial traders
increased between 2003 to early 2008, the stance of these noncommercial traders has fairly
consistently been to hold bullish, long positions that supported rising prices. And, when their
market share was highest, so was their net long position, which again roughly coincided (acting
as a slight leading indicator) with the peak in oil prices at $147 a barrel in the middle of 2008
But didn’t the CFTC look at this data last summer and decide that it wasn’t speculators’ fault? Yes, but they missed the point, say Jaffe and Medlock:
Shifting aggregate expectations due to relatively tight short-term fundamentals and changing
composition of market participants are not aspects the CFTC normally examines, and these
factors are indeed essential to the proper analysis of the question of the role of speculators in
price formation. Thus, it can be argued that the models employed were not adequate to answer
the types of questions being asked.
Their argument seems thoroughly researched and well thought out. So what’s the equally thoroughly researched and thought out rebuttal saying speculators have nothing to do with rising oil prices? If there’s even a slight chance that non-commercial interests are leading to a spike in oil, isn’t that enough of a reason to limit their positions?
What’s the argument against it? That there will be less liquidity in the market? We had position limits for 50 years, with no liquidity problems, say Jaffe and Medlock. Why would we get those problems now?
Another argument we’ve seen is that this allows the market to effectively establish a price. We’re not sure we believe “the market” is establishing the right price if 50% of the people deciding the price have no real use for the oil.
The risks of not enacting tougher regulations outweigh the risks of doing so. Yesterday, we pointed out the risk to the dollar. As Jaffe and Medlock point out, there’s the risk that it could be causing oil prices to rise. When oil prices rise everyone is affected, and the economy is put at risk.
Is anyone willing to argue that oil isn’t a precious resource? Does anyone think it should be placed at risk of being manipulated by speculators? Because if not, then why shouldn’t the CFTC go ahead with its plan to limit positions?
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