More Speculation on Oil Bubbles

The many factors that go into the setting of oil prices these days are not fully understood. That is why there is so much debate about whether or not there is an "oil price bubble" in the market currently. The rules for commodity trading were changed in the Clinton administration, making it easier for companies like Enron to slip through the regulatory cracks. Many of the smartest theorists in finance are saying that it is impossible to know 100% whether a speculative bubble exists--under current trading rules and lax regulation by the CFTC.

The problem is that the futures market has gotten so big, and the trading rules in the markets so lax, that it's not easy to dismiss the speculation theory.

The infamous December 2000 "Enron loophole" is the topic du jour in Congress. That legislation didn't just make it easier for savvy traders to buck the system. It exempted entire over-the-counter electronic exchanges (where trading takes place directly between parties, without an intermediary broker) from regulatory oversight by the Commodity Futures Trading Commission.

As a result, capital zoomed to new unregulated exchanges like Atlanta-based ICE, an American firm operating under U.K. regulation, where trading volume tripled from 2005 to 2008, representing 47.8% of global oil futures trading. And participants in the new electronic markets didn't even have to file "large trade reports" with the CFTC, obscuring trading details across the fastest growing exchanges. That's scary murkiness.

In addition, while the 1936 Commodity Futures Exchange Act once curtailed excessive speculation, the Enron loophole redefined who a speculator was, and more importantly, wasn't. If investment banks could claim they were "hedging" certain derivative trades, they could avoid speculation limits set by the exchanges altogether.

"In dark markets, more paths of manipulation are available," says former CFTC trading division head and University of Maryland Law Professor Michael Greenberger. "That may not be happening now, but we just don't know."

...If speculation isn't driving spot oil prices, the [proposed] laws would have no effect on them. But, to the extent that something funky is going on in the futures market, a clearer picture of the market's participants and of oil's true value would emerge. That might help an ailing economy.

"You can't solve the debate without looking at what's happening," says Greenberger. "Even people who accept the supply and demand argument, must accept that the markets are too opaque. We need to look at the data, so we can know for sure." __Fortune

OPEC is eager to blame speculators for the price jumps, but then OPEC would point the finger at anyone or anything to keep the attention away from the oil dictators and kleptocrats in member nations. Biofuels is among the latest OPEC targets.

It is likely that the overwrought prices in the oil market are caused by multiple factors. Speculation may be responsible for 10% to 20% of the excess pricing. But OPEC is certainly responsible for as much. And the US Congress under Boxer and Pelosi are most responsible of all--for they are the ones hamstringing the US domestic energy industry. Which means that Boxer, Pelosi, and corrupt company are hamstringing all of us.

It will be interesting to see where the US presidential candidates position themselves on this issue as Novemeber 08 approaches.