CFTC Commissioner Bart Chilton has been touting research that he claims supports his view that speculation has distorted prices, thereby necessitating position limits. I’ve read each one. My conclusion: if this is the best he can come up with, the case for position limits is weaker than I thought. And that’s saying something.
The citations fall into a couple of categories: superficial quasi-academic studies, and quotations from various figures, including some well-known economists, who have done absolutely no serious research on the subject.
Here are my quick takes on each one.
“The Oil Price Really is a Speculative Bubble.” (“The Oil Price Really Is a Speculative Bubble,” R. S. Eckaus, MIT Center for Energy and Environmental Policy Research, June 13, 2008). This paper is extremely thin gruel. It briefly discusses data on consumption and production of oil, but carries out no statistical analysis. Indeed, Eckaus says: “We cannot pick out the constraining effect or prices on demand without doing a lot of careful statistical analysis, which is beyond the extent of this note.” A note, mind you. No formal model. No econometrics. Nothing. Eckaus at least recognizes that speculation would tend to distort inventories, but does not carry out any analysis of inventory data. Indeed, he acknowledges “that [an increase in inventories] has not occurred,” and provides two silly excuses for the lack of a stocks runup. ”First, inventory capacity is relatively low.” But then there should still be evidence that inventory was hitting capacity–he provides none. More damningly, in 3Q2008-2Q2009 inventory levels exploded. This means that inventory holdings were not capacity constrained during the peak in the summer of ‘08. He also says that OPEC successfully limited production, thereby preventing an inventory buildup. Er, wouldn’t that be a price-increasing reduction in supply? How does that implicate speculation? Eckaus essentially argues that he can’t find any other reason for high prices, so it must be speculation. Extremely weak.
“Who Is In the Oil Futures Market and How Has It Changed?” Kenneth B. Medlock III and Amy Myers Jaffe, James A. Baker III Institute for Public Policy, Rice University, August 26, 2009. Please. This study is wretched. How wretched? This wretched. Let us pass over this in silence, to spare Medlock and Jaffe any further embarrassment.
Paul Krugman from Princeton and the London School of Economics said in 2009, “So, this time there’s no question: speculation has been driving up prices.” “Oil speculation,” Paul Krugman, New York Times Editorial Blog, July 8, 2009. Chilton’s use of this borders on intellectual dishonesty. Note the date–July, 2009, whereas the price spike was July, 2008. Moreover, note Krugman’s “this time,” making clear that he’s making a distinction between the summers of ‘08 and ‘09. In fact, during the summer of 2008 Krugman argued it was not driven by speculation. If Chilton wants to cite Krugman, cite all of Krugman’s opinions on the subject.
Jeffrey Sachs from Columbia University said, “The fact that prices soared and then came down so much really does suggest that there was a speculative element to it. (“Corn Futures Spark Riots as Speculators Take Trading to Limit,” Ian Katz and Ari Levy, Bloomberg, December 15, 2008). Unsupported opinion by someone who has done no research in this area.
Robert Aliber at the University of Chicago said, “You’ve got speculation in a lot of commodities and that seems to be driving up the price….” (“Oil Rally Topped Dot-Com Craze in Speculators’ Mania,” Michael Patterson and Elizabeth Stanton, Bloomberg, June 13, 2008). More unsupported opinion by someone who has done no research in this area. (BTW, I took a class from RZA at Chicago in 1980–during the Hunt silver episode, ironically. I learned some things from him. He was entertaining. He always reminded me of Thurston Howell III.)
Nouriel Roubini of New York University said in 2009, “Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand.” (“The risk of a double-dip recession is rising,” Nouriel Roubini, Financial Times Opinion, August 23, 2009). More unsupported opinion by someone who has done no research in this area. And more borderline intellectual dishonesty by Chilton–again note the summer, 2009 date.
“The 2008 Oil Price “Bubble”,” Mohsin S. Khan, Peter G. Peterson Institute of International Economics, September 19, 2009. This is the best of the lot, but the opinion is far more guarded and equivocal than Chilton insinuates: ”one cannot rule out speculative buying as a cause of the price surge.” Wow, based on that ringing conclusion, we should definitely impose position limits. Khan examines consumption and production data and claims that it cannot support the view that demand tightness caused the price rise. Again, he performs no formal statistical analysis. Moreover, his analysis of the Verleger hypothesis is rather superficial and unpersuasive. Khan acknowledges that “it is very difficult to measure speculation in any direct way” and criticizes heavily the use of commitment-of-trader data: Chilton should pay attention to that. To his credit, Khan does mention the inventory implication, but punts: “one should not draw strong inferences because the data on oil inventories are notoriously poor.” Well, go with what you got. Good inventory data are available for the US, and they show no such effect. How would it be possible for inventories to swell worldwide due to speculation, but not in the US? Khan also mentions the difficulty of measuring oil afloat, but (a) there was widespread coverage of use of tankers to store inventories during the crash, and (b) the use of tankers to store heavy oil (primarily from Iran) during the summer when the market was dying for light crude was also well covered. So if there had been a surge in floating speculative stocks, it likely would have been noticed if not measured precisely. Like Eckaus, Khan arrives at his conclusion that speculation might have been a cause of the price spike by rejecting alternatives on the basis of superficial empirical analysis. He provides no serious explanation as to how it could have done so. A good part of Khan’s piece refers to the opinion of the CFTC (there’s some circularity for you) and Arab oil ministers. Yeah. There are some objective sources for you.
“The Effects of Ethanol on Texas Food and Feed,” Agriculture and Food Policy Center, Texas A&M University, April 10, 2008. This study merely asserts that speculation caused prices to rise more than they should have. There is no empirical analysis whatsoever, just a recitation of statistics about growth in commodity funds, and a completely unsupported assertion that “the price exaggeration generated by these investment funds is so pervasive.” This “study,” in brief, is a joke.
Richard Branson of the Virgin Groups said, “There is strong evidence that speculation exacerbated the last oil and food bubble. Speculation will fuel the next one too, unless meaningful speculative position limits are established.” (Letter to The Economist, July 29, 2010). Richard Branson? Really? Appeal to non-authority.
The International Monetary Fund (IMF) said in an Outlook report that, “…it appears that speculation has played a significant role in the run-up in oil prices….” (IMF Regional Economic Outlook: Middle East and Central Asia, May, 2008). There is no serious empirical analysis in this report.
Since Chilton has had three years to trawl the earth to find work that would support his idee fixe, it is rather amazing that this is the best he can come up with. It’s rather sad, actually, that he believes that he is looking at the problem in a “more sophisticated way.” Although Chilton says that based on his literature review, “[i]t’s simply not the case that ‘there is no evidence that financial investors affect commodity prices,’” that’s not true. What I wrote in Regulation last summer, and what I’ve repeated numerous times on this blog remains true. As yet there is no serious theory, and certainly no serious evidence that speculators have distorted commodity prices.