For years I have been saying and writing that every spike in energy prices results in a replay of the final scene from Casablanca: “Round up the usual suspects,” with speculators being at the front of the line. No exception now. With rising gas prices being the main threat to his reelection prospects, Obama and other Democrats are doing their best Captain Renault imitation. Obama:
Obama sought to deflect growing Republican attacks over rising prices at the pump, blaming recent increases on a mix of factors beyond his control, including tensions with Iran, hot demand from China, India and other emerging economies, and Wall Street speculators taking advantage of the uncertainty.
“Wall Street profiteering, not oil shortages, is the cause of the price spike,” Pelosi said in a statement. “Unfortunately, Republicans have chosen to protect the interests of Wall Street speculators and oil companies instead of the interests of working Americans by obstructing the agencies with the responsibility of enforcing consumer protection laws.”
And, again at the risk of sounding like a broken record (responding to a vast collection of broken records): no theory, no evidence.
With respect to evidence, a heads up: The opponents of the “financialization” of commodity markets have flogged the Singleton paper on oil index trading for all it is worth. I am putting the finishing touches on a far more extensive study, the conclusion of which is quite simple: the Singleton results do not stand up in a broad sample of commodities, or even in oil for a longer sample period. Watch this space.
In other words: try again, guys. But that would actually presume, I guess, that evidence matters to these people, anyways.
One thing struck me about the Obama and Pelosi statements: the deliberate inclusion of “Wall Street” in their formulation, as in “Wall Street speculators.” What, London, Geneva, and Singapore don’t rate?
Which brings another movie image to mind: the scene in Frankenstein in which the villagers storm the castle. Obama and Pelosi are just following the #OWS-themed, Valerie Jarret-inspired class warfare campaign script. Be prepared to be bombarded with similar rhetoric for the next eight months. And the shrillness of the attacks will vary directly and exponentially with the price of gasoline.
I don’t have a lot more to say on the subject, primarily because there’s not a lot new to say. Obama and Pelosi are being good greens, and recycling well-used rhetoric.
I was interviewed on the subject Tuesday for an NPR piece. It does a pretty good job of summarizing what I said in a 20 minute interview. A few brief comments:
- The CFTC claims that it has brought numerous energy enforcement actions and collected large fines. This is highly disingenuous. Highly. These have not been in the oil market (except for the Arcadia case which I criticize in the piece, echoing what I’ve written on SWP). They have not shown any connection between speculation and manipulation and high oil prices. Virtually all of these cases relate to price reporting fraud and wash trading in the natural gas markets during the merchant energy boom, prior to the demise of Enron and the merchant energy meltdown in 2002. I was highly involved in efforts designed to prevent these abuses from recurring. Efforts that did not come to fruition, but which focused on a solution (the creation of transaction data hubs with mandatory reporting) that has now been adopted for the derivatives markets worldwide-not just natural gas in the US. That is arguably one of the only sensible things in Frankendodd.
- The piece mentions John Arnold making a billion in speculating. Yes, he did. In gas. The price of natural gas is at near-historic lows, demonstrating that speculative activity does not inevitably cause prices to be high. Indeed, the disconnect between natural gas prices and oil prices is a huge embarrassment to the anti-speculation mob, especially those who claim that index investing (which results in highly correlated trades in oil and gas) is a dominant force in driving commodity prices.
- It drives me to distraction that “speculation” and “manipulation” are used interchangeably. No. No. No.
- Manipulation definitely occurs in commodity markets, including the energy markets: for instance, manipulations were common in the Brent market in the late-90s and early-00s, and may become more common again as BFOE production continues to diminish. These manipulations lead to highly temporary and localized price distortions. Most of the Brent squeezes resulted in elevations in Brent prices for days, or a few weeks, and didn’t push up prices of other types of oil: indeed, the main symptom of these squeezes was the rise in Brent relative to other grades and locations. As another example, the BP propane squeeze (a case I was involved in) resulted in a spike in TET propane prices for about two weeks. They don’t explain persistent, global prices spikes.
Hopefully I will have the results on the expanded Singleton analysis available within a few weeks. Until then, get prepared for a continued onslaught against “Wall Street profiteers and speculators.” La plus ca change . . .