Speculation≠Manipulation*
Yesterday Obama delivered another of his it-must-have-been-some-other-body-it-wasn’t-me (h/t Chuck Berry) speeches on energy. And, true to form, he delivered another clarion call to round up the usual suspects: evil speculators, whom he confabulates with manipulators . (And I am being generous, because confabulation is inadvertent, whereas I Obama’s slander is almost certainly deliberate):
That’s what’s happening right now. It’s those global trends that are affecting gas prices. So even as we’re tackling issues of supply and demand, even as we’re looking at the long-term in terms of how we can structurally make ourselves less reliant on foreign oil, we still need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil.
That includes doing everything we can to ensure that an irresponsible few aren’t able to hurt consumers by illegally manipulating or rigging the energy markets for their own gain. We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher — only to flip the oil for a quick profit. We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick. That’s not the way the market should work. And for anyone who thinks this cannot happen, just think back to how Enron traders manipulated the price of electricity to reap huge profits at everybody else’s expense.
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That includes doing everything we can to ensure that an irresponsible few aren’t able to hurt consumers by illegally manipulating or rigging the energy markets for their own gain. We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher — only to flip the oil for a quick profit. We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick. That’s not the way the market should work. And for anyone who thinks this cannot happen, just think back to how Enron traders manipulated the price of electricity to reap huge profits at everybody else’s expense.
He used the word “manipulate” or “manipulation” 11 times in his relatively brief remarks. In typically dishonest fashion, he isn’t responding to specific, credible evidence of manipulation; he provides no evidence that manipulation is rampant or is at all responsible for current price levels. Hell, he can’t even come up with a current example, having to reach back more than a decade to Enron (itself a dubious example). He merely insinuates and implies. But the average listener or reader will conclude from his remarks that manipulation is causing their pain at the pump. Rather than encouraging a sober and realistic appraisal of the role of speculative trading in energy, he is feeding suspicions and encouraging a witch hunt.
Moreover, note the repeated and casual identification of manipulation and speculation. This is itself a manipulative use of language. Manipulation is not even a proper subset of speculation: hedgers can be some of the most dangerous manipulators. It further encourages the popular suspicion that financial trading in commodity markets is inherently dishonest and crooked.
Insofar as concrete steps are concerned, he is demanding substantial increases in resources for the CFTC to oversee the energy markets and a substantial hike in the criminal and civil penalties for manipulation. With respect to oversight, I’ve said more times that I should have to that the undetected manipulation is the unsuccessful manipulation. If manipulation distorts prices, that distortion will be manifest. Moreover, those harmed by the manipulation have every incentive to bring the manipulation to the attention of the regulators. The idea that manipulation is rife and is having huge impacts on prices, but it is necessary to surveil the markets intrusively using “modern tools” to find it is an oxymoron. Which means that greater penalties imposed ex post are defensible.
It doesn’t inspire confidence that Obama justifies the greater CFTC resources by quoting another of GiGi’s inane metaphors.
The other major concrete step is to give the CFTC authority over margins for energy derivatives. This is another hardy perennial: similar proposals were made with respect to stock index futures in the aftermath of the 1987 Crash.
Obama’s justification for this is risible: “Congress should give the agency responsible for overseeing oil markets new authority to protect against volatility and excess speculation by making sure that traders can post appropriate margins, which simply means that they actually have the money to make good on their trades.” So which is it? Are margins to ensure contract performance, or are they to reduce volatility and excess speculation? If the former, there is zero evidence that CME Group or ICE or OTC market participants aren’t charging margins that are sufficiently high to control efficiently counterparty risk. If the latter, there is (a) no evidence that there is excess speculation in energy, or that it is elevating volatility, and (b) no evidence that tweaking margins will have any impact on volatility. Indeed, hiking margins can raise volatility by reducing the amount of speculative capital available to absorb fluctuations in hedging demand.
In sum, the parts of Obama’s markets aimed at speculator-manipulators are intellectually confused, empirically baseless, and deeply irresponsible because they encourage a witch hunt atmosphere by slandering (by slimy insinuations) legitimate market actors as criminal manipulators.
Well played. Because of all the practice, no doubt.
A few other things stand out. First, he repeats the “we use more than 20 percent of the world’s oil and we only have 2 percent of the world’s proven oil reserves” mantra. Hell, even he admits he says this repeatedly: “But as I’ve said repeatedly.” Repetition of a dubious factoid does not make the conclusion it is intended to support true. Indeed, that’s a staple of the Big Lie.
Second, he continues to take credit for increased US oil output when in fact he and his administration don’t have a damn thing to do with it, except that it could have been higher yet without some of their counterproductive policies.
Third, take a look at this remark: “We’ve added enough new oil and gas pipeline to circle the Earth and then some.” To which my first response is: What do you mean “we” kimosabe? Again, a guy who has never done anything that would risk getting a callous taking credit for the actions of those that actually put hands to shovel and made some truly shovel ready projects realities. Moreover, it raises the question: if building so much pipeline capacity is such a great thing, why is he doing everything in his power to stall or stop Keystone? Is that uniquely damaging? (To the environment, I mean, not to the fortunes of Buffett’s BNSF.)
A rule of thumb to keep in mind. Whenever Obama talks about energy generally, and speculation specifically, it is safe to conclude you are being manipulated: that’s not at all speculative.
* Title suggested by R.
Obama politics –
Demonology – find someone to blame – to bad he can’t come out and blame the eviiiiiiiiiiiiiil Joooooooos directly, Hitler wrecked that one. Will just have to be satisfied with “speculators” (but only if they make money.
The modified George Washington: ” I cannot tell a lie – they did it.”
The two pronoun Presidency: “who, me?”
Rally the base: “Let’s have some race baiting!”
the ultimate meme being the President is helpless, unless something good happens, then he did it.
Comment by sotos — April 18, 2012 @ 8:52 am
Godwin’s Law notwithstanding, the comparison with those who blamed the Jews is exact.
I read Kershaw’s excellent “Hitler: Nemesis” about 10 years ago. He relates how, every time something went tits up for the Third Reich, Hitler would make a speech in which he exploded about how the Jews had really done it this time and they were bloody going to pay.
The German Army crushed at Stalingrad? I’ll get the Jews for this! This time the buggers have really gone too far!
Hamburg firebombed into a moonscape? Right – that’s it! The Jews are going to answer for this one, the bastards!
Rommel’s whole army captured in North Africa? It’s those Jews again! I’m going to really crack down on them this time!
The disconnection from reality is exactly the same other than in scale, but in both cases you do wonder whether either Hitler or Obama actually believe their own crap. I’m not sure if it’s more or less frightening if he does or doesn’t.
Comment by Green as Grass — April 19, 2012 @ 4:22 am
[…] common economic fundamentals rather than the financialization of oil futures markets.And another post, by Craig Pirrong, an expert in energy markets who pulls no punches:In sum, the parts of Obama’s […]
Pingback by Oil Speculators Are the New Boogeymen — April 19, 2012 @ 9:39 am
Funny how these speculators can’t stop natural gas prices from crashing to historical lows, isn’t it?
Comment by Tim Newman — April 19, 2012 @ 9:40 am
Tim-yup. A point I’ve made repeatedly in the last year, including in a CNN Money oped that ran a couple of weeks ago. I’ll post a link.
I think P. Obama should concentrate the government resources on finding the money his buddy Jon Corzine stole from MF Global customers!
Comment by Bob — April 19, 2012 @ 6:31 pm
Russia Forgoes Shale Gas – The delicate balance of gas production
http://www.dailyfinance.com/2012/04/11/russia-forgoes-shale-gas/
There may be more reasons to hold back on shale gas production. Russia supplies the European Union with 25% of its natural gas needs. Demand in Europe is currently outpacing supply, keeping prices up. The price of natural gas on the continent is about $12.50 per MMBtu. If Russia went after shale gas, the influx of more product would likely drive that price down, cannibalizing profits and creating a situation much like the one we see in the U.S. right now, where natural gas prices are closer to $2.03 per MMBtu. For those keeping score, that’s a new 10-year low.
Pentagon Study: ‘08 Financial Crisis May Have Included Work of Finanical Terrorists
The Freeman paper visualizes a three-stage assault on the US economy, and the American position of military, political, and economic leadership, only two parts of which are so far completed.
The hypothesis under consideration is that a three-phased attack is underway with two of those phases completed to date.
The first phase was a speculative run-up in oil prices that generated as much as $2 trillion of excess wealth for oil-producing nations, filling the coffers of Sovereign Wealth Funds, especially those that follow Shariah Compliant Finance. This phase appears to have begun in 2007 and lasted through June 2008.
The rapid run-up in oil prices made the value of OPEC oil in the ground roughly$137 trillion (based on $125/barrel oil) virtually equal to the value of all other world financial assets, including every share of stock, every bond, every private
company, all government and corporate debt, and the entire world‘s bank deposits. That means that the proven OPEC reserves were valued at almost three times the total market capitalization of every company on the planet traded in all 27 global stock markets.
The second phase appears to have begun in 2008 with a series of bear raids targeting U.S. financial services firms that appeared to be systemically significant.
An initial bear raid against Bear Stearns was successful in forcing the firm to near bankruptcy. It was acquired by JP Morgan Chase and the systemic risk was averted briefly. Similar bear raids were conducted against various other firms during the summer, each ending in an acquisition. The attacks continued until the outright failure of Lehman Brothers in mid-September. This created a system-wide crisis, caused the collapse of the credit markets, and nearly collapsed the global financial system. The bear raids were perpetrated by naked short selling and manipulation of credit default swaps, both of which were virtually unregulated. The short selling was actually enhanced by recent regulatory changes including rescission of the uptick
rule and loopholes such as ―the Madoff exemption.
While substantial, unusual trading activity can be identified, the source of the bear raids has not been traceable to date due to serious transparency gaps for hedge funds, trading pools, sponsored access, and sovereign wealth funds. What can be demonstrated, however, is that two relatively small broker dealers emerged virtually overnight to trade ―trillions of dollars worth of U.S. blue chip companies. They are the number one traders in all financial companies that collapsed or are now financially supported by the U.S. government. Trading by the firms has grown exponentially while the markets have lost trillions of dollars in value.
The risk of a Phase Three has quickly emerged, suggesting a potential direct economic attack on the U.S. Treasury and U.S. dollar.
Such an event has already been discussed by finance ministers in major emerging market nations such as China and Russia as well as Iran and the Arab states. A focused effort to collapse the dollar by dumping Treasury bonds has grave implications including the possibility of a downgrading of U.S. debt forcing rapidly rising interest rates and a collapse of the American economy. In short, a bear raid against the U.S.financial system remains possible and may even be likely. Phase Two may have concluded with the brief market rebound that was supported by an emerging regulatory response calling for greater transparency across the board.
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Freeman observes: “[W]e remain left with the critical unanswered questions of who and how?”
Comment by Anders — April 20, 2012 @ 6:43 am
[…] Craig Pirrong commented on the supposed crackdown on the supposed gasoline price manipulation. Yesterday Obama delivered another of his it-must-have-been-some-other-body-it-wasn’t-me (h/t Chuck Berry) speeches on energy. And, true to form, he delivered another clarion call to round up the usual suspects: evil speculators, whom he confabulates manipulators with speculators. (And I am being generous, because confabulation is inadvertent, whereas I Obama’s slander is almost certainly deliberate): … […]
Pingback by Pickerhead :: Pickings from the Webvine ::April 22, 2012 — April 22, 2012 @ 3:37 am