June 4, 2008

Turning futures markets into 'gambling casinos'

The Grocery Manufacturers Association and its collection of anti-ethanol groups said they chose to go after corn ethanol because they can’t control other things driving food prices, including high energy prices.

Most members of the Senate Commerce Committee would disagree on the energy price notion. The Committee held a hearing yesterday on energy market manipulation, and the testimony was clear that speculation has added a significant “premium” to oil prices. (For info on yesterday's CFTC announcement on ag futures, click here.)

Michael Greenberger, a law professor and former director of the Commodity Futures Trading Commission (CFTC), said markets that are supposed to allow individuals and companies to hedge their needs in a commodity like oil have been turned into “gambling casinos.” He said speculators were regulated in this country for 78 years, from 1922 to 2000. At that point, CFTC “modernization” legislation passed Congress and contained what is now referred to as the “Enron Loophole”. (Enron - who believed it could make more money bidding up energy in the futures market than by creating and selling energy.) This loophole allows speculators to take over energy markets.

George Soros, chairman of Soros Fund Management, said speculators should play a role in markets but that they shouldn’t control markets. If speculators are over involved, markets tip. Soros said it could be done with oil, even though it is a big market, but would be easier to do with agriculture futures.

Mark Cooper of the Consumer Federation of America said OPEC manipulation tacks on $40 to the price of oil, while rampant speculation tacks on an additional $40. Meanwhile, we’re all paying higher gas prices and small businesses are struggling to survive because they can’t hedge their needs

Greenberger said adding one word (“energy”) in two places in the CFTC legislation would control speculators. That and some other simple fixes would cause oil prices would drop 25 percent "overnight." He said the attempted fix in the Farm Bill won’t do it.

The testimony by these individuals and others, delivered in a replay last night by C-SPAN, was fascinating. Read their submitted comments or view the video here.

Read articles about the hearing here and here.

Oh…and here’s some interesting tidbits: A big player in the oil markets is the Intercontinental Exchange (ICE) based in Atlanta, who owns the International Petroleum Exchange in London. ICE was founded by Goldman Sachs, Morgan Stanley and British Petroleum and is unregulated because it is considered a foreign exchange. So if Goldman Sachs has a net long position in oil and it trades oil through ICE, who benefits when Goldman Sachs comes out and says oil could hit $200 per barrel?
And guess who is setting up an exchange in Dubai - with Dubai partners? NYMEX - the New York Mercantile Exchange. And what will they trade? Oil. Will it be regulated? Not by CFTC.

No comments:

Post a Comment