Congress Seeks to Curb Oil Speculation

[flashl]

WASHINGTON -(Dow Jones)- U.S. federal lawmakers think they may have found a way to pop what's possibly an energy market bubble.

If they have, proposed regulations targeting speculation limits could prick one of the most dramatic run-ups in crude-oil prices in history.

By targeting two loopholes, U.S. legislators from both parties hope to limit the amount of buying by purely financial players such as hedge funds and investment banks - effectively cutting billions of dollars in additional demand in commodity markets - and to bring prices closer to earth.

"It's incredibly important to take action," said Sen. Maria Cantwell, D-Wash., a member of the Energy and Commerce Committee. "I want to make sure that we are doing everything that we can in the U.S. to burst this oil-price bubble," Cantwell said on the Senate floor last week.

The move comes as crude barrels on, hitting an intraday high above $135 a barrel last week, double its price on the New York Mercantile Exchange a year ago. Agricultural products such as cotton, wheat and rice have also risen between 50% and 120% in the last year.

Crude prices have been supported by the increased cost of finding and extracting crude oil. Oil executives say lifting costs run $55-$75 a barrel. A weakening dollar, a thin cushion of spare production capacity, growing demand and tensions in oil-producing regions are also playing roles.

Smart Money

[slackmaster]

1. "possibly" a bubble?

It sure as hell looks like one to me.

[Captain Angry]

2. I wonder if there is any futures/forwards trading by purely financial players in London.

Or Singapore, or Hong Kong, or Japan, or Germany...

Smoke and mirrors.

[SergeyDovlatov]

3. that should lead to higher price volatility

Those speculators that make money perform a vital society function of smoothing price shocks, by buying commodity when it is priced too low (according to their judgement) and thus rising its price and selling it off when it is high (thus lowering the price).

In other words, they buy excess when there is a glut and release it when there is a shortage. This brings profit to speculators and smoothes prices for everybody else.

There are also dumb speculators that get cheap money (see federal reserve) and use it to do random things on the market, being a housing bubble, oil bubble, etc. Those are very harmful.

Unfortunately those dumb speculators frequently bailed out, since they are "too big to fail".

The only reasonable way to address the dumb speculator problem is to switch to commody backed money which will prevent dumb speculations due to absense of easy credit. (You can only borrow what was saved and if you lose there is no federal reserve printing fresh money to bail you out).

[crazymans economics]

4. At least two people had it figured out...

As with most committee hearings, it was a lot of bluster and chest-thumping and double-speak, with very little accomplished. However, two people appeared that had an idea of the dangers of the commodities market.

One was Michael Greenberger, law professor and fmr. Clinton Justice Department official. Here's a transcript of his presentation: http://commerce.senate.gov/public/_files/IMGJune3Testimony0.pdf

The other was Dr. Mark Cooper of the Consumer Federation of America who spoke of the dangers of the market to consumers. His testimony is here.

Here's the problem: They think the commodities markets can be "fixed" by making adjustments to margins or closing the "Enron loophole," even though they are trying to put a band-aid on a mortal wound. It's not that the markets are broken, it's that the existence of the markets THEMSELVES is the problem.

We can get word to Professor Greenberger and Dr. Cooper that they have their toe dipped in the water, but they need to jump in. If they had a copy of "Crazyman's Economics" and I can speak with them, I can give them the ammunition to take back to the committee.

Please take a moment to e-mail Professor Greenberger at
E-mail:
mgreenberger @ law.umaryland.edu

And Dr. Cooper at [e-mail].

Tell them that T.E. Scott, a.k.a. the "Crazyman" can help their cause.

www.crazymanseconomics.blogspot.com