President Barack Obama’s latest policy initiative to take a more aggressive stance against manipulation of oil markets received mixed reactions. The proponents of the measure, including Chairman of the Commodity Futures Trading Commission (CFTC), Gary Gensler, welcomed Obama’s proposal, noting that it “build[s] on progress the CFTC has made in making the unregulated swaps market more transparent and implementing new anti-fraud and anti-manipulation reforms.” Other federal agencies, including the Energy Information Agency, pointed out the role of oil supply disruptions from unstable parts of the Arab world as well as temporary interruptions from Canada, China and Brazil due to technical problems were key factors in elevated crude and gasoline prices.
A bigger argument against Obama’s policy initiative appears to be that high oil and gasoline prices are not because of the presence of financial investors in the oil futures markets and “there is no evidence that the bulk of the financial investors taking positions in oil futures markets since 2003 have engaged in such activities.” According to the Chicago Mercantile Exchange (CME) Group, which sets margins for the benchmark U.S. crude oil contract, “speculation should not be confused with manipulation.” Still, it is interesting that “speculators tend to buy crude when there is a strong underlying reason to do so such as the loss of Libyan crude last year or sanctions and possible military action against Iran” this year. In fact, higher oil price bets by speculators at times of an anticipated supply crunch from Libya and Iran increased prices by $15-$20 a barrel.
At this point, a prudent approach for the Obama administration to understand the oil futures market may be to monitoring it better, particularly since it plans to increase access to CFTC’s data, before setting trading margins on the market. The latter may carry unintended consequences, such as making prices more susceptible to swings by squeezing out smaller investors out of the market and giving more influence to bigger hedge funds and banks.