[Marxism] Oil prices

[bauerly@xxxxxxxx]

Are big bets by speculators driving up oil?
Experts disagree on what's behind rising crude prices
By Adam Shell
USA TODAY

Speculation about whether speculators are to blame for the superspike in oil
prices is in overdrive.

Now that it costs $100 to fill up big SUVs, an Agatha Christie-esque whodunnit
featuring finger-pointing lawmakers and suspected speculators is gripping this
oil-obsessed nation in search of someone to blame.

Anyone who drives a gas-powered vehicle or runs a business that uses oil ? and
is experiencing financial distress ? can't help but wonder: What's causing
prices to go up so much?

In the early 1970s, the Organization of Petroleum Exporting Countries was Public
Enemy No. 1, thanks to its oil embargo, which caused gas shortages in the USA
and long lines at the pumps.

But today's energy crisis is different. OPEC insists there's plenty of oil.
There's no queuing up at gas stations. And Congress is pointing fingers at an
altogether different villain: financial speculators.

"When I began to see wild swings in gas prices, I was suspicious of mischief in
the markets," said Rep. Bart Stupak, D-Mich., who recently introduced an
updated version of a bill dubbed the PUMP Act, or Prevent Unfair Manipulation
of Prices Act.

The proposed legislation aims to close regulatory loopholes that enable
speculators to manipulate and artificially inflate the price of energy.

Efficient market purists disagree. U.S. Treasury Secretary Henry Paulson,
billionaire investor Warren Buffett and the oil-rich kingdom of Saudi Arabia
all insist that free-market forces are at work. They cite the Economics 101
concept of supply and demand as the main reason a barrel of oil has surged
above $140, up nearly 50% in 2008.

Phil Flynn, senior market analyst at Alaron Trading, sums up this thesis best:
"You can argue that the economic fundamentals for oil are as strong as they
have ever been in mankind's history." He cites robust demand from emerging
economies around the world, a growing belief that future oil supplies will be
tight, and the ability of foreigners to buy oil cheaply because of the steep
drop in the value of the U.S. dollar.

Still, the search for a culprit is not surprising given how far and how fast oil
prices have risen. Oil prices are now higher than the record set in the late
'70s, adjusted for inflation. The oil rally is now bigger than the Nasdaq
composite's run during the Internet stock bubble, Bespoke Investment Group
says. And the energy sector is now the second biggest by market value in the
Standard & Poor's 500 index, at 15.6%, three times larger than it was at the
Nasdaq top in March 2000, says S&P.

The financial fallout is hard to ignore. Oil's rise has caused a sharp drop in
stock prices, made it harder for average Americans to make ends meet, forced
U.S. automakers to rethink their emphasis on gas-guzzling SUVs, and put
domestic airlines on a death watch.

That's why Congress is on the offensive. Lawmakers are holding what seems like
daily hearings to figure out what's going on in the futures markets where the
price of oil is set. They have introduced a flurry of legislation designed to
curb speculation. They are also working to boost the manpower and financial
resources of the Commodity Futures Trading Commission, the USA's top
commodities cop, to help it better monitor and detect questionable trading
practices. The CFTC has 447 full-time employees, 50 fewer than at its inception
in 1976.

Stupak has cited statistics showing that speculators account for roughly 70% of
energy trading, up from 37% in January 2000, on regulated U.S. exchanges.
However, the CFTC says that number is flawed because it includes trades by
investors, not deemed as speculators, for the purpose of hedging and risk
management.

"Speculation is not illegal, but that does not mean it isn't hurtful," said Sen.
Joe Lieberman, I-Conn., at a Senate hearing last Tuesday addressing the role of
speculation on energy prices. He plans to roll out an anti-speculation bill
after July 4.

"Speculators," added Lieberman, "are moving enormous amounts of money into
commodity markets for the obvious purpose of making more money. But in doing
so, they are artificially inflating the price of fuel futures and causing real
financial suffering for millions of people."

Some lawmakers contend that oil prices would tumble sharply, perhaps to $60 a
barrel, if speculators were banned from commodities markets. They suspect ? but
have yet to prove ? that illegal market manipulation is inflating a commodities
"bubble." The CFTC acknowledges that it started a nationwide probe in December
to investigate possible illegal activity in the oil futures market.

But without full knowledge of who all the players are and how big their
positions are in the oil futures market, both regulators and politicians admit
it's tough to prove their suspicions. "At this point, we simply don't know what
role speculation or manipulation is playing in price increases," Sen. Dick
Durbin, D-Ill., chairman of the Appropriations Subcommittee on Financial
Services and General Government, said in a recent statement.

Some energy experts say singling out speculators as scapegoats is misguided.

Market forces are to blame for the bulk of the run-up in energy prices, says Jim
Ritterbusch, president of energy consultant Ritterbusch and Associates. He
points to a massive demand surge from China and India. The falling value of the
U.S. dollar also deserves blame. Oil is priced in dollars, which makes it more
affordable for foreigners paying with stronger currencies. He also cites a lack
of investment in energy infrastructure and supply constraints.

Ritterbusch also says the Iraq war, rumblings of an Israeli-Iran dispute, and
political upheaval in Nigeria have increased uncertainty about future oil
supplies. The lack of good investment alternatives (stocks are down 13% this
year, and long-term U.S. government bonds are yielding around 4%) has prompted
big investors to divert more capital to better-performing assets, such as oil.

"Commodities such as oil, grains and metals have become the new kids on the
block," says Ritterbusch of the influx of buy orders into the market.

So what exactly are lawmakers screaming about? And how are they proposing to fix
it?

Congress has pinpointed two major areas of concern. One is the rise in energy
prices they say is resulting from fresh cash being invested in commodities. The
second issue involves regulatory loopholes that allow speculators to operate in
relative secrecy, outside the purview of U.S. federal regulators. A closer look
at the two:

Impact of index funds.

Much of the controversy surrounds massive investments in commodity-based index
funds by pension funds and hedge funds in search of diversification, better
returns and protection against rising inflation. Since 2004, assets in index
funds that track a basket of commodities have jumped from $30 billion to $180
billion, says S&P. The popular S&P GSCI commodity index has a 70% weighting in
energy-related commodities.

The emergence of commodities as an "asset class" ? no different than stocks or
bonds ? is causing concerns. Big institutions have decided to boost their
long-term, buy-and-hold portfolio weightings in commodities. In March, the
California Public Employees' Retirement System (Calpers), the largest U.S.
pension fund, said it may increase its commodities exposure to $7.2 billion
from less than $1 billion by 2010. These funds are being branded as speculators
because they have no intention of taking delivery of oil, unlike airlines or
trucking firms.

In testimony before the Senate in late May, hedge fund manager Michael Masters
said investments in all funds tied to oil futures have risen to $260 billion,
from $13 billion in 2003. This massive cash infusion, he noted, has coincided
with higher energy prices.

It is akin to investors' chasing returns as they did during the tech stock boom,
says Jeffrey Kleintop, chief market strategist at LPL Financial. "Higher oil
prices destroy demand for actual barrels of oil, but higher prices also
encourage more investors to chase performance and put more cash into
commodities."

But Merrill Lynch commodity analyst Francisco Blanch says there is "no evidence"
that index money is responsible for rising prices. He says gains for commodities
that are not linked to indexes, such as coal, rice and steel, have posted bigger
returns than oil. And orange juice, tin and platinum have enjoyed big gains
after dropping out of the biggest commodities index.

Many analysts say the only way speculators can artificially increase prices is
by hoarding oil and taking supply off the market. But there is scant evidence
that is occurring.

Still, lawmakers and regulators are proposing potential position limits on big
investors. Lieberman's upcoming bill would restrict commodity investments by
institutions that invest through index funds. CFTC Commissioner Bart Chilton
says if his agency's study of commodity index trading, which will be sent to
Congress on Sept. 15, shows that index players are creating a negative economic
impact, new rules and controls might be required.

Impact of loopholes.

A major roadblock for U.S regulators is that they have not had oversight of all
futures trades tied to U.S. crude oil. The CFTC has regulatory and
data-gathering powers over trades placed on the New York Mercantile Exchange,
or Nymex. But it has not had the power to regulate or investigate trades
involving U.S. oil futures that originate in an electronic futures exchange
based overseas.

An estimated 30% of U.S. oil futures trades are executed abroad, mainly in
London on the ICE Futures Europe exchange. The problem: Those trades, which are
not subject to the same position limits or reporting requirements as New
York-based trades, fly under the CFTC's regulatory radar. It's called the
London Loophole. This loophole raises the specter of, say, a hedge fund
purposely driving up prices on a foreign exchange to influence the price of
futures contracts traded in the USA.

That's about to change. A number of bills circulating on Capitol Hill, including
the PUMP Act, would give the CFTC regulatory authority to police foreign trades
involving U.S. futures contracts. The CFTC has also established new conditions
that require traders using the London-based ICE exchange and other foreign
exchanges to trade U.S. oil futures to abide by the same rules that apply at
Nymex.

The CFTC "needs to have a complete picture," said CFTC's Chilton. It can't just
"have an eye only on what goes on in New York."

To limit market access and make it more expensive for speculators to buy oil
futures contracts, some Democrats in Congress propose to boost margin
requirements to 50%, which is what stock investors pay. Currently, traders need
to put down 5% to 7% in cash to buy a futures contract. That means a trader can
control $10 million of future oil contracts by putting $500,000 to $700,000
down, says Daniel Clifton of Strategas Research Partners.

A report from TrimTabs Investment Research predicts oil prices would "collapse"
if the margin requirement were raised to 25%. The CFTC and Nymex both are
against raising margin requirements, saying it would cause business to move
overseas.



________________________________________________
YOU MUST clip all extraneous text when replying to a message.
Send list submissions to: Marxism@xxxxxxxxxxxxxxxxxxx
Set your options at: 
http://lists.econ.utah.edu/mailman/options/marxism/archive%40archives.econ.utah.edu