Witnesses: Energy Speculation Not Evil

WASHINGTON (HedgeWorld.com)–The Agriculture Committee of the U.S. House of Representatives heard from two witnesses very familiar with the workings of the commodities markets Thursday [April 27], and each assured the committee members that futures speculation isn’t an alien force hijacking the fundamentals of the energy markets, but is in fact part of the price-discovery mechanism of those markets.

In his opening statement, the committee’s chairman, Robert Goodlatte (R-Va.), called for a continued debate on what the United States can do to reduce its dependence on foreign imports of oil–and spoke, in particular, of the folly, as he sees it, of leaving the Arctic National Wildlife Refuge and its potential petroleum reserves untapped.

After making that point, he turned to the subject of the hearing. “As the committee has oversight responsibility over the futures market, I want to ensure that activity on the futures market is not allowed in any way to unduly influence the high price of gasoline,” he said. “There have been many theories generated about the causes of our current energy dilemma including the impact of the futures market and speculators on the gasoline market.”

Walter L. Lukken, a commissioner of the Commodity Futures Trading Commission, told the committee that the CFTC has been paying particularly close attention to futures trading in energy commodities, “because of the importance of energy prices and supplies to the U.S. economy and to every U.S. citizen.”

He said that in the course of this scrutiny, the CFTC has inferred that the crude oil and gasoline futures markets have been accurately reflecting the underlying fundamentals.

In making this point, he described the CFTC’s Large Trader Reporting System, which requires clearing members of exchanges, futures commission merchants, and foreign brokers to file daily reports concerning their own and their customers’ positions. The CFTC thereby becomes aware of concentrated and coordinated positions that might be used for purposes of manipulation. The staff can also issue special calls for supplemental information on a market participant’s trading and delivery activity.

Data from this system, he said, can help sate the committee’s curiosity about the role of non-commercial traders (also known as “speculators”) in the energy markets. Speculators take the other side of commercial traders who go into the market to hedge the risks that they face in their day-to-day operations. “An ‘all hedgers’ market simply can not work.”

In recent years, he said, increased economic growth in China has increased demand for oil and gasoline. Further, in the short run the supply curve for these goods is price inelastic–and by definition even a small change in the demand conditions, fed into an inelastic supply curve, can create a very large difference in price.