- When oil prices shot skyward last summer, Congress impelled the CFTC to investigate the role of speculators—the final report found no link.
- New CFTC Chairman, Gary Gensler, is once again pushing for regulation against "excessive speculation" in commodities markets.
- But limiting "speculative" price discovery throws supply and demand out of whack and makes markets more volatile, not less.
- Luckily, there are no guarantees the proposed limits will be applied in their current form—cooler (wiser) heads may yet prevail.
Remember when oil prices spiked last summer? Hard to forget—given the barrage of breathless daily gas price updates and cries of speculative foul play. As oil soared north of $140 a barrel, the age-old debate raged in Washington. Was it really spiteful speculators (with only personal profit as motivation) driving prices higher? And if so, shouldn't they be stopped?
At Congress's behest, the Commodity Futures Trading Commission (CFTC) looked into it. Their subsequent report determined fundamental supply and demand was the most likely culprit and "increases in the speculative activity and the number of traders in the crude oil futures market do not appear to have systematically affected prices." Today's commodities market is simply too huge for any one investor or even groups of investors to affect much. And most participants in these markets actually deal in these commodities and are hedging or locking in prices (like airline companies for example).
One would think the CFTC's report would have ended the debate. But since then, leadership has changed. New CFTC Chairman, Gary Gensler, is once again pushing for regulation against "excessive speculation." Gensler's proposed changes would limit the size of investments in oil, but it could be further extended to other commodities markets.
We're all for preventing malicious wholesale manipulation. But we're not talking about manipulation here. We're talking about speculation, which is just another way of saying price discovery—the central role of markets. Limiting price discovery throws supply and demand out of whack and makes markets more volatile (not less!). And how can we determine when speculation gets "excessive"? Who draws that line? And where? Due to the sheer size and complexity of the marketplace, no single entity has enough information to make those decisions. Only the aggregate wisdom of all market participants can do that.
Luckily, the discussion isn't over. The CFTC will hold hearings this month and next to determine subsequent action. There are no guarantees the proposed limits will be applied in their current form—cooler (wiser) heads may yet prevail.