Ending Oil Speculation Will Not Help Consumers

Much has been said recently about the evils of market speculation, and in the coming weeks Americans will hear a great deal about why Washington must protect against it. Senator Obama vows to curb oil-market speculation, while Senator McCain, rather defend buyers and sellers from government interference, accuses Mr. Obama of policy imitation.Governor Corzine, who had a successful career on Wall Street and now supports Mr. Obama, recently claimed that “everyone believes there is too much speculation in the oil markets,” and that much of that speculation is the result of the so-called Enron exemption. In a law enacted in 2000, many forms of derivative contracts for oil were exempted from some forms of regulation by the Commodity Futures Trading Commission.If Mr. Corzine were correct and unregulated speculation necessarily led to higher prices, one would expect the price of oil to have spiked after the passage of the Enron exemption. Of course, the opposite happened. Oil prices fell for much of the year that followed. Oil prices did not price precipitously for more than six years after the Enron exemption, a delay that only a politician could interpret as causal.Indeed, had oil prices spiked directly as a result of less government regulation of futures markets, Enron might still be in business today. It went out of business not because changed laws enabled the company to manipulate markets through futures trading, but precisely because prevailing laws and fundamental market economics did not.It simply is wrong to conclude that trading in futures and other derivative markets necessarily inflates the value of a commodity. If trading in future contracts for dollars would necessarily raise the value of a dollar as a commodity, we would have a stronger dollar. We do not. Future value of dollars are often lower than current values not because trading in futures distorts the current value of dollars, but, again, precisely because it does not.One is left to argue that futures trading has, at most, a small effect on the prices of commodities such as oil, but that such trading does not overwhelm more fundamental market conditions. The obvious conclusion is that, while we could reregulate futures trading for oil, we should not expect substantial price reductions. Indeed, we should not expect any.Moreover, prices have risen rapidly for many commodities whose futures are more heavily regulated than petroleum contracts. A wide range of commodities such as aluminum, copper, and several agricultural commodities have had substantial price volatility and increases over the past two years, even greater than those for oil.Even if it were true that speculation in oil markets led to somewhat higher prices, renewed CFTC regulation would not substantially affect futures contract prices. The reasons are twofold. First, investors can and do already trade futures contracts in many countries outside the reach of CFTC regulation. World futures contract prices are set in broader markets in Europe and Asia, not just those regulated by the CFTC.Second,imposition of new CFTC regulations on futures contracts would likely drive some futures trading offshore, both to established futures markets such as those in Europe, and possibly to new, undeveloped futures markets. Investors have choices of where to invest.To avoid the flight of investors from America under a new and harsher regulatory regime, the Obama campaign suggests greater international coordination and encourages other countries to adopt regulations similar to those in America.Even if America were to adopt bad regulations regarding market speculation, there is no reason to expect other countries to follow suit. And even if other countries imitated America, there is little solace to American consumers in knowing that not only would American regulators stand between them and willing sellers, but so too would Asian and European regulators.American regulators have challenges coordinating within their own agencies, much more with other federal agencies, much more with other state and local agencies, and certainly much more with regulatory agencies in more than 100 other countries.Market speculation is a concept that perhaps only economists love. Politicians do not love, much less understand, market speculation. Contempt is based on unfamiliarity; the bad consequences will be based on contempt.A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott–roth.com.

Ending Oil Speculation Will Not Help Consumers

Ending Oil Speculation Will Not Help Consumers

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