U.S. president Barack Obama unveiled a plan Tuesday to throttle oil price manipulation by market speculators as part of a bid to lower gasoline prices.
Obama wants the U.S. Congress to strengthen federal supervision of oil markets, increase penalties for market manipulation and allow regulators to slap energy traders with stiffer financial requirements to back up their trades.
Proponents of the plan say that when hedge funds and huge investment firms such as Goldman Sachs buy up futures contracts to bet on the direction of the price of oil, it drives up the price of the commodity, and by extension, the price of gasoline.
Others argue that the two are separate, that the derivatives have no underlying effect on the physical price of oil – just as betting on which team will win doesn’t affect the game itself.
Here’s a primer on the debate.
The background: The highly-politicized debate over oil market manipulation has been raging for more than five years. It previously came to a head in 2008 when crude oil prices spiked to $147 (U.S.) per barrel.
An initial report on the escalating prices by the Commodity Futures Trading Commission cited supply and demand. Today, experts often refer to potential shortages created by geopolitical tensions around Iran, and increased demand from massive emerging market economies such as China and India as reasons for high oil prices.
However, the commission issued another report a year later blaming the price hikes on oil speculators.
In May, 2011, the CFTC charged Parnon Energy and two traders with manipulating oil prices using a $50 million scheme.
A Bank of Canada discussion paper written by Ron Alquist and Olivier Gervais, published in July 2011, concluded that financial speculation played only a “modest role” in the 2003 to 2008 run-up in the price of oil.
Obama’s plan: The $52 million plan calls for Congress to increase six-fold the surveillance and enforcement staff of the Commodity Futures Trading Commission to detect and deter oil market manipulation; increase spending on technology to provide better oversight and surveillance of energy markets; increase civil and criminal penalties against firms that engage in market manipulation to $10 million from the current $1 million; give the CFTC the authority to increase the amount of margin required for traders to back up their positions.
The reaction: “I think this is unlikely to pass before November. Obviously we’re in an election year so it’s very political, but the only scenario I can see it possibly passing under before then is if there’s a huge spike as a result of a major supply disruption from Iran. That’s the only way I see it getting enough bi-partisan support,” Michael Wittner, global head of oil research at Societe Generale.
Carl Larry, president of Oil Outlooks in New York argued the U.S. already enjoys some of the cheapest oil prices in the world.
“There is little market manipulation in the oil markets and this is an easy way for him (Obama) to break it to the American people that oil is cheap in America,” he said.
The bottom line: Jason Toews, founder of GasBuddy.com and Torontogasprices.com, says that speculation does have an impact on gasoline prices, but he offers a caution.
“It’s going to be a good thing for oil and gas market if Obama does clamp down on speculators. But consumers shouldn’t expect gas prices to drop by half,” Toews said. “It’s not going to happen. We’re talking single-digit percentage differences and it’s not going to be a dramatic change at the pump.”
Original Article
Source: Star
Author: Madhavi Acharya-Tom Yew
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