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Administration’s Steps on Oil Market Speculation Mostly Rely on Congress

The President used a Rose Garden speech today to announce a new effort to crack down on rising oil market speculation. Here’s an excerpt from the remarks:

We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage, and driving prices higher — only to flip the oil for a quick profit. We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick. That’s not the way the market should work. And for anyone who thinks this cannot happen, just think back to how Enron traders manipulated the price of electricity to reap huge profits at everybody else’s expense.

That’s certainly a decent explanation of the problem. But what of the solution? The details of what the President announced are laid out in a White House fact sheet. There’s a five-point plan here:

1) Requesting an increase in funding for the CFTC (Commodity Futures Trading Commission) to oversee the enforcement staff for oil futures market trading.
2) Requesting increased CFTC funding for IT upgrades so they can strengthen their monitoring.
3) Proposing an increase in civil and criminal penalties for oil market manipulation.
4) “Calling on Congress” to grant CFTC authority to increase margin requirements in oil futures markets when necessary to prevent over-speculation.
5) Some executive actions to help analyze oil market trends.

So the first four of the five parts in the plan are entirely dependent on Congress. In fact, the first two are in no way new, since they’re a part of the President’s budget and the funding for the CFTC. It asks for immediate funding to bridge to the higher funding request in the FY 2013 budget, but the immediate funding is commensurate with the higher funding request. Clearly House Republicans will not agree to that. Perhaps they’ll assent to increased civil and criminal penalties or increased margin requirements – I doubt it – but again, it’s hinged on Congressional legislation.

Stripping all that away, then, you have what amounts to an increase in data collection and sharing for the CFTC. The Council of Economic Advisers will share some of their expertise with the CFTC.

What is not said here is anything about immediate implementation of the position limits mandated by Dodd-Frank that empowers – commands – CFTC to set limits for how much of the market any one trader can own. In fact, the White House includes the CFTC’s position limits as an example of what they have done in this area, even though they have not gone into effect yet, and even though they are seen as too weak to make a serious impact into rising speculative activities. All of the other regulatory steps they claim to have taken are outweighed by the simple fact that speculation has risen significantly over the last three years. Speculators now control a majority of the oil futures market, with a definitive impact on prices of up to 15% over the last decade, according to the Federal Reserve Bank of St. Louis. The Administration touts the Oil and Gas Price Fraud Working Group, which has barely even met since being established.

President Obama closed by saying that none of the steps outlined today “will bring gas prices down overnight.” He’s right.

UPDATE: The other element to this is that Obama is getting out in front of gas prices just as market forces conspire to lower them, allowing him to take credit later in the year.

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David Dayen

David Dayen

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