In the push to redesign the US financial regulatory system, some observers continue to tread a dangerous line, particularly when it comes to ferreting out the role of speculators in determining energy prices.
At the Commodity Futures Trading Commission's Energy and Environmental Advisory Committee earlier this week, Raphael Martinez, a member of the agency's market oversight division, said the industry has "reached a point where we just talk past each other, leaving the public confused."
Martinez said CFTC and other researchers have found that speculators have not been behind the runup in energy and agricultural prices last year. However, denying the perception that speculation is akin to manipulation "gives the impression that we are market apologists ... to the anger of many in Congress and Main Street," Martinez said.
He even went so far as to liken what he believes is misinformation about the role of market speculators to the perception in the 1980s that AIDS could spread by handshakes or, more recently, that the swine flu can spread by eating pork.
Despite the warnings of Martinez and others at the EEMAC meeting, the web of potentially misleading market interpretation has continued.
Case in point: At a press conference Friday morning, Representatives Bart Stupak and John Larson noted that, according to NYMEX data, only about 0.1% of crude oil traded on the exchange is taken to delivery. Therefore, by their assessment, a whopping 99.9% of the crude oil market is dominated by speculators.
Well, yes ... and no. Although crude oil traded on NYMEX can be taken to delivery, it is, for the most part, a financial commodity designed to facilitate price discovery. It is true that very little physical crude oil, natural gas or other energy commodity is ultimately delivered (electricity is the exception, as roughly half is delivered.) In the simplest sense of the term, nearly all trading of NYMEX crude oil contracts is "speculative." However, this "speculation" includes both those who might profit off trading financially and the commercial traders -- airlines, truckers, industrial manufacturers -- who need this mechanism to hedge their risk.
To be sure, there is legitimate dispute over whether index funds and other passive investors should be deemed bona fide hedgers or not. But lumping your own commercial constituents in with the very type of trader you're fighting against simply seems counterproductive and ultimately misleading to the public.
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