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Lawmakers Probe Commodity Market Speculation

posted on May 23, 2008


Hello, I'm Mark Pearson. Monday's Memorial Day Holiday officially kicks off the summer driving season. But as motorists hit the road for a coveted three-day weekend, there was little cause for celebration at the pump.

Oil prices bolted to a new record above $132 a barrel Wednesday on news that U.S. supplies of crude oil and gasoline fell unexpectedly last week. That, in turn, pushed the national average gasoline price to an all-time high of $3.80 per gallon. Still, price differences between the nearby crude oil contract and deferred contracts for delivery in later months point to a possible correction.

Many analysts believe prices have risen well above levels that can be explained by supply and demand fundamentals. And on Capitol Hill this week, experts testified on the impact of speculators on the price of oil and other commodities.

Lawmakers Probe Commodity Market Speculation Jeffrey Harris, CFTC chief economist: "There is not only a demand for buying of the oil but there is tremendous uncertainty about supplies and uncertainty about the future. Five years ago you couldn't buy an oil contract beyond four or five years but now you can buy out more than eight years into the future."

On the cusp of summer driving season, lawmakers have convened numerous committee hearings to explore the root causes of high oil prices. The role of speculators in the commodity markets was a contentious issue on Capitol Hill this week. Representatives from the commodity futures trading commission, private industry, and agriculture all shared their thoughts on market forces.

Sen. Mark Pryor: "What percentage of the price for oil today is speculation?"

Jeffrey Harris, CFTC chief economist: "We have yet to date to document that any group of speculative traders are moving prices."p> Pryor: "Does the rest of the panel agree with that?"

Michael Masters, hedge fund manager, Masters Capital Management: "I certainly wouldn't. What moves prices? Magic? I mean there's somebody buying and selling. Clearly speculators, with the increase we've had, they've had to have an impact."

Sen. Carl Levin: "Are you able to estimate how much of the $125 a barrel price for oil is the result of either hedge funds or the index funds?"

Michael Masters, Managing Member and Portfolio Manager of the hedge fund Masters Capital Management: "You know, when we talk to refiners and other industry contacts, they consistently come back and say without speculation oil would be in the $65-70 range today."

In March, the Bush Administration proposed an overhaul of government economic policy. One top proposal centers on merging the Commodity Futures Trading Commission with other agencies in an effort to centralize oversight powers. The National Farmers Union has expressed hesitation to that move, but this week one NFU official stood in favor of increased monitoring.

Tom Buis, National Farmers Union: "To give CFTC the tools to be able to monitor all these newer trading schemes that have come up over the last couple decades. You can't find out whether there is a problem if you can't count it."

While speculators received a heavy dose of criticism, one hedge fund manager predicted pension funds could play an even bigger factor in the commodity markets.

Michael Masters, Managing Member and Portfolio Manager of the hedge fund Masters Capital Management: "If you think about institutional investment in terms of worldwide pension funds collectively its 30 trillion dollars. So they've allocated less than 1 percent of their investment to commodity futures as an asset class. Imagine if we have another 10%, what prices will do then."


Tags: agriculture crops government markets news