A key Republican financial regulator continued his crusade this week against a proposed rule on speculation, repeating claims that the practice doesn’t have a negative impact on markets.
Commodity Futures Trading Commission member Christopher Giancarlo said that although the body is moving forward with the regulatory work mandated by the landmark Wall Street reform law, “there was a complete lack of real data supporting the need to enact position limits,” particularly in energy markets. He then cited the energy spike before the worldwide economic collapse of 2008 as bolstering his claim.
“The EEMAC heard evidence that the run up in oil prices before the financial crisis did not bear any of the signs of excessive speculation,” Giancarlo said, referring to a CFTC advisory board on energy that he oversees. “This discussion aligns with the same findings made by the CFTC’s chief economist in 2008 and discussed at the CFTC meeting in 2011 when the rules were finalized the first time.”
Giancarlo made the remarks Wednesday at a shipping industry conference in New York.
When Congress in 2010 passed Dodd-Frank financial reform legislation, it gave the CFTC authority to set ceilings on certain types of speculative activity. In 2011, the Commission proposed curbing “excessive speculation” on physical commodities. In 2012, that rule was almost wholly struck down by a federal judge in Washington and remanded to the CFTC. Late in 2013, the CFTC proposed an amended version of the regulation. It is still awaiting finalization by the Commission.
As the CFTC has debated the rule, Giancarlo has vigorously opposed it, saying in January, for example, that the need for position limits on “excessive speculation” is not borne out by data–an allegation he repeated this week.
The spike referred to by Giancarlo was seen differently by US diplomats, however, according to leaked State Department dispatches published by Wikileaks. In the summer of 2008, around when oil cost about $147 per barrel, the American Embassy in Riyadh called on the government of Saudi Arabia to ratchet up production. The Saudis replied that they would struggle to sell it and that it would have no discernible impact on the market rate because “speculators bore significant responsibility for the sharp increase in oil prices in the last few years.”
According to McClatchy, the Wikileaks cables showed that US diplomats have been an audience to Saudi complaints about energy speculators for years, and that the petroleum-rich theocratic monarchy’s protests seem credible.
“Saudi officials explain that they have two primary concerns about artificially high crude prices: that they’ll dampen the long-term demand for oil and that the wide price swings typical of commodity speculation make it difficult for them to plan future oil field development,” McClatchy’s Kevin Hall noted. “After that $147 a barrel peak in 2008, for example, prices plunged to $33 a barrel as the global financial crisis rocked the world. That was a stunning change in less than half a year.”
Other assertions and reports also directly challenge Giancarlo’s claims. In 2011, the CEO of Exxon said in testimony before a Senate committee, that futures contracts drove up the price of crude oil at the time, about $100, by roughly $35. In 2012, the Federal Reserve Bank of St. Louis concluded that speculators were responsible “for about 15 percent of the measured rise in oil prices from 2004 to mid-2008.”
“Global demand remained the primary driver of oil prices from 2000 to 2009,” the research stated. “That said, one cannot completely dismiss a role for speculation in the oil bubble of the past decade. Speculative demand can and did exacerbate the boom-bust cycle in commodity prices.”
Earlier this year, Giancarlo made news for matters related to speculation of a different kind. Sen. Elizabeth Warren (D-Mass.) and Rep. Elijah Cummings (D-Md.) asked the ex-vice president of wholesale market broker GFI Group Inc. to explain why, in September 2014, he deviated from the divestment plan he formulated upon entering public service a few months prior. “We are troubled by these gaps in your letter,” the pair stated, remarking that Giancarlo made $100,000 selling his GFI stock as two rival firms engaged in a bidding war to acquire it.
