Coalition Offers List Of Evidence To Show Speculation's Heavy Influence On Oil Prices

HeatingOil.com — Monday, February 28, 2011

By Josh Garrett

It's proven to be a lucrative practice for many investors, but the CMOC believes commodity speculation has caused unprecedented volatility in commdity prices and needs to be regulated.

It's a lucrative practice for many investors, but the CMOC believes commodity speculation has caused unprecedented volatility in commdity prices and needs to be regulated.

On Wednesday, the Commodity Markets Oversight Coalition (CMOC) released an updated version of its document "Evidence on the Impact of Commodity Speculation." The document is a list of 59 news articles, journal articles, reports, and other bodies of research that support the belief that speculative activities in commodity markets affect the prices of commodities like crude oil and heating oil.

In an open letter to Blanche Lincoln (the former Democratic senator from Arkansas who served as chairman of the Senate Agriculture Committee) written last year, CMOC described itself as:

an informal alliance of industry groups, consumer advocates and academics, representing commodity producers, processors, distributors, retailers, and residential, commercial and industrial end-users. We believe that policy in the commodity trading markets should aim to strengthen oversight, transparency and stability to address inadequacies in the existing derivatives markets, both regulated and over-the-counter.

Formed in 2007, the CMOC represents heating oil dealers and consumers through the membership of industry groups like the New England Fuel Institute (NEFI) and consumer groups like the New Jersey Citizen Action Oil Group. The common bond that unites heating oil dealers and customers and other members of the CMOC is a desire to reduce volatility and lower prices on commodities markets. By actively advocating for new regulations of commodity speculation, the CMOC has staked out a firm position in the debate over whether or not huge increases in speculation in commodities markets over the last decade have caused higher and less predictable prices for energy commodities like heating oil as well as food and metal commodities.

Opposing the CMOC are investment banks, commodity exchanges, and other groups and firms in the financial industry with an interest in commodity speculation. These opponents have repeatedly claimed that speculation plays an important role in commodity markets by providing additional liquidity (the accumulation of money in markets that makes buying and selling easier). They argue that the added liquidity actually benefits "bona fide hedgers," the market participants, like heating oil dealers, that buy and sell commodities to manage their operating costs by hedging against the prices of certain commodities. According to most opponents of new regulations, the influx of speculators into commodities markets since 2000 is not a cause of volatile and fast-increasing commodity prices since then, and there is no conclusive evidence to the contrary.

It is this claim that the CMOC seeks to discredit with its "Evidence" document. While it is true that no one study or discovery can be labeled as irrefutable proof that speculation destabilizes the prices of crude, heating oil, and other commodities, CMOC's extensive list of anecdotal evidence of just that makes a strong case. The collection of studies, news articles, and statements from well-regarded sources such as the United Nations and Saudi Arabia's oil minister show that there is broad consensus among a diverse group of experts that unchecked speculation is at least partially responsible for unprecedented and wildly unpredictable commodity price swings in recent years.

Surely the CMOC's document is a great resource for any institution or individual seeking to show that excessive commodity speculation is bad for American businesses and consumers. But the document will likely have little effect on the politicized and underfunded Commodity Futures Trading Commission's (CFTC) decision-making process as it seeks to write new rules for commodity speculation under the financial reform law passed last year. In the meantime, the CMOC will no doubt keep the pressure on Congress by continuing its letter-writing campaign in support of greater transparency and tougher regulation of commodity speculation as soon as possible.

Disclosure: HeatingOil.com, through its membership in NEFI, is a member of the CMOC. It is HeatingOil.com's position that speculation is at least a partial cause of soaring and more volatile prices for heating oil and other commodities. HeatingOil.com writers have produced numerous opinion pieces defining and supporting this position, including articles posted in January and March of 2010.

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