The spectacle of an industry lobbyist decrying the prospects of increased regulation is very much dog-bites-man, as far as news value goes. But there's something especially annoying about the comments made by John Damgard, the president of the Futures Industry Association, in a five-minute video snippet produced by the Financial Times.
In a response to a question about whether speculation plays a role in the current state of energy prices, Damgard blamed the current U.S. congressional focus on the issue as the result of the "silly season" of an election year, and offered some dire warnings as to what might happen should legislators be so foolhardy as to boost regulation.
"The issue is whether or not there is a full understanding among our legislators that we are really in a global marketplace. And for a U.S. regulator to try to extend its authority over markets that are regulated in other countries will in my judgment probably result in retaliation. We've worked long and hard to make sure that cross border trading was as seamless as possible -- that's very much in jeopardy, it seems to me if U.S. legislators try to regulate British markets.... But this is certainly not the time to take legislative action that would be like Sarbanes-Oxley and disadvantage U.S. markets in the short term."
As Damgard very well knows, the question at issue is not the U.S. Congress' interest in regulating markets in other countries, but in ensuring that commodity exchanges that operate in the United States conform to U.S. regulations. As extensively documented in congressional testimony two weeks ago by former Commodity Futures Trading Commission staffer Michael Greenberger, the United States currently allows exchanges owned by foreign interests to trade U.S. energy contracts on U.S. soil without having to report the full extent of that trading activity to U.S. regulators. This allows energy traders who wish, for whatever reason, to escape U.S. regulatory scrutiny, a safe haven for their activities.
Damgard's not-so-veiled threat is that if the U.S. tightens its rules, traders will take their business elsewhere, but that ignores the reason that so many foreign-owned exchanges operate in the U.S. in the first place -- there's a lot of money to be made in the U.S. market. It's just a guess, but a strong stance by the U.S. government on standards of transparency for energy trading might also prove popular elsewhere in the world, if prices continue to rise. I can't imagine politicians in the U.K. are any happier with $135-a-barrel oil than they are in the U.S.
As to the specific question of whether speculation is unwontedly raising prices?
"Well, I don't think that there is any question that when pension funds and endowment funds that basically benefit a lot of people, took a really long look at the equity markets and look at the commodity markets and they made a shift in their allocation so that they devoted more of their assets to the commodity markets. Now this is what they're paid to do. So to the extent that they've reallocated their portfolio to commodities, they feel that they should be rewarded, now what does that do, that drives up the selling pressure, so yes, markets are going to move up, commodities are more expensive, and commodities are more expensive because more people are buying them. The bogeyman here is the oil companies, and I think we had one irresponsible executive of an oil company say that I think said that fundamentally oil should be 45 dollars a barrel. Well, what does he know, oil is whatever people are willing to pay for it and whatever people are willing to sell. And there are more buyers in the market than there used to be. But quite honestly, there is no evidence that there is any manipulation taking place in the markets.
How the World Works is no fan of oil company executives but it's still amusing to hear a futures industry lobbyist so cavalierly dismiss their expertise in understanding their own industry. But notice the sleight of hand there at the end -- the switch to denying "manipulation" instead of "speculation." The FT reporter didn't ask if the markets were being manipulated -- which would imply a nefarious cabal of traders orchestrating affairs behind the scenes to rig prices. Maybe that's happening, maybe it isn't. But what Damgard essentially acknowledged was that, yes, speculation is propelling energy prices up. Whether it's pension funds or endowment funds or hedge funds that are doing the buying is irrelevant: Anyone who invests in a commodity purely in the hope that the value of that commodity will rise, rather than because they actually need to consume that commodity, is engaged in speculation.