With his reelection bid reeling from rising gas prices, U.S. president Barack Obama has placed Wall Street oil speculators in his sights, asking Congress to broaden government oversight. It’s smart politics, but is it sincere?
Obama addressed oil speculation from the White House rose garden today with a proposal to add US$52 million in funding to the Commodity Futures Trading Commission, raise civil and criminal penalties for bad actors, and giving the Consumer Financial Product Safety Administration (CFTC) broader regulatory powers.
“We can’t afford a situation where some speculators can reap millions while millions of American families get the short end of the stick,” Obama said. Today’s proposal is a follow-up the administration’s Justice Department investigation of speculation that began last April.
Obama is correct is stating that the price you pay at the pump isn’t only determined by supply and demand or what your gas station decides to charge. Wall Street plays some role in how much consumers ultimately pay. Last May, former Exxon Mobil chairman and CEO Rex Tillerson said that oil prices would be significantly lower if normal economic forces dictated prices.
Investment bankers make bets on oil futures, which are contracts between buyers and sellers where the buyer is speculating on whether the price of a barrel of crude oil is going to rise. The buyer receives the barrel at a fixed price, which can be bought on leverage. Obama’s plan would require bankers to pay with more cash.
Massive oil storage facilities cater exclusively to investment banks, which purchase the oil at the price established in the futures contract. If the price of oil rises, the bankers can make a quick and handsome profit.
This practice has drawn the scorn of businesses, consumer advocates, politicians, and unions alike. Critics claim that bankers are making a quick profit at the expense of national interests. House Democrats held a hearing earlier this month where Michael Greenberger, a University of Maryland Law School professor, testified that speculation is what is keeping oil prices above $4 per gallon.
“It is obsessive speculation, which is a fancy word for saying that gamblers wearing Wall Street suits are taken these markets over and are controlling the price and creating investment vehicles that are designed to push the price of oil up,” Greenberger said. There’s also the new reality that oil demand has shifted to Asia.
Not everyone agrees with the White House assessment. House Republicans accused Obama of feigning outrage and questioned the effectiveness of his administration’s DOJ task force over the past year. Presumptive GOP presidential nominee Mitt Romney defended bankers and deemed the President’s proposal a “gimmick” to “dramatically increase federal regulation.”
I find it very peculiar that the CFTC has not excised that rule making power that it already has. The 2010 Dodd-Frank Financial Reform bill mandated that it create rules to reign in speculation. If the President wanted it done, wouldn’t it have been done already? This is how Obama makes political progressives want to pull their hair out.
The reason could be that the CFTC seems to be unable to do its job. Part of Obama’s request is for data analytics tools to help the CFTC find patterns in its data that might uncover bad behavior - if it does exist. CFTC also lacks the authority to raise margin requirements on traders.
It’s easy to accept that the Commodity Futures Trading Commission and CFTC are outgunned, ill equipped (Obama is asking for new computers), and need adequate resources to do their jobs. Regulators are always swimming against the current. If that’s the case, increasing funding is justified, but why not first have the CFTC draft its rules before piling on additional regulation?
This is an election year. It would behoove the president to produce results on gas prices (if possible), but political posturing is a known side effect of campaigning. Do you think Obama is sincere?
Photo: Chuck Kennedy/White House
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