While prices at the pump shoot over $4 a gallon, five United States senators are calling on the Federal Trade Commission (FTC) to investigate whether gas prices are being manipulated. The job of assuring that our energy markets are fair actually falls not upon the FTC but upon the Commodity Futures Trading Commission (CFTC), but it's had little success to date at curbing oil speculation and slowing this latest run-up in price. The senators may be hoping that the FTC, using a newly crafted 2009 law, can lend a hand.
There's good reason for Senators Maria Cantwell (D-Wash.), Olympia Snowe (R-Maine), Jay Rockefeller (D-W.Va.), Mark Pryor (D-Ark.) and Ron Wyden (D-Ore.) to be frustrated with the CFTC. The Dodd-Frank Financial Reform bill, signed into law on July 21, 2010, mandated that the CFTC write rules for the oil markets designed to stop speculation from controlling prices on crude oil and gasoline and driving them to astronomical levels, as they did in 2008. The bill also demanded that these rules be in place and working by February of this year.
There's just one problem: Those rules haven't yet been written and approved.
They haven't been written largely because of the pushback that the CFTC has received from the traders that make massive profits from the financial oil markets and the advocacy groups and lawyers that represent them. As the CFTC has proposed new rules, they've been met by a who's who of derivative traders and their advocates arguing for the status quo and urging caution, including PIMCO, BlackRock, Goldman Sachs, JPMorgan, the Futures Industry Association (FIA) and the Securities Industry and Financial Markets Association (SIFMA) -- to name only a few. The lawyers arguing their case are predictably the best, brightest and most expensive in Washington, including attorneys from Alston & Bird, Gibson, Dunn & Crutcher, Patton Boggs, Sullivan, Cromwell and Skadden, Arps.
Under this pressure, the CFTC has buckled and thrown in the towel on much of the needed rulemaking, at least for now. To take one example, the Commission has given up trying to craft a rule on position limits in oil derivatives until at least 2012, and position limits is only one of thirty complex rulemaking areas the CFTC has acknowledged it must tackle before its mandate is complete.
If these five senators are serious about restoring fair pricing to the oil market, and not merely acting outraged for the sake of their constituents, they will likely not find the Federal Trade Commission better equipped to answer their call. All of the tools at the federal government's disposal that could be used to reduce the speculative interest in oil -- in trading, clearing and reporting -- reside with the overseeing regulatory agency: the CFTC.
Moreover, it's hardly assured that even the completion of the CFTC's rulemaking mandate, if it ever comes, will make prices fair. Investment in paper barrels of oil from both commercial funds and individuals is the single most important speculative source driving energy prices higher. A ban of both commodity index funds and exchange-traded funds that use commodity futures, removing much of this investment, would be an important and instantly measurable first step. So far, however, a ban of these instruments is not even being considered.
But it's important to remember that chasing destructive speculative activity out of a commodity market is not an impossible task. In January 1980, the Federal government and the exchange overseeing silver futures trading, the COMEX, took collaborative action: In a series of draconian but necessary measures, the exchange instituted a "liquidation-only" restriction for the market, forcing speculators to either take delivery of contracts or find massive credit for their holdings while the Federal Reserve blocked commercial lenders from extending that credit. The impact was immediate: Within three months, prices dropped 77%.
The example of silver in 1980 shows that the tools are available and that only with the combined will of the industry and our government can we restore fair prices to commodities. Whether we see such will in action to help lessen oil prices for consumers, however, remains to be seen.