Daniel Lubetzky

For a newspaper with editorials as sophisticated and generally on target at least as free markets economics is concerned, it was surprising to read an editorial about "speculators" with such fallacies in logic as the one here. 

Amidst all the finger pointing against speculators, the Wall Street Journal regularly asserts that speculators do not have an impact on the rise in oil prices because they do not hold on to the physical goods and do not play any significant role in setting pricing.

But in an example of an over-reaching argument that undermines its core argument, now they cite evidence that speculators actually did have an impact in reducing prices in the latest period under study. 

Lo and behold, the CFTC found that index traders and swap dealers actually reduced their stake in crude oil futures as prices spiked. The number of contracts held by these investors betting that prices would increase — the net long position — fell by 11%, and more were shorting oil than going long over the six-month period. In other words, index traders and swap dealers were driving the future price of oil down.

But if this is indeed the case, then the possibility that speculators can have the opposite impact is alive and well – and it just so happens that the study and data they analyzed covered a period where speculators started laying off the market!  This coincides with what has actually been happening of late – with prices coming down, and it may buttress the argument that speculators did have a role in the initial astronomical rise of oil prices.

I don’t know if speculators are indeed behind the roller coaster ride of commodity pricing.  And prior posts in this blog have pointed to arguments against blaming them.  I just found it entertaining that the very Wall Street Journal would have such fallacy of logic.

Another argument they make in the same editorial is that because futures contracts are matched – buyer with seller – and one loses if another wins -these contracts have no impact on price. But the fundamental laws of demand & supply remind us that the aggregate of these matches is indeed what creates the balance that sets prices. 

Who is writing these editorials?!

• 
• SEPTEMBER 15, 2008

See You Later, Speculator

http://online.wsj.com/article/SB122143397998234079.html

It was said to be the year of speculators gone wild. Seemingly everyone in Washington, including Barack Obama and John McCain, decided that oil prices were soaring because profiteers and middlemen were manipulating the futures markets. "Speculators" were spotted everywhere this side of the grassy knoll.

The only problem is that there’s no evidence to support the conspiracy theories — and sure enough, federal regulators dismantled this Beltway consensus late last week. In one of the broadest and most authoritative studies to date, the Commodity Futures Trading Commission has offered hard statistical data that financial trading hasn’t been driving price moves. The CFTC conducted an unprecedented Wall Street data sweep and scrutinized millions of transactions worth billions of dollars between January and June of this year.

Commodity futures markets have grown fivefold by volume over the last decade, while becoming more complex. "Index traders" are one cause. These pension funds and other institutional investors don’t buy options for commercial use, but rather roll them over from month to month as passive long-term investments. "Swap dealers," usually investment banks, operate off the main exchanges and sell customized futures packages to firms. These aggregations of options and derivatives are designed to match particular needs and spread risk more broadly.

Lo and behold, the CFTC found that index traders and swap dealers actually reduced their stake in crude oil futures as prices spiked. The number of contracts held by these investors betting that prices would increase — the net long position — fell by 11%, and more were shorting oil than going long over the six-month period. In other words, index traders and swap dealers were driving the future price of oil down.

Commodity index funds also have a much smaller share of the oil market than everyone thought: just 13%. Even if the figure was 70% or more, as some assumed, it wouldn’t have mattered. In a futures exchange, trades are matched, so one trader’s gain is another’s loss. The overall volume is irrelevant.

The CFTC study is especially notable because it came in response to extraordinary political pressure. Congress held more than 40 hearings on "speculation" over the summer, and commission chief Walter Lukken was the pinata. Federal bureaucracies have been known to try to appease their Congressional funders, so the CFTC deserves special credit for debunking the speculator frenzy.

As it happens, the CFTC report arrived just as the Moe, Larry and Curley of the antispeculation show — Senators Byron Dorgan and Maria Cantwell, and Michigan Democrat Bart Stupak — pre-emptively released their own study, by Virgin Islands fund manager Michael Masters, which purports to show "index speculators" are "now the single most dominant force in the commodities futures market." Bad political timing, folks.

Then again, the speculation furor was never about the evidence. The politicians wanted a fall guy for rising prices, since the real explanations of supply and demand and the falling dollar were partly their fault. On that point, the CFTC rightly notes that the expansion of commodities indexing can be partially explained by investors seeking to "hedge against inflation." It’s not surprising that traders have been driven to commodities to protect themselves, given that the Federal Reserve, Bush Administration and Congress have all trashed the dollar.

No doubt the politicians will keep trying to shoot the price messengers, but thanks to the CFTC they look increasingly silly in doing so.

See all of today’s editorials and op-eds, plus video commentary, on Opinion Journal.

And add your comments to the Opinion Journal forum.