CFTC: Speculators caused 2008 oil price crisis

(RAW STORY)   In a major U-turn from its claims during the Bush administration, the Commodity Futures Trading Commission is now set to admit that speculation in oil markets — and not the forces of supply and demand — are behind last year’s massive oil price spike.

In the summer of 2008, oil prices on the open market reached an unprecedented $147 per barrel. Many economists argue the spike helped push the US into an economic free-fall last autumn.

At the time, the CFTC — which is tasked with regulating commodity and financial futures — said that the huge price spike was a result of supply and demand. That explanation was met with ridicule from many market-watchers, who said it was impossible that demand for oil increased by such a huge margin even as the North American, European and Japanese economies were slowing down.

Now, according to a scoop in the Wall Street Journal, the CFTC is about to reverse its Bush-era position, and admit that market speculators — investors who bought oil futures on the expectation they would rise in value — “played a significant role” in the oil spike.

Bart Chilton, a CFTC commissioner, told the WSJ that the original assessment was based on “flawed data.” He told the newspaper that the CFTC’s report, which will be released next month, will acknowledge the role of speculators in oil markets.

The CFTC’s admission highlights the often dangerous role that Wall Street speculators play in Main Street’s economic health. Many policymakers are now beginning to wake up to the reality that speculation in commodities markets can cause massive damage to the pocketbooks of ordinary citizens.

The Columbia Journalism Review reminds readers that, in his Rolling Stone article“The Great American Bubble Machine,” Matt Taibbi describes how major Wall Street players gamed the oil market:

With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market — stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil.

Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008…

But it was all a lie. While the global supply of oil will eventually dry up, the shortterm flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the shortterm supply of oil rising, the demand for it was falling — which, in classic economic terms, should have brought prices at the pump down…

So what caused the huge spike in oil prices? Take a wild guess.

The CJR writes: “Note that Taibbi’s hardly the first person to say that the money from the housing bubble moved to form the commodities bubble, which remember, not only sent gas prices skyrocketing but helped cause dangerous food disruptions around the world.”

The CFTC’s turnaround comes after many other major oil-market regulators already came to similar conclusions. Last month, the European Union and OPEC agreed at a meeting that regulation of oil markets would be necessary to prevent future oil bubbles.

“The 2008 bubble could be repeated if adequate regulatory reforms, including greater transparency, (are) not made as part of an overall reshaping of the global financial sector,” Reuters quoted EU officials as saying in a statement.

The CFTC now seems to agree with this view, but the WSJ points out that there is no consensus on this issue. Wall Street speculators may fight hard to keep their ability to profit off of commodity bubbles — potentially setting the stage for an international political showdown over financial market regulation.

“These decision makers don’t present a united front,” the WSJ reported. “The U.K.’s Financial Services Authority has found no evidence that speculators are behind big oil-price swings, people familiar with the matter said.”

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