The fight against speculation has been long and arduous. The initial rounds were spent persuading regulators and legislators that undue speculation in the commodities markets was a reality. The market environment truly was opaque. You could find academics and seasoned traders with notable credentials who presented cases supporting each side of the argument. Further, while the dramatic changes in market behavior seemed linked to significant market deregulation in 2000, there is always the concern that coincidence doesn’t equal causation.
For me, someone who has been covering the issue since the beginning, the coincidence was hard to ignore. Furthermore, people far more knowledgeable than I, such as the late analyst Peter Beutel, could no longer figure out what was happening in the markets. While it was perhaps plausible to explain the run-up in prices and the increased volatility prior to 2008 on a range of international supply and demand concerns, the rapid fall that followed the economic collapse was much harder to justify.
As a result, industry associations and this magazine have supported the reregulation of the commodities market to the extent possible under the Dodd-Frank legislation passed in 2010. That is not to say that Dodd-Frank is a perfect cure for the financial ills that slammed our economy in 2008. In fact, as a whole there is a lot you can be skeptical about with that law. However, the work done on derivatives that our industry played a key role in developing seems clear and appropriate, even to a libertarian-leaning person such as myself. The term ‘weapon of mass destruction” gets thrown around lightly, but I believe it was appropriate when applied to derivatives ‘ housing as well as energy.
As my article on page 16 notes, the long fight is now entering its final rounds. A lot was won, some of that was subsequently lost and there are a few key elements that still need to be cemented in place. There is also some degree of weariness among those who have fought the fight the longest and hardest, and honest concerns over how best to apply what are limited resources. So many things need to be addressed in this industry and they all require time and money.
What has been accomplished so far? Volatility has declined, and I believe you can reasonably claim some of that comes from our successes as an industry in reducing the financial incentives behind creating volatility in the markets. Prices seem to have seen some stability, but we are all waiting for them to drop much further than they are today. Of course, we are also producing a lot more domestic oil. So, when that day arrives and prices adjust, it may not be as clear-cut about exactly what was the primary driver.
My personal belief is that the industry made the right call. And as an industry we need to make sure we finish out as successfully as possible on such remaining issues as setting effective position limits, and making sure the CFTC has the funding it needs to give the regulations some teeth.