Regulators Try to Cover for Banks Again -- This Time Over Oil Trades
When Vermont senator Bernie Sanders released confidential information about past oil trades from the U.S. Commodity Futures Trading Commission, the CFTC went bureaucratically ballistic. One commissioner called for better security for sensitive information. Two former commission members -- Republican James Newsome and Democrat Fred Hatfield -- called for an investigation in a Washington Post op-ed.
According to Messrs. Newsome and Hatfield, the data, provided under promise of confidentiality, belongs to regulators "who are equipped to monitor these markets and prosecute wrongdoing." Here's why they're wrong.
Oh, those nice speculators
The data in question was from 2008, when enormous spikes in energy prices battered consumers and businesses alike. As the Congressional Research Service noted at the time, there was widespread belief that speculators drove prices higher than market fundamentals. In retrospect, it makes a lot of sense, as prices rose and fall without concomitant changes in consumption.
Not that market fundamentals had no impact. Flat production and increasing demand made a spike possible, as economist and oil pricing expert James Hamilton argues. Here's a graph of the data he pulled together (click to enlarge):
Oh, those nice speculators
But when you look at Hamilton's argument, it's clear that while low production likely set the stage, it alone doesn't explain the spike. Even a drop in the growth of consumption wouldn't necessarily cause the prices to tumble. Speculation would. And there's an uncommonly tight relationship between actual oil prices and at least one estimate of oil futures contracts held by speculators (click to enlarge):
The oil data that Saunders spilled helps shine some light on the subject. Commodities futures markets were historically used by producers and big consumers to get some price predictability so everyone in the industry could adequately plan. Some of the names you'd expect were on the list of crude oil speculators. But dwarfing most of that activity were the oil contracts taken by banks: Goldman Sachs, Deutsche Bank, Barclays, JP Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Societe Generale, and UBS.
Information is dangerous
Businesses and consumers all need confidence in financial mechanisms if the economy is to regain its strength. That's why Sanders did the right thing in releasing the information. For too many years, government and industry have been complicit in keeping secrets that affect everyone.
The CFTC is looking at this month to take action on oil speculation, but only because of Dodd-Frank, which mandated the action. The agency has blamed 12,000 comments on the proposed rules in part for the process having taken well over a year.
How can most people and businesses comment on rules when they don't get the data to see what happened? Perhaps the CFTC wants to protect the real industry players, and there is some argument to make there. But the information in this case is for trades that happened years ago. Trying to equate Sanders's disclosure with leaking someone's personal tax payments is absurd.
Don't ask and we won't tell
The impact that the banks -- institutions that have now received trillions in special bailouts -- had on prices of such a fundamental commodity as oil is so high as to tax anyone's ability to tally it. In trying to protect its data, the CFTC may be following its legal mandate. But its actions are reminiscent of the $1.2 trillion in bank loans the Fed wanted to keep secret.
Hatfield and Newsome want to argue that the data should be restricted to regulators who have the wisdom to use it. Newsome's experience is in agribusiness, not energy. Hatfield was a chief of staff to two legislators. Oh, and the deputy commissioner general of the U.S. Pavilion at the World's Fair in Lisbon in 1998. Hardly what you'd call deep experience in understanding energy markets.
It's time for a little less protective concern about a particularly industry and more about the economy in general. Good decisions need transparency, and the petroleum industry is one where some glass cleaning is long overdue.
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Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.
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