Congressman David Cicilline introduced a bill today that would curb rampant speculation in the oil markets, which would both drive down the price at the pump and put the petroleum economy back in line with the laws of supply and demand, he said.
“If you look at what has happened in the market, production is up and demand is down,” Cicilline told me today. “So the market is not working right. And a substantial piece of this is excessive speculation. Wall Street is using oil futures as a gambling casino.”
Though they’ve inched back down recently, oil prices have skyrocketed in 2012. The national average has climbed from $3.34 in mid-January to $3.87 today. In Rhode Island during that same time period, the average price of a gallon has gone from $3.50 to $3.97.
During the gas price spike in 2008, the exact same piece of legislation passed the House by an overwhelmingly bipartisan vote of 402-19.
The bill, which is co-sponsored by Congressman Maurice Hinchey (D-NY) and Congressman Raúl Grijalva (D-AZ) would compel the US Commodites and Futures Trading Commission, the entity that regulates such speculation to put new rules into place to negate the effects of speculation on the price at the pump.
Cicilline said the CFCT could set greater limits on how many future shares one entity could own at a time or set limits on how much of the oil market could be designate for futures trading.
“This is dangerously reminiscent of what we saw in the housing market when Wall Street was using very sophisticated tools to drive up prices,” he said. “We’re not powerless to respond to this crisis.”
The futures market controls about 80 percent of all crude oil, said Gary Gensler, the Chairman of the CFTC, recently. Cicilline added that that percentage has doubled in the past decade and shortly before that futures trading controlled only about 20 percent of the market. Cicilline said Goldman Sachs is the biggest holder of crude oil futures.
President Obama called for further regulation on oil speculation earlier in the week. Sen. Bernie Sanders (I-VT) is sponsoring similar legislation in the Senate.
Speculation occurs when investors buy “futures” in a commodity such as oil. In effect they purchase a credit to buy a barrel (or many, as is often the case) at a price set now and collect the oil at a future date. If the price is higher than they bought the future share for, they make money. The problem occurs when many investors purchase future shares, artificially driving up the price beyond what it costs to extract, refine and deliver.
““So the market is not working right”
Ah, the ultimate fallacy with central planning — as if Cicilline could possibly know how this or any other market “should” be working. Just because an outcome is not the desired outcome of a given party does not mean it’s the “wrong” outcome.
“Just because an outcome is not the desired outcome of a given party does not mean it’s the “wrong” outcome.”
Actually, there’s nothing else to do with any given market than to make exactly this kind of judgement.
Indeed, every argument for deregulation of markets makes precisely the same point Ciccilline does. That is: the market is not doing what the person looking to implement deregulation wants the market to do.
Now, if you want to say that a market that isn’t ‘free’ isn’t really a market, fine. If it’s not really a market, then it is some other system of trade, the outcome of which there is no reason not to criticise.
It’s actually not always subjective. Market failure has a very specific meaning in economics and it can be expressed in objective terms. Progressives toss around the term to mean anything they don’t like, but that’s not a correct usage.
I presume you intended this reply for another comment, though there’s really no more relevance to it, no matter where you put it.
I also presume that you want to rely on the way the Austrian school interprets market failure, which is to say that you believe market failures simply cannot happen.
It makes no difference: technically or colloquially defined, your use of ‘market failure’ leads to an epistemological dead-end. Pure know-nothingness.
You assume a lot, and all of it wrong. Actually, I’m using the traditional neoclassical economic understanding of market failures, which acknowledges that they can occur and defines them as a scenario in which a market participant can be made better off without making another participant worse off.
It’s not know-nothingness. It’s simply arguing for intellectual responsibility, skepticism, and logical conclusions based on the knowledge we do have.
“As if any one person could even know such a thing and draw such conclusions.”–RTW
“It’s not know-nothingness”–RTW
I think it is!
If it’s not, then, it’s merely a matter of ‘We have established what kind of woman you are, now we are merely negotiating a price.’
In which case you would have to make an argument that shows speculation is not driving up oil prices, which you haven’t even attempted to do.
Instead, you’ve said, first, that it’s impossible to make that kind of argument, then that it is possible to make that kind of argument, but Ciccilline’s doing it wrong.
Any way you slice it, you have provided precisely nothing that contradicts what Ciccilline is saying.
“If you look at what has happened in the market, production is up and demand is down,” Cicilline told me today. “So the market is not working right.”
I almost fell out of my chair laughing. What a completely foolish statement. Cicillini is an expert in the oil industry now, apparently, and understands all of the motivations, costs, obstacles, concerns, investment strategies, and planning of the industry in aggregate. As if any one person could even know such a thing and draw such conclusions. Unfortunately, progressives tend to lap this anti-market rhetoric up without much scrutiny of the underlying economic principles because it confirms all of their biases and justifies bigger government.
I would actually say that the “ultimate fallacy” of central economic planning is the consistent failure to consider the posibility that government failures resulting from interventionism can be worse than the market failures they intend to correct. Of course, there are so many fallacies, it’s difficult to choose just one.
“As if any one person could even know such a thing and draw such conclusions.”
If this is so, then all interventions are justified.
“that government failures resulting from interventionism can be worse than the market failures ”
And the reverse is also true. These statements of yours are perfectly meaningless. You’re simply saying that the market–which is not ‘free’ or ‘efficient’ in any real sense–is completely unknowable.
If the market is unknowable, then there is nothing to be said about it one way or another. No one can know if its outcomes are good or bad or whether it is functioning poorly or well.
Of course, such market nihilism is complete nonsense. A society certainly can decide for itself if it likes the outcomes of the markets that it creates, and it can decide to change the structure of its markets to achieve whatever ends it desires.
All markets are planned, one way or another. To suggest otherwise is sheer, willful ignorance.
No, you’re just taking it too far. Skepticism is not nihilism. Cicillini makes a very specific claim about a market based on what is clearly insufficient information. We can make more general statements about markets or draw some specific conclusions if we have sufficient information to back them. There is also economic theory that reaffirms the efficiency of markets generally, and can give us clues as to whether a particular market is efficient or not (nowhere near what Cicillini uses to justify his conclusion).
Nobody disputes that markets are planned. The debate is bottom-up or top-down. It’s central economic planning we take issue with as fundamentally backwards and misguided, not the planning itself. Localized knowledge is the key to an efficient market.
“Cicillini makes a very specific claim”
There is no more general claim you can make about a market than that the law of supply and demand seems to be working poorly in it.
“on what is clearly insufficient information”
I have a feeling this is mere tautology.
“It’s central economic planning ”
There’s no other kind. All planning ultimately rests on the power of government and is effected through the manipulation of government. Any arguments to the contrary are merely attempts to get suckers to give up their grips on the levers of power.
His claim is that the current price of oil is “wrong” and that he can tell this simply by looking at oil production and current consumer demand. Obviously whether you consider the claim “specific” or “broad” depends on the context in which you are viewing it, but in either case, his claim cannot be logically supported on the basis he gives alone. It’s not a tautology – he doesn’t have enough information according to basic economic theory.
” All planning ultimately rests on the power of government.”
This is *clearly* untrue because markets can be defined to include just two participants, such as friends or family members making the most basic of exchanges with no money or oversight involved. Government would not enter into such market transactions at all.
“he doesn’t have enough information according to basic economic theory”
You don’t know that. He hasn’t elucidated his entire process of assessing the market; he has merely made brief statements outlining his conclusions. There’s no real explanation of why speculation accounts for the seeming problem with price.
You can say he hasn’t explained himself; you can’t say he hasn’t thought things through. Or that it’s not possible for him to have thought things through, which, I remind you, was your inital position on the matter.
“markets can be defined to include just two participants, such as friends or family members”
Who will have an understanding of property rights entirely dependent on the way their government defines them.
“Who will have an understanding of property rights entirely dependent on the way their government defines them.”
There is no reason why government “must” be involved in such transactions. You’re just choosing to read government into the equation because it is familiar to you, but even primates and lower animals engage in basic market exchanges where there is clearly no government in place. It’s not a necessary component of economic activity, and I doubt even the most progressive economist would disagree with that principle.
“even primates and lower animals engage in basic market exchanges”
Oh please. If you’re going to define markets into nothingness, then you can’t make any kind of claim about them at all.
The definition is the same – we’re just talking about markets of different sizes. It’s not “nothingness” – it’s just taking the most basic form of a market to illustrate the point that government is not “necessary” for market behavior to occur. Your statement was incorrect and not just theoretically so – it is demonstrably so in the real world.
Yes. Bonobos trade sexual favors in Pareto optimal markets out of rational self-interest with perfect information.
The idea that your definition of ‘market’ has any connection to the real world is beyond laughable.
Nobody said anything about “pareto optimality” or “rational self-interest” or “perfect information.” You’re adding things into the discussion to obfuscate. I just gave an example of a simple market to counter your incorrect point about governments being necessary for markets to occur. I could give plenty of other real-world examples as well – black markets, etc. Maybe you should exercise semantic hygiene in the future to avoid saying things that you didn’t really mean to say.
You did not give an example of a market that exists outside of government. You gave an example of a kind of exchange that could in no possible way have any of the characteristics associated with the word ‘market’, in either a technical or conventional sense.
Animals do not have markets.
I am glad that you brought up black markets, however, because they amply demonstrate how clouded your thinking is on this matter: black markets exist and can only exist as a result of specific government interventions. There is no market more determined by government than a black market.
The various markets for illegal drugs are an excellent example of this. They are totally, 100% created by government prohibition of certain drugs. In fact, the whole libertarian argument against drug prohibition ultimately comes down to the notion that prohibition is a huge market distortion without which few of the problems caused by illegal drug markets would exist.
This is a gigantic error on your part. Your mistake shows that you are completely out of your depth here.
Moving the goal posts again to continue your never-ending intellectually-dishonest war of attrition. The original point you set out to prove was that governments are necessary for markets to operate because they offer some kind of fundamental stability or mechanism. As I proved this statement wrong through examples, you have modified your argument in two respects. You are now arguing that what you really meant was complex market economies, and that you were taking government as a given and only trying to demonstrate that the presence of governments can change the nature of markets. This is very different from your original statement: “All planning ultimately rests on the power of government and is effected through the manipulation of government,” which is clearly wrong. This is precisely why semantic hygiene and organization of logical thinking are so important. Without them, every argument just turns into a perpetual back and forth about what was really meant and the true scope of the argument, which is what every thread you post in quickly becomes.
“As I proved this statement wrong through examples”
What examples? You gave no examples.
You have in no way established that any given exchange constitutes a market. You’ve simply made the assertion and backed it up with no evidence whatsoever.
Saying animals have markets is not the same thing as showing that they do. Give an example of an animal market. I’m in the mood for a good laugh.
“You are now arguing that what you really meant was complex market economies, and that you were taking government as a given and only trying to demonstrate that the presence of governments can change the nature of markets”
Not at all. I am saying that government is necessary to make markets possible. Any market. The case of black markets, which you tried to present as a market that exists without government, supports my position: government creates them. Government is a necessary condition for the existence of black markets.
You know full well that what I’m saying is true and that you are caught out. I defy you to say that a market in illegal drugs is possible without government.
You won’t because you know you royally screwed up with that example.
As an aside, I’m really enjoying the little tirades about logic that you append to your posts. Nothing pleases me more than your repeated performative contradictions and, especially, your excessive use of the rhetoric of hygiene.
I think someone knows that he’s a dirty boy!
“You don’t know that.”
Of course we don’t have 100% knowledge, but there exists enough evidence to make an educated guess that he probably doesn’t have a deep enough understanding or knowledge to come to such a conclusion. All we have to look at is the quote, especially the 2nd part.
And a substantial piece of this is excessive speculation.
That statement screams politics and not knowledge. What is excessive speculation, and how would he know if it existed in the oil market?
“an educated guess that he probably”
Oh. Well, as long as you’re sure.
”What is excessive speculation, and how would he know if it existed in the oil market?”
How would anyone? If there is some way, then Ciccilline’s way could be that way.
“That statement screams politics and not knowledge.”
There is nothing more political than the oil business. It is the height of absurdity to suggest that anyone could possibly distort the oil markets by inserting politics into them. The oil business consists of nothing but political distortions. I mean, Jesus: the oil business?
“Ciccilline’s way could be that way.”
C’mon now turbo, even you are better than this. Nothing in the Congressman’s past or present suggests he has any more of a freakin’ clue about the oil business than your average Rhode Islander. He is very good at spouting talking points though… didn’t we just hear about “excessive speculation” the last time oil prices went up. There was all this faux outrage then too… they even had special investigations and everything.
“suggest that anyone could possibly distort the oil markets by inserting politics into them.”
Nice strawman.
“Nothing in the Congressman’s past or present suggests he has any more of a freakin’ clue”
Oh good lord. Of course, Ciccilline himself didn’t come up with the actual reasoning. Do you have any idea how politicians operate? How naive are you?
He listened to some technocrats and believed them. Which is how everbody goes about making this kind of decision.
I mean: how exactly would you go about refuting Ciccilline’s position, if you cared to do so (and apparently you don’t, because you haven’t tried)?
You would turn to Lew Rockwell or whomever. Your ideology would guide you to someone whose thinking on the subject you might like, and you’d use your brain to assess the argument.
Look: let’s face it: all you’ve done here is say, ‘Larf! Ciccilline’s stoopit!’ You’ve made no counter-claim about oil speculation, except to suggest that perhaps markets are completely opaque, in which case no decision about them could possibly be informed.
So…what is your point?
P.S. You don’t know what ‘straw man’ means.
@turbo
“Ciccilline himself didn’t come up with the actual reasoning.”
Wait, I thought you said Ciccilline’s “way” could be that way? Now you’re saying he didn’t come up with the reasoning?
“I mean: how exactly would you go about refuting Ciccilline’s position, if you cared to do so (and apparently you don’t, because you haven’t tried)?”
He’s the one asserting there’s “excessive” speculation. The onus is on him to provide evidence of such. If he’d like to provide his evidence, I’d be glad to offer counters to it.
“P.S. You don’t know what ‘straw man’ means.”
Then please point out for me where I advanced the notion “that anyone could possibly distort the oil markets by inserting politics into them”.
“Wait, I thought you said Ciccilline’s “way” could be that way?”
Yes. The same way anybody goes about it, which is the way I outlined.
“If he’d like to provide his evidence, I’d be glad to offer counters to it”
Why wait?
”where I advanced the notion “that anyone could possibly distort the oil markets by inserting politics into them”.”
Ciccilline is advocating an intervention in oil markets, and you’re crying foul because he’s doing it for political reasons.
“Why wait?”
Because he hasn’t defined “excessive speculation”
Is this same Goldman Sachs where Senator Jon Corzine came from as CEO ? and Governor Jon Corzine? Have we found the 1.2 billion missing? Messers Hinchey and Cicilline know little por nothing about speculation in the futures markets……please he could barely understand city finances while mayor
This is one of those few times I agree with JGardner. “Rampant speculation” drives prices in virtually every market we participate in, and not just in commodities either. Housing? Cattle? Gold? Do Mr. Cicilline and his esteemed colleagues think that we should limit speculation on just one of these markets, or just the one that makes them look better around election season?
Furthermore, it’s a crying shame to see the Democrats, those flag-bearers of progressive politics everywhere (lol) again sacrificing the greater long-term good for that of the short-term gain. If gas prices never go up, we’ll never have a market incentive to invest in alternative and renewable power sources for transportation. What, did anyone here think that government regulation was what created the market for hybrid electric vehicles? If that were the case, it would have happened back in the 80s or 90s, when gas prices were relatively low.
This is the kind of backwards, knee-jerk populist thinking that has exhausted our country’s former superiority in energy technologies. Thanks!
“Do Mr. Cicilline and his esteemed colleagues think that we should limit speculation on just one of these markets, or just the one that makes them look better around election season?”
Just one? I take you’re not overly familiar with Dodd Frank? You’re just wrong on this one, Jake.
[quote]
Nineteen senators are urging a federal court to uphold rules from the Dodd-Frank reform law that limit speculative trading in oil and other commodities…
The CFTC rules limit the amount of futures and swaps contracts that traders may hold for oil and some other energy commodities, and a range of metals and agricultural products.
[end quote]
So you’re in favor of unregulated food an energy markets? I’d like to hear your progressive justification for starving the 3rd World to make sure you can keep your SUV fueled up.
“Not a Game: Specualtion vs. Food Security”
Wow after cutting through all the gobbledegook we finally get some reasonable conversation from Jake Paris and jgardner. Just because Cicilline says so doesn’t make it true. Consumption growth is down but global consumption is up. Countries like Indonesia and Mexico that were once oil exporters are now importers. Ford isn’t building a plant in China to supply the US with cheap cars. The markets are elsewhere. The price of oil is going to rise with a recovering economies and increased production costs. Ironically, isn’t fighting oil prices counter productive to the left’s green initiatives? Sounds like Cicilline is talking out both sides of his mouth.
While I agree that pretty much ALL markets need substantially greater scrutiny, transparency and regulation, it kind of hurts me to see the Rep pushing this line of reasoning. As DD rightly points out (oh, that hurts ;-), global demand continues to put buying pressure on this commodity.
Also, saying that there’s speculation in a futures market is like saying there’s wetness in water. So it’s not really about speculation; it’s about manipulation.
As I pointed out in my previous post on this topic, overbought futures markets are super-easy to spot because they crash once per month when contracts come due. If you’re on the sell side of a contract, you only make your money when you actually deliver oil to the entity holding the buy side of that contract. If the price is high, you’re loving life.
Conversely, if you’re a financial company that’s playing the oil futures markets, you HAVE TO get out before the contract comes due or else you’re under a legal obligation (known as “a contract”) to receive and pay for oil. This process of non-refiners selling contracts as they come due is what drives the crash, and it’s what keeps prudent folks like us on the sidelines. Don’t play the futures markets with your mortgage payment unless you want to live in a cardboard box.
Given that we don’t see this monthly crash cycle, is there really manipulation at play? Well, there could be, but we’d never know. This is where we need the reforms and the transparency.
By “carrying over” contracts, two sides can basically call a do-over until whenever they feel like it. Why this would occur continues to baffle me because one of the two players is CERTAIN to be walking away from a profit. The only way it makes sense is if the same entity is on both sides of a large number of contracts. THIS SHOULD BE ILLEGAL IF IT ISN’T ALREADY!
Futures, like most derivatives markets, are highly opaque. There are no clearinghouses like in the bond and equities markets where clearly unfair trades are reversed on a regular basis. It’s the so-called “dark pools” of hedge funds and brokerage “proprietary trading” that slosh around and actually and truly moving – even manipulating – markets.
So, Bob is only partly right when he concludes that the problem is too many people buying contracts. That definitely drives prices up. The other – and more nefarious – part of the problem is that the true market correction of forced sales PER THE TERMS OF THE CONTRACT may not be enforced.
The clearly undemocratic and, frankly, evil part is that until we implement counter-party transparency and push it all into a clearinghouse, we’ll never know.
PHL: I have little confidence in either Mr. Frank (who has been around on his committees long enough to have willingly become blind to the housing crisis), or Mr. Dodd, who now works for the folks he supposedly used to regulate. He’s busy right now trying to destroy your right to access the Internet, BTW.
I’ll take a page from the Frymaster’s book and argue that putting limited-scope or poorly-targeted caps on swap deals is just window dressing thought up by folks who benefit from the current lack of transparency. Without transparency in markets, we are lost. But considering Mr. Cicilline also recently pushed for a release from the Strategic Petroleum Reserve to combat high gas prices (a nearly worthless tactic in that we don’t have nearly enough in the SPR to affect even monthly prices, and we are mandated to refill it), my guess is that he isn’t making this call because he’s concerned about poor market controls. Lower pump prices = win at the polls.
Also, people own SUVs in part because gas is so cheap in the U.S. — sorry, how are these regulations allowing for fair competition with alternative energy resources? What progressive justification do I need when I can point to the fact that we are currently subsidizing ethanol, which takes away from the potential arable land to contribute to the global food supply — but ethanol barely breaks even or is quite possibly a net-energy-negative resource? That’s corporate America driving our public policy decisions yet again, so how is the U.S. government doing anything but screwing us all over with its energy policies, including low fossil fuel taxation and subsidizing the worst alternatives?
PS: I drive a small Japanese car that gets over 30mpg highway. Seeing over SUVs is a pain.
Look, I don’t think Dodd-Frank went nearly far enough, but it’s flatly false to say that Democrats have focused their efforts soley on a single market and started only this year (say, a day late and a dollar short and I might be with you).
PHL: I never said the Democrats weren’t at least pretending to try… they’ve been significantly more in favor of regulation on markets than the Republicans for as long as I’ve been alive at least. But it’s a false choice: between one party that wants NO regulation and one that wants ineffective and even counter-productive regulatory frameworks.
Again, I do think it’s pretty telling that Mr. Dodd now works for one of the largest, best-funded, and most invasive lobbying groups in the nation. Was he really working for the people back when he was in office?
I just don’t think anyone is worthy of any praise, given the fact that our energy and corresponding environmental crises have remained largely ignored for the better part of three decades now.
We can do better. We need to do better.