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September 17, 2008

President Bush Threatens Veto of Poison-pill Laden Drilling Bill; Oil Falls to $90/bbl

So far, Republicans have managed not to cave on offshore drilling (though ANWR seems to be out of the question). House Democrats passed a bill which would allow energy exploration on the Outer Continental Shelf, but sharply limited drilling closer to land. The bill would also increase the tax burden on oil companies to subsidize wind, solar, and conservation programs. President Bush says "no deal" and it looks like Senate Republicans will keep it from a vote.

Oil fell to near $90 per barrel today, the lowest it has been in seven months. Following the financial mini-crisis over the weekend, I bet Saudi Arabia is sending a big "I told you so" to the rest of OPEC. Of the oil producing states, Saudi Arabia seems most concerned with keeping the price of oil low enough to stave off the development of energy alternatives or a world-wide economic slump, either of which would cause oil revenues to plummet.

In related news, the Commodity Futures Trading Commission actually looked through the data and discovered that speculators were not manipulating the market to cause prices to skyrocket.

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.

Don't expect this to stop both presidential candidates from blaming the boogeyman for high gas prices.


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posted by Gabriel Malor at 10:54 AM

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