Q And last thing. Senator Obama is saying speculation is a big part of this. The administration seems to reject that; Secretary Bodman over the weekend saying in Saudi that speculation really is not the issue here. But the Saudis themselves came out yesterday and said they do believe speculation is a problem. So where does this White House –
MS. PERINO: We believe the fundamental problem is the basic one of law – the basic law of supply and demand. We do think that speculation could have impact on the day-to-day volatility in the market. But over the long term what we have seen is a leveling off of supply and a dramatically rising – rise of demand, and that is what the fundamental problem is.
But in terms of the day-to-day volatility or turbulence in the market, perhaps that can be attributed to speculators, and the CFTC is looking into that aspect and all the other aspects that go into this, as well.
Q And a follow to that. Congress is actually perhaps considering legislation to set stricter limits, or even ban trading on energy futures in some markets. Is that something that the White House – I mean, what’s your position on that?
MS. PERINO: I think the best place for that discussion and that review is at the CFTC, and we’ll let that independent agency look at it and then review any of their recommendations. I know that Walter Luken is heading that up.
Okaaaayyyy…. Then let’s get Mr. Luken up there to the Hill and get him squirming:
NEW YORK (CNNMoney.com) – Near-record oil prices could quickly fall by half if Congress were to rein in speculators, according to testimony Monday from a hedge fund manager and oil company adviser before a House subpanel.
Michael Masters, of Masters Capital Management fund, told the subcommittee of the House Energy and Commerce Committe that - with greater regulation - oil prices could drop to $65 or $70 a barrel within about 30 days.
The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?
What would be the effect of a big increase in the volume of purchases of near-term futures contracts? If investors were all equally informed and risk neutral, an increased volume of purchases would have no effect on the price. In such a world, there would be an unlimited potential volume of investors out there willing to take the other side of any bets if the purchases were to result in a price that was anything other than the market fundamentals value. But with risk-averse investors or with differing information, the answer is a little different. For example, I might read your willingness to buy a large volume of these contracts as a possible signal that you know something I don’t. For this reason, standard financial “market micro-structure” theory predicts that a large volume of purchases may well cause the price to increase, at least temporarily, until I have a chance to verify what the true fundamentals value would be.
In a scramble to find a fix for energy prices, Congress has tried (and failed) to strip tax breaks from Big Oil, to open protected sites for exploration and drilling, and to jump-start a new era in nuclear power.
Now, Capitol Hill is zeroing in on speculators and the legal loopholes that some lawmakers say are adding as much as $70 to the price of a barrel of oil.
“Energy speculation has become a fine growth industry and it is time for the government to intervene,” said House Energy and Commerce Committee Chairman John Dingell (D) of Michigan, at hearing on Monday.
Fixes in the works on Capitol Hill range from new constraints on speculators – including a 50 percent margin requirement on financial speculators, full disclosure of all trading by investment banks in all markets, and prohibiting investment banks from holding energy assets – to more funding and regulatory mandates for the Commodity Futures Trading Commission.