CNNMoney recently ran two columns on the role speculators are having on oil prices.
Better Markets, an organization dedicated to Wall Street reform, argued speculators are to blame for the high prices while finance professor Craig Pirrong said speculators are having little impact.
Pirrong's piece directly attacked Better Markets. This is a response by Better Markets' president Dennis Kelleher:
Everyone is entitled to their own opinion, but not their own facts or evidence.
Better Markets has done extensive research on the commodity markets and commodity index funds in particular.
Moreover, Better Markets did a comprehensive review of the literature on commodity speculation, which was included in a lengthy appendix to the comment letter it filed with the CFTC regarding position limits. This work is publicly available on our website and elsewhere.
Mr. Pirrong clearly didn't bother to look at any of this and, rather than address that substantive evidence, engaged in name-calling.
The article also suffers from a common misunderstanding about how futures markets actually work.
Pirrong argues that because index funds never take delivery of the physical commodities they can't affect their prices.
This is wrong for two primary reasons. First, the reality is that prices in the futures markets are used for physical transactions as (a) benchmark prices for physical auctions, (b) reference prices for physical delivery products, and (c) assessed prices like Platts which uses the near month futures prices as a key component for physical prices.
Second, the Wall Street firms that trade the futures also actually own refineries, storage facilities and other physical assets and crude products with which they arbitrage the futures markets. Therefore, when index funds pour artificial demand into the futures markets this translates into higher prices for real commodities too.
Another mistake Mr. Pirrong makes is cherry-picking just one commodity as supposed proof that speculation does not impact prices.
But, as he points out, the fundamentals in natural gas have been uniquely benign. Corn, wheat, soybeans, metals and various other essential commodities have all behaved like oil rather than the outlier natural gas.
The article also incorrectly asserts that rising inventories are a necessary condition for speculation to affect prices. This would be true if all market participants had perfect information and the ability to adjust their demand or supply at will.
The fact of the matter is that several studies from both inside and outside academia have provided strong evidence to back up the common sense observation that letting financial speculators pour vast capital into markets that were designed for an entirely different purpose is having hugely damaging effects.
The article ignores basic economics, common sense and rigorous empirical research when it claims that the tidal wave of speculative money in the commodity markets today is not pushing up prices and disrupting the markets.
Trying to shoot the messenger with obscure historical allusions and rhetorical sleight of hand may be entertaining in the academic context.
However, oil and gas impact every American family, farmer, business, and community and, therefore, the subjects of rising prices and speculation in the commodity markets deserve serious, thoughtful consideration, not disparagement.
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