…the task force said that its research “does not support the hypothesis that the activity of these groups is driving prices higher.”
Yes, we know that — but it doesn’t look like Congress has a clue. On the silly legislation making its way through Congress, Megan McCardle has this to say at The Atlantic:
Now suppose you were an idiot. And suppose you were a Senator . . . but I repeat myself.
and if you feel the need for more pain, try reading the lawgiving prose of your representatives here.
The captioned report [PDF] is by the Interagency Task Force on Commodity Markets (Task Force or ITF). The other Task Force participants include staff from the Departments of Agriculture, Energy, and the Treasury, the Board of Governors of the Federal Reserve System, the Federal Trade Commission, and the Securities & Exchange Commission. From the Executive Summary:
In June 2008, the Commodity Futures Trading Commission (CFTC or Commission) formed an Interagency Task Force on Commodity Markets (Task Force or ITF). The Task Force draws on a broad range of government expertise on the fundamental factors and market forces affecting commodity markets. In light of the recent increases in energy prices and the resulting concerns of the public and policymakers, the Task Force has prepared this interim report on crude oil, which offers a preliminary assessment of fundamental and market factors affecting the crude oil market between January 2003 and June 2008.
The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures market – as measured by the number of contracts outstanding, trading activity, and the number of traders – has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.
The world economy has expanded at its fastest pace in decades, and that strong growth has translated into substantial increases in the demand for oil, particularly from emerging market countries. On the supply side, the production of oil has responded sluggishly, compounded by production shortfalls associated with geopolitical unrest in countries with large oil reserves. As it is very difficult to rely on substitutes for oil in the short term, very large price increases have occurred as the market balances supply and demand.
If a group of market participants has systematically driven prices, detailed daily position data should show that that group’s position changes preceded price changes. The Task Force’s preliminary analysis, based on the evidence available to date, suggests that changes in futures market participation by speculators have not systematically preceded price changes. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information – just as one would expect in an efficiently operating market.