Echoing Yesterday’s CFTC Announcement, Heads of France and Britain Call for Curbing Oil Speculation

British PM Gordon Brown and French President Nicolas Sarkozy made clear their support for tighter regulation of oil markets in a WSJ opinion piece. (image: timesonline.co.uk)

In an opinion piece in today’s Wall Street Journal Gordon Brown, prime minister of the UK and Nicolas Sarkozy, president of France, called upon other world leaders, the oil industry and the international business community to take steps toward stabilizing oil prices worldwide for the common good.

Their article points out that for the past two years, oil prices have been all over the map, even though there has been no serious interruption in supply. “Governments can no longer stand idle,” they wrote. “Volatility damages both consumers and producers. The surge in prices last year gravely damaged the global economy and contributed to the downturn. The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery.”

The Wall Street Journal piece followed an announcement yesterday by the Commodity Futures Trading Commission (CFTC) that it is considering new measures to curb speculation in the markets for energy and other commodities to reduce the volatility of prices and protect consumers. The CFTC, the top regulator of U.S. commodities markets, would clamp down on excessive speculation in energy trading by restricting the holdings of big financial interests.  Although there has been no public announcement of collaboration between Sarkozy, Brown, and the Obama administration on this issue, the timing of the announcements suggests that the three leaders have agreed to coordinate their efforts.

CFTC chairman, Gary Gensler, said that the agency will hold hearings in the next few weeks to seek comments from consumers and market players on whether to set position limits on all commodity futures contracts.

Moves to curb speculation face resistance from top Wall Street firms, who fear regulation will cut into their profits. Regulators worry that these firms have already used their size and power to inflate the prices of commodities. When oil prices went through the roof last summer, CFTC data showed that a significant amount of oil trading was concentrated in the hands of just a few speculators.  Opponents of the proposed regulations also argue that they will reduce liquidity in the energy markets, thereby restricting trades.

Brown and Sarkozy are looking at both sides of the coin, arguing that extreme price volatility hurts everybody. “In Britain and France we know how the price of crude dictates the price of petrol at filling stations — and the effect it has on families and businesses. And for countries heavily reliant on income from oil exports, the windfalls from brief price surges are offset by the consequent difficulties of planning national budgets and investment strategies.”

They point out that Saudi Arabia and the Organization of Petroleum Exporting Countries (OPEC) have expressed interest in stronger regulation as well.
“Extreme fluctuations in price are encouraging energy users to reconsider their reliance on oil,” they wrote. “Producers are in danger of finding out that oil is losing its market and its long-term value.” Oil prices, they argue, need to be neither too high, nor too low. Abnormally low prices provide short-term benefits but do long-term damage by diminishing incentives to invest not only in oil production but in alternative energy sources.
They believe the time is right for a worldwide consensus on oil pricing. “Producers and consumers are closer now than at any time in the past 30 years to recognizing the huge common interest in giving clear and stable signals to long-term investment,” they wrote.

With heads of state the UK and France (both powerful founding members of the European Union) in agreement with the US on the need for increased oversight of oil speculation, implementation of new regulations on US and international energy markets in the next few months is a pretty safe bet.