Famed hedge fund manager and philanthropist George Soros told a Senate committee today that the rise in oil prices has the appearance of a bubble, but he also said, "A crash in the oil market is not imminent."
Soros addressed a Senate Commerce Committee hearing on several oil-market issues, including whether market manipulation is behind the run-up in prices and the effect of futures market speculation. Oil prices reached $135 per barrel last month before falling back.
Soros outlined several factors that he said are pushing up prices, including high costs to develop new oil fields, rising demand in China and other nations, fuel subsidies in these countries that keep prices "artificially low" and other factors.
But investment trends are playing a role in the run-up, he said. "Trend-following speculation and institutional commodity index buying reinforce the upward pressure on prices," he said, noting the rise of institutional investing in commodity index funds.
"So is this a bubble?" Soros said. "The answer is that the bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality."
Soros said commodity index trading should be discouraged because it is inflating the bubble, but he also warned that new regulations could have adverse and unintended consequences, including further pushing investors into unregulated markets.
But Soros did call for restrictions on commodity investing by certain institutions and said that techniques for evading speculative limits should be banned -- if they can be made to apply to both regulated and unregulated markets.
A recent proposal by Senate Democrats would require the Commodity Futures Trading Commission to substantially raise margin requirements, or the collateral that traders must provide to participate in exchanges. Soros said this would not affect commodity index buying by financial institutions but would be justified because it would discourage speculation that can distort prices.
Sen. Maria Cantwell (D-Wash.) said there are signs of manipulation of the market, noting that oil prices have more than doubled over the past two years without a major supply disruption.
CFTC last week announced that it is six months into a wide-ranging investigation into U.S. oil markets. The agency also announced new measures to increase market transparency, including an agreement with British regulators to obtain more information about trading in U.S. oil contracts on the London-based ICE Futures Europe exchange (E&ENews PM, May 29).
But Cantwell today called CFTC a "toothless tiger" and accused the agency of being far too timid in policing the markets.
She said the agreement with British regulators suffers from several problems, such as lack of enforcement mechanisms and auditing. "The CFTC announcement appears to be nothing more than a ruse to deflect criticism of its abdication of responsibility," she said, and added that new legislation may be in the offing.
Sen. Byron Dorgan (D-N.D.), pointing to a chart of the oil price rise, said "there is nothing with respect to the fundamentals that justifies where that line has moved."
Other witnesses also blamed futures market speculation on the increase in prices and called for tougher oversight, such as requiring more information from large traders and other steps.
"If traders do not have comprehensive reporting requirements, there will always be room for mischief that is out of sight to the regulator," said Mark Cooper, director of research for the Consumer Federation of America.
Michael Greenberger, a former senior CFTC official under President Clinton, said he believes 70 percent of the U.S. oil market is driven by speculators, rather than parties who have commercial interests. He said there is too much trading that is not subject to speculative limits.
Greenberger also said that the recently enacted farm bill did not fully close the so-called Enron loophole that had exempted some exchanges from oversight. The measure will not capture trading in petroleum contracts on unregulated exchanges, he said.
"It has ... been widely reported that the CFTC intends to use the new legislation to show that only a single unregulated natural gas futures contract, and not any crude oil futures contracts, should be removed from the Enron loophole and be fully regulated," he said in testimony to the committee.
He said lawmakers should bring all energy contracts under the U.S. regulatory scheme. He also joined calls for bringing U.S.-based trading on overseas exchanges in London and Dubai under CFTC regulation.
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