A new policy paper by Rice University's Baker Institute for Public Policy shows a clear increase in the size and influence of noncommercial traders, or "speculators," in the oil futures market since regulations were eased by the Commodities Futures Modernization Act of 2000. Speculators now constitute about 50 percent of those holding outstanding positions in the U.S. oil futures market, compared with only about 20 percent prior to 2002. The report also finds that the correlation between oil and the dollar has strengthened significantly over the past several years.
The coauthors of "Who is in the Oil Futures Market and How Has It Changed?"-- Kenneth Medlock and Amy Myers Jaffe -- advocate that the government should revise its policies to reverse these trends. Kenneth Medlock is an energy fellow at the Baker Institute and adjunct professor of economics. Amy Myers Jaffe is a fellow in energy studies at the Baker Institute and associate director of the Rice Energy Program.
Using data from the Commodity Futures Trading Commission (CFTC), the authors state that the previous claims by the commission that speculation wasn't influencing oil futures markets were based on inappropriate analysis. The authors present new evidence that speculative trading is playing an increasingly important role in the oil market.
They note that while the question of what has produced sharp swings in oil prices since 2005 is a complex one that requires further and deeper study, there are "inescapable facts" that need to be part of the debate about regulating the activities of institutions betting on movements in oil price purely for financial gain. Specifically, speculators, which the CFTC designates as any reportable trader who is not using futures contracts to hedge, have increased their footprint in the marketplace dramatically since the late 1990s.
Hedgers are typically producers and consumers of the physical commodity who use futures markets to o
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