On Thursday, the commodity broker Michael Martin called me un-American in a blog he wrote for The Huffington Post. He was attacking a story I'd written, Are Wall Street speculators driving up gasoline prices? I'm old school and believe journalists should report the news, not seek to be part of it. But since Mr. Martin opted to make it personal on such a public forum, a response is necessary.
As the headline on my story suggests, I questioned what role speculation might have in the rapid rise in oil prices right before the start of peak driving season. The story doesn't declare that Wall Street speculators are solely to blame. The degree to which Mr. Martin responds with a personal attack, however, suggests that perhaps where there’s smoke, there’s fire. After all, isn’t the best defense a good offense?
Over the past two years, I've been cautious about writing declaratively that Wall Street speculators are solely to blame. Few markets are as opaque as oil, with questionable data about Saudi production, Chinese consumption, dark markets for private trading and overseas exchanges that until recently allowed position limits reduced on one exchange to be rebuilt on another without regulators able to see this activity in real time.
What appears quite clear, however, is that there is a correlation between financial flows into commodities and rising oil prices. Correlation, of course, is not causality, and this is an issue that, by the very nature of what a futures market is and does, makes it hard to prove or disprove with certainty.
Mr. Martin conveniently ignored key parts of my article, such as CNBC's Sharon Epperson's reporting from the Nymex that floor traders were telling her passive investment flows — the long-hold positions from big institutional investors looking to diversify their portfolios — were behind the run up in prices. Ironically, on his own blog Mr. Martin calls long-only positions in mutual funds “the true weapons of mass destruction.” These are different markets, of course, but he seems to suggest that long-hold positions can be distortive under some circumstances.
Mr. Martin also left unmentioned quotes from the acting chairman of the Commodity Futures Trading Commission stating that he believes financial flows are at least part of the story behind rising oil prices. And he didn't mention the April conclusion of the Federal Energy Regulatory Commission that this same speculative activity drove up home heating oil prices in 2008.
In fact, even Alan Greenspan, that stalwart champion of laissez faire regulation, acknowledged before and after his departure from the Federal Reserve that these financial flows from big “speculators” were baking in a price for crude oil above what supply and demand would dictate.
Nowhere in my story did I suggest that hedging in commodities markets should be banned, an allegation Mr. Martin makes to set up the accusation of my being un-American. Nobody is talking about banning these trading activities, rather limiting them.
That’s what Treasury Secretary Timothy Geithner recently proposed. If Congress passes what he proposes, we may have our answer to this debate soon enough. Geithner wants position limits on Wall Street investors who don’t actually take physical delivery of oil. These restrictions might provide a better sense of whether these flows do or do not drive pricing.
I have yet to find anyone who can say with a straight face that the current run up in prices is strictly about supply and demand for oil itself. In Mr. Martin’s criticism, when he refers to supply and demand, he’s actually referring to supply and demand for oil futures, not oil itself. And this demand for oil futures is driven not by the desire to consume oil per se, but to use oil contracts as a store of value, to guard against a weak dollar, or rising inflation or a drop in the stock market. Does he really dispute this?
In fact, I had a long conversation with a major index investor following the publication of our article. This person made a compelling case that these funds on their own aren't large enough to influence prices. But then this private conversation ended with the investor asserting that it would be wrong to limit the ability of pension funds to hedge against inflation. The assertion makes my point: Oil prices aren't just about consumption of oil. Oil contracts have become a way to store value, like gold.
If rising oil prices are in some ways detached from the consumption of oil, the real-world effect is that everyday Americans pay more for energy because financial institutions are protecting themselves against x, y or z.
You can defend the trade however you choose — and since Mr. Martin is a commodities trader I'd expect him to — but this isn't the way oil trading used to work. And in the real world, far from Wall Street's fine dining and fancy John Lobb shoes, real people trying to stretch their income have less wiggle room because of higher pump prices. Real businesses, small and large, pay higher power bills that eat into their payroll. Real men and women have lost jobs, or work a second job to make ends meet, all in large part because of the global meltdown brought on by Wall Street excess.
You don't need a weatherman to know which way the wind blows. In the aftermath of the AIG scandal — the publishing of home addresses of AIG executives and threats made against them — it seems abundantly clear that Americans are pissed off at Wall Street, and the street can ignore this at its own peril.
Income statistics show that about three quarters of the nation accounts for roughly just a quarter of all income. This means that for the majority of Americans, higher energy prices divert spending that could have gone to pay bills, health care, school supplies and other needs. And again, the rising costs are partly explained by the bidding up crude oil prices to hedge against the falling dollar, rising inflation or a drop in stock prices.
If it is "un-American" to explain to Americans how activities on Wall Street affect what they pay at the pumps or in their monthly power bills, then I guess I’m guilty as charged. Just don't complain when the pitchfork crowd starts hanging around the commodities exchanges.
Kevin G. Hall is national economics correspondent in the Washington Bureau of McClatchy Newspapers. He's on the board of governors of the Society of American Business Editors and Writers and is the 2004 winner of the Society of Professional Journalists award for best foreign correspondence.