Jack Walker

Oil Price Economics the 60 Minutes Way

Eddy,

While you are certainly right to support the concept that speculation plays an important role in the market process perhaps it would be good to back up and look at the bigger picture.

There are important differences between the Commodity Futures markets and the equity markets. The Commodity Futures market is a price discovery market where buyers and seller of commodities exchange their views on market conditions by executing financial commitments in an effort to determine the supply and demand clearing price. The equity markets are for raising long-term investment capital and serve a completely different function than the futures markets.

The argument is being make that institutions who manage long-term investment capital such a pension funds and endowments have lost the distinction between the function of these markets in their effort to generate short-term gains. In the process, due to their financial size, they have distorted the normal price discovery that takes place in the Commodity Futures market to the detriment of both producers and users of many commodities. In their effort to secure above normal returns for institutions of their size they found ways around the normal and established practices of position size limits and then moved their trading off of the exchange in order to avoid reporting and to obscure their activities.

At this point, no one is saying speculation does not play a role in the markets. The legitimate question revolves around the issue of institutions responsible for long-term investments directing their capital to short-term price discover markets thereby distorting the price discovery process. The argument is they should limit their long-term investments to the equity markets that are more suitable for their large investment capital. It is a basic and fundamental suitability argument.

Jack