It's time to regulate the oil speculators...

By Eric Watkins
Oil speculators get the jab this week from John Sfakianakis, chief economist at the Banque Saudi Fransi and Noé van Hulst, secretary-general of the International Energy Forum. That’s the jab, not the job.

Writing in the Saudi Arabia-based Arab News, Sfakianakis and van Hulst note that since political turmoil started in the region less than two months ago, oil prices have increased by more than $20/bbl.

“If sustained over several months,” they say, “this may drive up inflation and threaten global economic recovery efforts.”

In their view, the dominant sentiment in the oil market is “the fear that political turmoil will spread to major oil-producing countries in the region, with the risk of substantial loss of oil supply.”

The two writers acknowledge that more needs to be done to improve matters in the global oil market.

They say, for example, that there is a need for more transparency and better oversight to reduce excessive price volatility which helps much needed investment in future capacity expansion.

But they also take issue with what they call “the paper oil market.”

Regarding the paper oil market, they say, regulators like CFTC, FSA and the EC are currently developing concrete regulation to increase transparency in and oversight of trading in oil derivatives including the still opaque OTC market.

Sfakianakis and van Hulst acknowledge that the paper oil market does play a useful role where it helps airlines, e.g., to hedge their fuel price risks.

“But where it is used as a channel of massive speculative momentum trading and causing violent over- and undershooting of oil prices, this should be reined in by position limits,” they argue.

“Regulators should also seek ways to expose institutions that make wild price predictions while simultaneously taking market positions,” they say, adding that “analysts should be more self-restrained in making panic calls of ?spiking’ oil prices as self-fulfilling prophecies.”

Finally, it is important to ensure that current regulation under way will be internationally coordinated in order to avoid regulatory loopholes.

“In reality,” they say, “the Middle East has been a reliable supplier of oil for many decades and its future share in global oil supply is set to increase.”

Longer term, it will always be in the interest of the region's governments to sell oil and use the revenues to provide a young and growing population with education, jobs, and higher standards of living.

As a final point, Sfakianakis and van Hulst say it is necessary to acknowledge significant differences within the region, drawing attention to the fact that “Saudi Arabia's global systemic role as the largest oil producing country is now evidenced.”

In the view of Sfakianakis and van Hulst, speculators need to understand such differences between countries in the region.

Instead, they say, many are taking advantage of markets’ “ill information, lack of differentiation and broad statements that do not provide stability for the global economic recovery.”

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