Robert McCullough, the “analyst known for his work with a Washington utility trying to prove that Enron manipulated power markets” (in the words of Newswatch: Energy), is back in the news with a report sure to appeal to the economically naive in Congress and elsewhere.
In his report McCullough concludes, “All available evidence indicates that the price spike of July 3rd was a form of market failure — most likely due to the significant concentration in the energy sector in recent years.” But his evidence for “significant concentration in the energy sector” consists of an estimate of market concentration (using HHI as his measure) based on the CFTC’s Commitments of Traders data for trading on NYMEX. And of course, even if a trader held a large share of contracts on the NYMEX, that is far far from being anything like controlling a large share of the international oil market.
In any case, McCullough finds his NYMEX-focused HHI estimate is increasing over time, with a significant and unexplained sharp increase during July 2008. The highest possible “worst case” estimate of the HHI that he finds appears to be around 850. For readers not conversant in the ways of the HHI, the maximum possible value for an HHI is 10,000; typically antitrust agencies don’t become the least bit interested until around 1,800 and serious antitrust consideration kicks in around 2,500. (It looks more significant in the chart McCullough presents because his chart showing the range of possible HHI values in NYMEX oil trading only goes up to 1,000 — well below the level of regulatory interest.)
So that is McCullough’s concentration result. His worst case HHI estimate does spike high near the end of his data – during July 2008 – but since prices peaked at the beginning of the month a kind of loose logic would link market concentration to falling prices. McCullough’s logic is looser still, noticing a general upward trend in his NYMEX-based HHI estimate during the same period that oil prices were rising. Once he considers a few other explanations and finds evidence for them lacking, he decides concentration must be responsible.
Washington senator Maria Cantwell, who appears with McCullough at a press conference to discuss the report, said in a press release:
“Mr. McCullough’s research clearly shows that oil prices are no longer tied to supply and demand,” said Cantwell. “Statistically, this research shows that prices are spiking absent of a crisis like a natural disaster or supply disruption. However, prices then fell when Congress began serious debate on how to crack down on those who may be trying to manipulate the markets.”
McCullough reports two regressions, one of which included the period during which the proposed Commodity Markets Transparency and Accountability Act of 2008 was under active consideration as a kind of proxy for future U.S. markets policy. He finds that this period correlates with falling spot prices. Curiously, it appears that spot prices fell a little more than futures prices during this period, but shouldn’t future energy policies reasonably be expected to more strongly effect futures prices rather than current spot prices?
By the way, McCullough says there is little evidence to support the view that “excessive speculation” explains the price spike. News reporters and perhaps Senator Cantwell herself, however, seem to miss that point (The Columbian: “Cantwell: Regulators asleep as speculators manipulate oil markets“; The Orgonian: “Cantwell blames spikes in oil prices on speculators“).