OPEC, CFTC, and the international oil market

Michael Giberson

Will the CFTC regulatory actions increase the market power of OPEC? As OPEC prepares to meet this evening in Vienna, the usual pre-meeting chatter arises: what will they do? what should they do? does it matter what they do? This time around, though, interest in whether the CFTC’s actions may enhance OPEC power.

At Forbes, claims of OPEC’s waning influence, quoting an analyst as saying “there are too many incentives not to comply [with quotas] at present.” (I’m not so sure that the present is special in that regard, there have been many incentives not to comply with OPEC’s quotas for most of the last 40 years. The problem is fundamental to cartels.) What may be new is the CFTC’s increasing desire to limit financial trader participation in energy markets, and the Forbes article quotes another analyst as suggesting CFTC action may be more influential on the market than OPEC over the next few months.

At the Atlantic Business Channel, David Indiviglio comments on the Forbes article:

If the CFTC kills a large portion of the oil trading market, then the price may plummet, as the article anticipates. That is, unless OPEC decides it goes too low and decides to cut supply.

And there’s the trade-off. By weakening the ability of traders to speculate in oil trading, you provide greater power to OPEC. That results in a dilemma: who would you rather have the power to control the oil market — commodities traders or OPEC? The CFTC would likely hand the power back to OPEC through stricter trading regulation. I’m not particularly convinced that’s a more favorable alternative.

Personally, I’d rather have “control” of the oil market in the hands of commodities traders – thousands of people with diverse interests and inclinations – rather than a small number of government oil ministers from a select number of oil exporting countries. Maybe that’s just my “blind faith in the market” speaking.

The more interesting question concerns whether CFTC’s efforts to more tightly regulate futures trading would serve to enhance OPEC’s power. I think the answer is yes, but fear that there is more subtlety to the interactions than I can manage to think through this morning.

FT Energy Source notes that the conventional wisdom for today’s OPEC meeting is “no change,” but also points out that the conventional wisdom is not always right.