If there's a conclusion to be found in the Federal Trade Commission's latest report on the reasons for high gasoline prices, it's tough to detect.
Actually, it's easy, if you define conclusion as statements of fact. The report is full of them. For example: "This observed correlation between the increase in commodity prices and rising financial trader participation in futures markets has led concerned parties to focus on two possible mechanisms that could lead to purely speculative effects on spot prices."
Yes, concerned parties have focused on it. But the FTC report doesn't weigh in on either side.
It's a great report if you want links in footnotes that bring you to work that other researchers have done on the question of price relationships. For example, the relationship between trader activity and the price of crude. Or the relationship between how fast crude prices go up and how fast that translates into an increase at the pump, or the relationship between a fall in the price of crude and a decline in the retail level.
There is one good graph in the study on the whole issue of rockets and parachutes, or rockets and feathers as the FTC report refers to it. It shows that during a period of rising rack prices in Cleveland in April and May of 2009, the average margin between rack and retail prices was 8 cts/gal. But on the way down for several weeks later, it grew to 19 cts/gal, as retail prices did not follow rack prices lower step-for-step. A similar phenomenon was tracked later in the year, though the spreads were narrower, 11 cts on the way up, 16 cts on the way down. It's data that certainly supports the rockets and parachutes theory.
If there's any takeaway on whether speculative activity tends to drive prices higher, it seems the FTC would lean toward the camp arguing that it doesn't. Again, it's difficult to tell, because it's not a report that takes a strong stand.
For example: "(T)here is little question that recent dramatic increases in spot prices have been coincident with equally dramatic increases in speculative activity in futures markets. However, correlation does not necessarily imply causation, and reasoned explanations of the mechanism by which activity in the futures market affects prices in the physical market have been missing or incomplete in many of the studies."
Or this: "(V)ariation in spot prices in the wake of changes to futures prices may be efficient, as it signals changing expectations about the future value of commodities. Thus, there is a need not only to establish a connection between futures and spot prices, but also to show that the connection is inefficient."
Even when citing the studies that try to prove a link between speculation and prices, the FTC seems less convinced: "At present, however, there is little consensus in the resulting literature," it said, citing what it said are differing theories about how speculative activity could be driving up prices. "Some analysts conclude that increased non-commercial participation in futures markets clearly has affected spot market prices...Other papers argue that the higher volume of trading in the futures market represents a speculative bubble...Other papers argue that volatility shocks in the futures market affect the volatility of spot prices without making the argument that the changes produced a speculative bubble." And so on. The FTC does not appear persuaded by any of these arguments.
If the political forces that have tried to get the FTC involved in policing oil prices were hoping for a full-throated attack on speculation from the agency, they didn't get it here.
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