Whether one believes speculators exert undue influence over commodity prices likely depends as much on one's market position as on any empirical evidence that speculative trading is "good" or "bad." So rather than trying to call out market sinners, a new report on gas market speculation from the National Regulatory Research Institute (NRRI) merely offers a primer on the long-debated topic and advice for state utility regulators who must weigh the impact of hedge fund activity on ratepayers.
"At the minimum, bad speculation results from the intent of speculators to artificially manipulate the price of a financial derivative away from that which demand and supply factors would determine," writes Ken Costello, NRRI director of gas research and policy. A broader definition of bad speculation might include what leads to a market bubble conducive to highly volatile prices. "Good speculation would help to efficiently allocate a commodity, such as natural gas, across different periods," the report says. "Good speculation, for example, could moderate future prices by storing more of a commodity presently to release in a future period when markets expect supply reductions."
As for noncommercial traders, Costello is noncommittal on their merits and recounts the views of both their supporters and detractors.
For state regulatory commissioners attempting to determine whether the utilities they regulate have left ratepayers vulnerable to speculation-induced volatility, Costello offers a list of several questions to ask utility executives. These include:
Even when commissioners become "educated" about speculation in gas markets, they may decide to do nothing about the issue, Costello allows. "A commission may conclude that speculation has posed no serious problem and that federal agencies are doing the best they can to prevent manipulation in financial derivative markets. A commission also may feel satisfied that gas utilities under its jurisdiction have adequately responded to price volatility, some of which [may be] attributable to speculators, through their hedging and gas procurement practices."
The report is available at www.nrri.org and www.naruc.org.
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