TAMPA — Despite growing public criticism that speculators are driving up the price of oil and gasoline, James Cordier, president of Liberty Trading Group, isn't about to apologize. His business of speculating in commodities has tripled over the past year as oil and food prices have skyrocketed.
"Futures traders provide liquidity to the market,'' he said of the contracts to buy and sell commodities that set benchmarks for the price of everything from orange juice to oil. "It is not some scheme some guy in the Hamptons dreamed up to screw the public."
But as Americans wince under pressure from $4-a-gallon gasoline, speculators are increasingly coming under fire as key culprits in the nearly 40 percent surge in oil prices since January. Some experts suggest a barrel of oil is now twice the price it should be, and people are overpaying for gas at the pump by at least $1 a gallon. Total overcharge to a typical family? About $1,500 over the past two years.
The growing clamor represents both concern and confusion over a complex and risky trading system that started with farmers wanting to ensure a profit for their wheat and bakers wanting to lock in a price for raw materials. Outside investors — speculators — joined in, both buying and selling, making money on the spread and acting as ballast to the market.
Today the commodities market involves far more than crops, with futures agreements trading around the world and round the clock to the tune of about $5-trillion in contracts daily. Farmers and producers no longer dominate the market. Instead, speculators make up more than 70 percent of the action.
Michael Greenberger, a former regulator with the U.S. Commodity Futures Trading Commission, the federal agency charged with overseeing the futures market, said the whole system is out of whack.
"Right now the market is overwhelmed by speculators," he said, noting that OPEC has said oil prices should be around $70 a barrel, not nearing $140. "If they're not policed, speculators will distort the market and drive the price in any direction they want to take it."
Although some of those speculators are individual investors, like Cordier's clients in Tampa, the bulk are large institutional players, including investment banks and pension funds, that have pumped billions of dollars in the futures market in recent years as the stock market has stagnated and real estate has tanked.
This group has considerable financial clout, at $260-billion from $13-billion five years ago. And unlike traditional speculators who both buy and sell, institutional investors repeatedly roll contracts over when they expire, driving up the price in what one critic called "virtual hoarding."
Mark Cooper, director of research for the Consumer Federation of America, estimates that speculation accounts for $1 of every $4 per gallon consumers pay at the pump. In the past two years, he said, the tsunami of speculative dollars into commodities has cost the average American household $1,500 and the U.S. economy $500-billion.
"While the financial institutions play their games, the consumer is getting clobbered," Cooper said. "We've put together the building blocks of a massive speculative bubble."
Under pressure from the public, Congress has started to respond. Florida's Democratic Sen. Bill Nelson filed a bill this week to increase regulation of oil and other energy commodities. Sen. Joseph Lieberman, I-Conn., unveiled draft proposals Wednesday that would include banning participation by big institutional investors in futures markets.
The head of the CFTC, meanwhile, said the agency will extend its oversight to crude oil contracts traded on the London futures exchange.
Critics of institutional speculators applauded Lieberman's proposal while saying the agency's action is too little, too late.
"The CFTC's new policy has a 120-day lag time, and that's a lifetime in the economy right now," said Greenberger, who added that unregulated markets can be easily manipulated. "Everything could be brought under CFTC oversight tonight and you'd see the price of crude oil begin to go down."
Cordier, the Tampa broker who started trading silver coins as a kid in Wisconsin, said the outcry against speculators is misplaced. He said investors, both large and small, have been drawn to the commodities market because the supply of oil is diminishing, while worldwide demand has exploded.
"Congress wanted free trade with China and India and now we've created the world's biggest energy-consuming monster,'' said Cordier, 46, who has been a broker for 20 years. "It's not traders' fault. Meanwhile, Congress is not allowing us to expand our own oil production."
If regulators want to temper the commodities market, Cordier said, they could raise investors' margin requirements, which are just 2 to 10 percent, compared with 50 percent for stocks.
"If there's a speculative bubble, that would lessen it dramatically," he said. "But if they raise it too much they'll just drive traders overseas."
Meanwhile, Cordier thinks reduced U.S. demand and a weakening economy will temper oil prices without legislative interference.
"Congress isn't going to fix the problem," he said. "They're just going to make terrible policy, over and over again."
Kris Hundley can be reached at email@example.com or (727) 892-2996.