At hearings being held by the federal government’s Commodity Futures Trading Commission (CFTC), the trucking industry is calling for more regulation of the markets that trade in petroleum futures – specifically to head off the type of fast upward swings in diesel prices that ravaged motor carriers in 2008.
“Trucking is a highly competitive industry with very low profit margins [and] this explains why many trucking companies are reporting that volatile fuel prices have greatly suppressed profits, if they are making a profit at all,” said Steven Graham, vp of TL carrier Schneider National, in testimony before the commission today. “Our industry cannot simply absorb this rapid increase in fuel costs. While some companies are able to pass some of these costs through to their customers, we rarely recoup the full additional expense.”
Graham – speaking on behalf of the American Trucking Assns (ATA) – said sudden fluctuations in operating expenses, especially fuel, wreak havoc on the trucking industry. Coupled with the severe downturn in the economy and soft demand for freight transportation services, trucking companies are now struggling to survive – noting that in 2007 and 2008, over 5,000 trucking companies with at least five trucks failed.
While petroleum market fundamentals are rapidly changing – including increased demand from China and India, supply disruptions in Nigeria and Venezuela, and the declining value of the U.S. dollar – they do not fully explain the dramatic rise and fall of the price of oil last year, said Graham.
“There has been a significant increase in the amount of dollars invested in the petroleum derivatives market by non-commercial participants, leading us to conclude that this increased speculation may be partially responsible for the dramatic rapid increase in oil prices,” he said.
Graham pointed out that between 2002 and 2007, the capital allocated to commodity index trading strategies rose from $13 billion to $260 billion. Such a huge increase in dollars invested in petroleum derivatives markets and the prevalence of exempt transactions and electronic exchanges that are not regulated by the CFTC makes it even clearer that excessive speculation in the unregulated energy and swaps markets caused and continues to cause unnecessary and substantial volatility in the agriculture and energy markets, he said.
As a result, the trucking industry believes the federal government should take steps to increase the transparency of the derivatives markets and establish reasonable position limits for non-commercial traders to prevent excessive speculation, Graham stressed.
“Trading in derivative products and some level of speculation to ensure liquidity in the derivative markets is beneficial,” he noted. “However, the CFTC should control excessive speculation that increases volatility or artificially inflates the price of the underlying commodity.”
Some market experts agree with ATA’s call for tighter regulation of the petroleum futures market. “The commission shouldlook into better disclosure of the entities that participate in all futures and derivatives’ markets,” said Tom Kloza, chief oil analyst for the Oil Price Information Service (OPIS), in his online blog late last month. “It [the CFTC] also should consider whether antiquated position limit thresholds need to be updated.”
He said that the public, and to some extent the petroleum business, wonders whether a huge foreign production concern could hypothetically move huge sums of money in unfettered fashion into a commodity-- with dire consequences for the users of said commodity.
“I’ve compared the futures and options markets before to a large superhighway,” said Kloza. “The bankers and professional traders and employees of fee-based exchanges would like this toll road to have no speed limits, no traffic lights, no guard rails, and few state troopers, while some of the end-users would like to shut the highway down.”
A compromise in the form of regulation makes sense, said Kloza. “Ultimately the polemic between the speculative pro-liquidity crowd and the suspend-trading-in-core-commodities crowd is not as clear cut as the battle between good and evil that is playing in your local metroplex this summer,” he pointed out. “[But] stay tuned. The hearings on his matter in Washington this summer will make for interesting theater.”