George Soros' Senate Commerce Committee Oversight Hearing on Oil Market Manipulation

Hearing on FTC Advanced Rulemaking on Oil Market Manipulation.  George Soros' Testimony before the U.S. Senate Commerce Committee Oversight

To summarize, Mr. Soros states the following in his transcript:

Soros is a keen student of bubbles [and has profited from them handsomely]. His ideas contradicts prevailing wisdom.  He states that he is not an expert in oil, but has his opinion.  With that...For bubbles in general, in regards to the oil market, there are four major factors at play and mutually reinforcing each other.

1.  Rising cost of discovery and development of reserves and increasing depletion of existing oil fields.

2. Backward-sloping supply curve. As the price of oil rises, oil-producers have less incentive to convert their oil reserves underground, which are expected to appreciate in value, into dollar reserves above ground, which are losing their value.  High price of oil has allowed political regimes, which are inefficient and hostile to the West, to maintain themselves in power, notably Iran, Venezuela and Russia. Oil production in these countries is declining.

3. Countries with the fastest growing demand, some major oil producers, and China and other Asian exporters, keep prices artificially low by providing subsidies. This creates demand inelasticity in those subsidized markets.

4. Trend-following speculation and institutional commodity index buying reinforce the upward pressure on prices. Commodities have become an asset class for institutional investors and they are increasing allocations to that asset class by following an index buying strategy. Spot prices have risen far above the marginal cost of production and far-out, forward contracts have risen faster than spot prices.

He finds commodity index buying similar to craze for the portfolio insurance that led to the stock market crash of 1987. Now as then, institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group exited as they did in 1987 there would be a crash.

Soros doesn't believe an oil market crash is imminent.  Only when a recession is well and truly in place is a decline in consumption in the developed world likely to outweigh his factors.  He'd like to discourage institutional investors pursuing a commodity index buying strategy is intellectually unsound and distinctly harmful in its economic consequences.  Though there is danger is this strategy, regulation of markets may have unintended, adverse consequences.

Possible remedies include:

Commodities should be disqualified as an asset class for ERISA institutions.

Various techniques for circumventing speculative position limits should be banned, provided the ban can be made to apply to unregulated as well as regulated markets.

Varying margin requirements and minimum reserve requirements are tools that ought to be used more actively to prevent asset bubbles from inflating. 

He would be hesitant of raising margin requirements and definitely wary of regulation of markets.