Five questions to Jean-Marie Chevalier

March 12, 2010 | 00:00

Five questions to Jean-Marie Chevalier

‘This report won’t end up gathering dust in a drawer’

Jean-Marie Chevalier, lead author of the French government’s report on oil price volatility, tells EER his work has been ‘warmly received’ by Economy Minister Christine Lagarde. ‘Our work will not be in vain, believe me.’

You’ve painted a pretty worrying picture of the current situation in the sense that all the ingredients are there for the crises of the past to recur. What are the signs of a possible crisis to look out for?
An economic crisis is always bad news. It could happen tomorrow for whatever reason. Everyone was surprised by what happened to Greece. I think that we need to put in place alert signals but that’s beyond my remit. When the price of oil soared to $147 per barrel, people put that down to speculative movements and then when it collapsed to $30 per barrel, people said that it was because of the economic and financial crisis. But now look. Today it has climbed back up to $80 per barrel, in total contradiction to the physical fundamentals. There’s a dichotomy between the physical and financial realities and the relationship between the two is not something that can be modelled.

Hasn’t the oil market as a whole ultimately become too complex to be fully understood?
This report made it possible to highlight that the dynamic relationship between the physical and financial fundamentals of the oil markets ends up in what can be called an almost mechanical volatility.

It’s a fact that toughening up regulations is technically very complicated and powerful lobbies are opposed to it
That’s already something. But you can’t model it either in terms of how it works or in terms of forecasting. ‘There is no statistical evidence,’ say all those people who have tried to analyse it. You can’t stop or limit the volatility in a drastic way. In the ‘paper’ oil markets, actors have different motivations: hedging, speculation, portfolio management or arbitrage. And that cannot be modelled because it is too complicated. There are risks that the regulator has trouble identifying and which end up leading to a systemic risk. The idea of the Commodity Futures Trading Commission (CFTC) is to identify more movements and in particular to repatriate OTC (over the counter) contracts towards organised markets. CFTC’s president Gary Gensler believes that that could be done with half the OTC contracts.

How are actions on regulation being coordinated between Europe and the US?
The oil markets are under US control, even in Europe, so US rules are the ones that really matter. It is therefore up to the English-speaking world to regulate physical markets but I see that they do not necessarily agree. Washington wants explicit rules while London wants implicit rules. Behind these

The French Economy Minister Christine Lagarde intends to circulate this report very widely and even personally to key stakeholders around the world
markets, there are commodity markets and behind that financial markets because there are two types of demand for oil: physical oil and ‘paper’ oil, which is considered by operators to be an asset like any other. And here, the work being done by the US CFTC and the British Financial Services Authority (FSC) in the working group IOSCO (the International Organisation of Securities Commissions) is designed to create some order. The EU’s thought processes are along the same lines. But you need to be careful here. All of this is taking place against the backdrop of competition between financial centres and, if we regulate too much in the West, investors will flee to the Asia Pacific.

How likely is it that real action will be taken?
Well, two working groups have tackled the subject. Ours and a group of seven experts from the International Energy Forum (IEF). We have fairly similar analyses. We have examined the problem and specific actions can be taken at European and international level. It won’t all be in vain, believe me. This report won’t end up gathering dust in a drawer. The French Economy Minister Christine Lagarde gave it a very positive reception. She intends to circulate it very widely and even personally to key stakeholders around the world. It’s important to take a position now because we don’t know too well where initiatives on the regulation of financial markets are heading. It’s a fact that toughening up regulations is technically very complicated and powerful lobbies are opposed to it. France has a strong and tough position, especially on limiting speculation on Credit Default Swap derivatives (CDS). That’s similar to the position held by Gary Gensler, the president of CFTC.

What would be the impact and feasibility of using strategic stocks to counter or prevent speculative bubbles?
It sounds like a good idea but it isn’t. Strategic stocks do not have so much impact when there are big fluctuations in price. And what would happen if you were forced to get rid of stocks to such a point that you didn’t have any more stocks? Financial sharks are ready to push countries to the limit. So this

EU is one of the major hubs for unprocessed oil and refined products but it suffers from a huge lack of transparency
proposal has been dropped. Strategic stocks are a taboo and very hot subject. In the EU, you come up against the fundamental interests of very powerful traders who control refined products as well as those of oil companies, who are not very keen on divulging commercial data. France and the European Commission were in favour of the weekly publication of stocks but 26 other European countries were against that. Let’s first comply fully with existing legislation and push for the speedier publication of statistics. The EU is one of the major hubs for unprocessed oil and refined products but it suffers from a huge lack of transparency.

Who is Jean-Marie Chevalier?

Jean-Marie Chevalier is currently Professor of Economics at the University of Paris-Dauphine, Director of the Centre de Géopolitique de l’Energie et des Matières Premières (CGEMP). He is also a Senior Associate at Cambridge Energy Research Associates (IHS/CERA, Paris office), member of the Conseil d’Analyse Economique (CAE) of the French Prime Minister, member of the Cercle des Economistes and member of the Board of Directors of Nexans. He has published numerous books and articles on energy economics and industrial organization. The most recents are : Les grandes batailles de l’énergie (2005), Les marchés européens du gaz et de l’électricité : un défi pour l’Europe et pour la France (avec J. Percebois Rapport du CAE, 2008), Les 100 mots de l’énergie (2008), The New Energy Crisis: Climate, Economics and Geopolitics (2009). In October 2009, Christine Lagarde, French Minister of Economy, Industry and Employment asked Chevalier to chair a working group on oil price volatility. The report was presented in February 2010.

This interview accompanies our article France declares war on oil speculators.

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