Consumer Watchdog Welcomes Investigation of Oil Price Manipulation, Cautions That CFTC May Be Ill-Equipped

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Group Calls for FBI, Justice Department Participation, Public Support by Bush

Santa Monica, CA — The announcement that federal regulators are investigating possible price manipulation in oil futures markets is a welcome indication that the Bush administration accepts the possibility of manipulation in $130 oil prices, said Consumer Watchdog. However, the group expressed doubt that the Commodity Futures Trading Commission could conduct such an investigation on its own and called for explicit support from the White House, as well as participation by the FBI, Justice Department investigators, or both.
Despite the obvious need for stronger regulation of energy trading markets, Consumer Watchdog noted that President Bush recently vetoed, as part of the farm bill, a Senate measure to add oversight and regulation to currently unregulated portions of these markets. Bush should state his explicit support for the oversight measure and urge its separate passage if necessary.

Consumer Watchdog also called on Bush to add FBI and other Justice Department resources to the weak, understaffed CFTC.

“We have a president who, just a few months ago, was unaware of the possibility of $4-a-gallon gasoline and refused to blame anyone but OPEC for oil prices,” said Judy Dugan, research director of Consumer Watchdog. “He has to increase public confidence that his administration is serious about investigating market manipulation.”
The CFTC itself has consistently expressed doubt that manipulation has occurred, said Consumer Watchdog. At a Senate energy hearing as recently as May 20, Jeffrey Harris, chief economist of the CFTC, stated that he believed prices that had already hit $130 were explained by the weak U.S. dollar, demand from emerging economies, world unrest, bad weather and supply disruptions. Other analysts at the hearing strongly suggested that such “market fundamentals” could not explain the price hike.
“On its face, the investigation smacks of the fox investigating a hen shortage in the chicken coop,” said Dugan. “It is up to the CFTC and the Bush administration to show that the investigation is well-staffed and unrestricted.” (See Harris testimony here.)

Consumer Watchdog noted that oil prices fell sharply Thursday as news of the investigation broke. A number of analysts have predicted that better market oversight alone could sharply drop oil futures prices.

 Adding to doubt about the CFTC’s capability to fully examine market manipulation, Sen. Jeff Bingaman of New Mexico, chairman of the Senate Energy Committee, was highly critical Wednesday of the CFTC’s reluctance to see manipulation in energy markets, sending the regulatory body a scathing letter. (See more details on Bingaman letter here.)
The CFTC Thursday also announced measures to beef up oversight of both regulated and unregulated energy markets, though due to lack of regulatory authority the effort involves only voluntary information-sharing with unregulated trading exchanges.
(See full CFTC announcement here.)

The exchanges are unregulated because Congress, in 2000, agreed with Enron energy traders that electronic trading required no government oversight. The resulting “Enron Loophole” has allowed futures traders to evade reporting their activity, even as the market grew exponentially and was flooded with exotic hedge fund trading instruments.
Consumer Watchdog has called for stronger energy market oversight, including:
Closing the “Enron Loophole” in commodity trading regulation. A regulatory measure in the federal farm bill (S.2058 by Sens. Dianne Feinstein and Carl Levin) would help stop speculative oil pricing. The farm bill was recently vetoed by President Bush, though the veto is likely to be overridden. (See more on Enron Loophole and farm bill amendment here.)

Increase the amount of margin funds that traders must put up in energy markets to help suppress speculation. Currently, traders must put up only 5% to 7% of the trade’s value, allowing control of large contracts with little money up front. In contrast, stock traders must put up 50%.
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Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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