Oil Speculators On The Run

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Government may clamp down on banks, funds and others that don’t actually use crude. But will new rules bring down prices?

NEW YORK, NY — Last year Andrew
Hall, the head of Citigroup’s energy trading unit, made over $100
million, making him one of the highest paid people on Wall Street.

Corey Carter, resident of an Alabama county where consumers’ gas price
burden is greatest, spent more than 25% of his $240 weekly pay on gas.

experts argue that the experiences of people like Hall and Carter are
linked by the economics of oil trading. They say it’s not a coincidence
that Americans are paying more at the pump in an era when Wall Street
has taken a greater interest in energy trading.

Even the
government is reassessing its opinion of speculation’s impact on oil
prices. In what could be a significant reversal, the United States may
tighten the rules on energy trading.

"Using an essential
commodity as [an investment tool] is crazy," said Judy Dugan, research
director at Consumer Watchdog. "If you want a double dip recession,
let’s just get $100 oil again."

Dugan is part of a growing chorus
of people calling for greater government oversight of the commodities
markets, where oil contracts are traded. The government agency that
regulates those markets, the Commodity Futures Trading Commission, is
starting to listen.

Last month, the agency held hearings about
what it could do to restrict speculator activity. Possible measures
include setting stricter limits on the amount of contracts people are
allowed to trade, increasing the amount of money investors have to put
up to buy contracts, or simply better reporting on who is buying what.

Wednesday CFTC said it will begin listing speculative money in more
detail in its weekly energy market reports starting this Friday, while
additional hearings on broader market regulation continued Wednesday
and Thursday.

The fact that the CFTC is even considering changing
the rules is a big departure from its stance under the Bush
administration. Last year the CFTC was adamant that speculators were
not driving up the price of oil, with its then-director testifying as
much before Congress several times. Now, under President Obama, the
agency has a new head and that position may change.

It was
reported last month that CFTC would soon reverse itself and say
speculators were at least partially to blame for the $147-a-barrel
prices seen last summer. Then the agency said those reports were not
true. Now they will only say they will be "putting out additional
elements of information."

Most analysts think additional restrictions will be placed on speculators, probably sometime this fall.

prices can’t triple and then fall by 85% within two years without a
political response," Kevin Book, managing director at the research firm
ClearView Energy Partners, wrote in a recent research note.

users of oil — as opposed to non-users like banks, hedge funds and
others who are generally lumped into the "speculator" category —
welcome any moves that might limit speculator interest.

"One day
[last year] oil prices went up by $11 a barrel," said David
Castelveter, a spokesman for Stop Oil Speculation Now, a lobby group
made up mostly of airlines and trucking companies. "That’s not supply
and demand."

Castelveter isn’t sure if tightening rules on oil
trading will result in lower prices and less volatility, but he thinks
it’s at least worth a shot.

The effect on prices

But what types of restrictions the government might enact and what that might do to prices is an open question.

Medlock, an energy economist at the James A. Baker III Institute for
Public Policy, thinks restrictions will bring down prices.

authored a recent paper looking at investment money influence on the
oil market, and said it’s hard to see how it’s not pushing prices

There’s just too much of a correlation between stock
prices, the dollar and oil prices to think big investment money – as
opposed to supply and demand – is not driving the price.

he notes how "non-commercial" players — i.e., banks, pension funds and
the like — now hold 50% of the contracts on the U.S. oil futures
market. That’s up from 20% in 2002.

He blames a large part of
investor interest in oil futures on a 2000 law now known as the "Enron
loophole." That rule exempted banks, funds and other non-users of oil
from reporting their positions on electronic markets. At the same time,
proliferation of electronic exchanges took off, and is now where most
oil trading takes place.

"That’s when there appears to be a
fundamental shift in the market," said Medlock. "The technology has
moved faster than the policy."

The lack of information brought
about by the reporting exemption is what makes it so hard to figure out
if speculators are unduly influencing oil prices.

Others have made projections.

week it was reported that Germany’s Commerzbank thinks oil prices will
fall 30% if regulations that rein in speculators are passed.

there are plenty of people who feel speculators are not behind the
runup in oil prices, starting with the Bush-era CFTC and their
counterparts in London.

Plenty of people point to the razor-thin
margins between what the world was using and what it could produce last
year when prices hit $147, and note that as soon as the economy
collapsed, oil prices did too. They also say that OPEC and other big
oil producers have a role in influencing prices.

The Citigroup
energy trading unit did not return calls seeking comment. But others
have said increasing market regulation in an attempt to lower prices
may be futile.

Deutsche Bank, which engages in energy trading,
noted in a recent report that during the recent commodity boom, items
that increased most in price were mostly rare metals not traded on an
exchange, and thus not subject to speculator influence. And even items
like rice and steel, also not traded on an exchange, saw a big runup in

The report noted how the U.S. government has been
attempting to regulate speculators for that last 100 years in other
commodities markets in an effort to bring down prices, often with
little success.

"Alongside speculators we believe fundamental
factors should not be forgotten in terms of the rapid rise in commodity
prices," the report said, highlighting strong demand and OPEC
influence. "Perversely focusing on regulation to curb speculative
activity may possibly increase the pricing power of OPEC over time at a
time when the U.S. government is attempting to do the exact opposite." 

Consumer Watchdog
Consumer Watchdoghttps://consumerwatchdog.org
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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