Oil speculation: What Congress wants

Lawmakers are threatening to get tough on traders and have introduced 9 different bills. But it's unclear if they'll succeed.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By David Goldman, CNNMoney.com staff writer

I will have enough savings to retire at age:
  • 55 or under
  • 56-65
  • 66-75
  • I'll never be able to retire

NEW YORK (CNNMoney.com) -- Close loopholes on foreign oil trading. Limit hedge funds from pouring money into the market. End oil speculation altogether.

Congress is vowing to take actions that it believes will reverse runaway crude and gasoline prices. Oil rose above $136 a barrel on Monday - more than double what it cost a year ago - and gas hovered around $4.07 a gallon.

Lawmakers have introduced nine different bills on speculation - not to mention many more that tackle other causes of escalating fuel and oil prices. Several of the speculation measures have bipartisan support. No fewer than four separate hearings have been scheduled for this week, including a House hearing held Monday exploring foreign trade regulation.

On Tuesday, a Senate panel will explore legislative options for ending "excessive speculation" in commodity markets.

Speaker of the House Nancy Pelosi, D-Calif., said she wants to address speculation on the House floor this week or the week of July 7. A spokesman for Rep. Bart Stupak, D-Mich., one of the strongest advocates for legislation, said he believes one of the proposals could get voted on by the House in July.

Regulating traders abroad

Perhaps the most contentious issue is the regulation of foreign oil trading, and it appears in five of the proposed bills.

Some proposals would only allow American investors to trade oil on regulated exchanges, while others would direct the U.S. Commodity Futures Trading Commission to collect trading data from foreign trade boards.

Though Congress addressed the controversial "Enron loophole" earlier this year in the farm bill, that piece of legislation only closed the door to natural gas trades on unregulated exchanges - not oil trades. Many bills attempt to further close these trading "loopholes." The most comprehensive was proposed by Rep. Stupak in the "Prevent Unfair Manipulation of Prices Act of 2008" (H.R. 6330).

Opponents argue that strict regulations such as those proposed by Stupak would only result in oil trading shifting to even less-regulated areas. Worse, critics say, traders could simply move their operations abroad, resulting in even higher prices.

"There's a good chance trading will be done overseas if U.S. market becomes overly regulated," said a spokesman for the Futures Industry Association. "If you make life too difficult for people to do business in U.S., they'll just leave, because it's much more difficult to regulate phone conversations in Dubai."

CFTC Acting Chairman Walter Lukken also said in testimony before the House Energy and Commerce Committee Monday that further regulation on markets that exchange $5 trillion daily would be "challenging."

But increased foreign regulation has support in Congress, and policy analysts from the Stanford Group expect a version to be enacted.

Raising margins

One bill would attempt to limit the role of speculators on the market by requiring traders to have substantially more money before engaging in oil futures trades. Proponents say that raising the so-called margin limits for oil speculators may encourage some traders to take smaller positions in the market and discourage others from entering the market at all.

Opponents say the proposal would do little to idle deep-pocketed speculators, who would merely put up the new minimum.

This idea is addressed in "The Consumer-First Energy Act of 2008" (S. 3044), introduced by Senate Majority Leader Harry Reid, D-Nev. The bill, which contains a controversial windfall profits tax on the five largest oil companies, recently failed to get enough votes to be debated on the Senate floor.

But some analysts think a new version of the bill, excluding the windfall tax, could be introduced soon, and that should pass through to the House.

Limiting hedge funds

Hedge funds are a convenient target for rising oil prices, since the funds' investors never see the physical oil they are trading. The "Oil Speculation Control Act of 2008" (S. 3131) - cosponsored by Sens. Dianne Feinstein, D-Calif., and Ted Stevens, R-Alaska - would enforce speculation limits and try to prevent deep-pocketed investors from taking too large a position in the market.

A similar proposal would beef up the CFTC to more closely monitor all traders, with an especially close eye on hedge funds. The "Increasing Transparency and Accountability in Oil Prices Act of 2008" (S. 3130), by Sen. Richard Durbin, D-Ill., would add 100 employees to the CFTC staff and release to the public monthly data on oil traders' activities.

There is no wide opposition to Durbin's bill, which would offer more transparency to the markets. But policy analysts believe more variations will come to these proposals before one is brought to the floor.

Ending most speculation altogether

Finally, legislation proposed this month by Rep. John Larson, D-Conn., would prohibit anyone without the ability to actually accept delivery of crude oil from buying a futures contract on an over-the-counter (OTC) derivatives market. That could effectively eliminate speculative trading, as swaps and forward contracts would be banned for traders that buy and sell oil futures without any intention of ever handling the commodity.

A spokeswoman for Rep. Larson said the bill, H.R. 6264, would only eliminate speculation in "dark, unregulated markets" and not speculation altogether.

"The Congressman recognizes the important role that speculators play in this marketplace and his legislation is a market-friendly approach that also protects consumers from skyrocketing prices at the pump," the spokeswoman said.

But Christine Tezak, a policy analyst for Stanford Group, said the bill would eliminate speculation except for a very small number of principals.

"I guess to them every OTC transaction on the planet therefore takes place in a 'dark market,'" said Tezak. "I believe it is far broader than they are pretending it is."

Policy analysts do not believe the proposal has a chance of being enacted, since many oil analysts believe speculators help to sustain market liquidity. Tezak went as far to call Larson's measure "draconian" and "completely nuts."

Some oil analysts believe that speculation plays a crucial role in the market by adjusting the price of oil according to supply and demand. Some argue that such regulation - no matter how broad - will hinder that process and actually result in higher prices.

"This is poor analysis and bad policy," said Kevin Norrish, a commodities analyst with Barclays Capital in London. "Any regulation in markets which results in forced trading is a very bad idea indeed."

Enactment dates may be later than sooner

More bills aiming at speculation may soon be forthcoming. Sens. Joe Lieberman, I-Conn., and Susan Collins, R-Maine, promise legislation in July. Sen. Byron Dorgan, D-N.D., is also expected to unveil a bill on higher margin requirements.

So far, most of the proposals have not gone far beyond the press conference or hearing phase. Since many of the bills overlap with one another, and some clash, it's not yet evident which bills will make it to the floor, never mind which - if any - have a chance to be enacted.

"It is not clear whether either the House or the Senate will be successful in whittling down and sorting out this broad range of competing proposals," said Tesak in an energy bulletin. "Getting bills to either floor ... appears a tall order in July." To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
How Wall Streeters blow off steam The financial world is a notorious pressure cooker. See how bankers and traders chill out. More
8 of the world's craziest fast food items American food chains operating abroad must cater to local tastes to succeed. The results are spectacular. More
Inside the $50,000 Emmys swag bags If getting nominated or presenting an Emmy award isn't prize enough, celebrities come away from TV's big night with luxury goods and vacations worth $50,000. Take a peek at some of this year's luxe giveaways. More


Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.