Congress aims at oil trading

Democratic Congressmen say they'll take another stab at closing loopholes that allow unbridled 'speculation.'

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By David Goldman, staff writer

What was the top economic story this week?
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NEW YORK ( -- "Speculation," a dirty word across America as Wall Street traders take the blame for record oil and gasoline prices, drew more attention Friday from Congress as three Democratic House members introduced yet another bill attempting to limit activity.

To underline his case, Rep. Bart Stupak, D-Mich., said speculators now control 71% of oil on the market. That means only 29% control the physical oil being traded, down from 61% eight years ago.

Stupak blamed loosely regulated trading markets with numerous loopholes for the ease that traders have to buy and sell crude.

As a result, Stupak introduced legislation with the support of two other Democratic Congressmen to close loopholes that allow oil to be traded electronically in unregulated oil markets. The bill would also regulate other methods that Stupak claims oil traders use to avoid federal oversight.

"We can eliminate a major avenue that traders use to avoid oversight," said Stupak at a press conference Friday. "It's time for Congress to close the Enron loophole and lower our gas and diesel prices by 50%."

Many in Congress have suggested that closing a provision in the Commodity Futures Modernization Act of 2000 that critics call the "Enron loophole," after the energy trading company whose bankruptcy was the centerpiece of the corporate scandals early this decade. The provision allows oil futures to be traded in markets outside of the jurisdiction of the Commodities Futures Trading Commission.

Stupak, the chair of a House Energy and Commerce subcommittee, has pledged to investigate regulation of speculation further in a hearing on Monday.

Congress is currently awash in nine different bills - including Friday's proposal - that attempt to limit the role of speculators. Several have bipartisan support, but only one was co-sponsored by a Republican.

Proposals have included requiring foreign exchanges to provide more information about crude oil trades, limiting the number of contracts speculators are allowed to hold, increasing the amount of money speculators need to put up to buy an oil contract, and removing speculators from the market entirely and limiting trade to just producers and consumers.

Opposition against regulation mounts

Traders have lashed out against some of the lawmakers' proposals, such as banning speculation in some markets, saying that would only result in oil trading shifting to even less-regulated areas.

Stupak countered by saying the new proposed legislation is "the most comprehensive approach" that has yet been offered. He suggests closing all loopholes, including bilateral out-of-market trades, foreign trades on the InterContinental Exchange, swaps, and hedging exemptions. As a result, he believes excessive speculation will be stopped by complete oversight of the markets.

But some 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 pervasive - 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 dangerous step indeed."

Though many Democratic and some Republican politicians have furiously blamed speculation for driving up the price of oil, many analysts argue that the market fundamentals of supply and demand are the cause of record prices.

"If it is a bubble, then where is the evidence in the actual physical market?" asked Norrish. "There is an endless list of reasons why this argument is a very, very poor one - it will only make things worse."

Stay tuned. To top of page

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