High Energy Prices Stoke Pressure to Regulate Trading

The continued surge in energy prices — including record highs for oil — is once again giving market speculation a bad name.

Mark Lennihan / AP Traders buy and sell crude oil futures contracts at the New York Mercantile Exchange.

It is also raising the prospect of new regulations to deleverage the market and tame  "excessive speculation" — although this still isn't a well defined concept.

But for all the public agitation over higher prices — which is getting more regular air time at Congressional hearings — most analysts are skeptical about any significant changes in energy trading regulations, especially oil, a thoroughly globalized commodity.

Trying to regulate oil trading now would be “like trying to go after the dog for baying at the moon. The moon is still going to be there. Traders will just move offshore,” said Philip Verleger, an industry consultant.

But natural gas, which is more of a domestic commodity, might be a different story.

In December, the Senate unanimously voted to close the so-called “Enron loophole,” which exempted large electronic trading from government scrutiny.

That sleight of hand, passed in 2000, resulted in an irrational regulatory bifurcation. The New York Mercantile Exchange (Nymex) remained a regulated exchange, but left newer, fully electronic energy exchanges, such as Intercontinental Exchange (ICE), to operate with virtually no oversight or even obligation to prevent excessive speculation.

This was the regulatory gap that the Amaranth Advisers hedge fund exploited to corner the natural gas market before vaporizing in losses of $6.6 billion in September 2006. When Nymex told Amaranth to reduce its positions, the hedge fund simply shifted them to ICE.

“It’s past time to put the cop back on the beat in US energy markets [in order] to stop price manipulation and excessive speculation,” says sponsor Senator Carl Levin about the hard-fought measure which was adopted Dec. 12. Its adoption is tied to the Farm Bill, which has a deadline for passage on April 18.

The legislation is a carefully crafted compromise worked out with industry and is not expected to immediately wring much speculation from the market but it does provides the basis for tightening oversight later on.

Populist Pressure Growing from Energy Users

For Paul Cicio, of the Industrial Energy Consumers of America (IECA), if this measure does pass it would be just a “first step” in a longer effort to curb soaring gas prices that ricochet into higher electricity prices.

The unregulated ICE has been steadily taking market share from Nymex and he estimated it probably now handles 75 to 80 percent of natural gas contracts.

Cicio is among the increasingly vocal interests demanding price-ramping speculation be curbed in energy markets for both oil and gas and their deriatiives.  

“Supply and demand does not matter at all when it comes to energy commodities, it’s all about how much money is being dumped into these commodities,” said Sean Cota, of the Petroleum Marketers Association of America, which represents retailers who sell half the country’s gasoline and 80 percent of its heating oil.

“From my perspective it’s like Las Vegas without the Nevada Gaming Commission,” he added. He will be testifying next week once again before Congress on the subject.

And there are Congressional allies to his cause. Current commodities law is so riddled with exemptions, exclusions and limitations, it is “extremely difficult to ensure US energy markets operate in a fair, transparent and efficient manner,” noted a 2006 Senate investigations report, which attributed $20-30 of the then-current oil price of $70 barrel oil to speculation.

CONTINUED: Where Price Increases Come From

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