The continued surge in energy prices — including record highs for oil — is once again giving market speculation a bad name.
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.
Where Price Increases Come From
Deconstructing Energy Prices Rises
Oil prices have nearly doubled in the last year but demand and supply has not changed enough to justify even a 10 percent price increase, insists Fadel Gheit, an oil analyst with Oppenhemier & Co.
“How did we get to $110 oil? The reason is not that Exxon is not producing enough oil or that it is jacking up prices — no — it is because financial speculators have basically seized control of this market in the last two years,” he says.
He blames hedge funds, as well as the dozen large financial institutions that execute the bulk of oil trades, using house money to place safe bets that collectively earn them about $30 billion a year. “You want to walk away from that?" Gheit asked.
Measures kicking around the halls of Congress that it's hoped might tame energy market speculation range from significantly raising margins or delimiting the number of contracts to establishing minimum holding periods.
But none of these had gained much traction before they were bumped by the more politically pressing housing mortgage crisis.
The new legislation closing the Enron loophole would surely bring more transparency to trading and some are convinced this will have an important effect.
“Once the traders know that someone will be looking over their shoulder, the malpractices stop and the price drop,” argues Michael Greenberger, a law professor who previously served as director of the Commodity Futures Trading Commission’s trading and market division.
But Verleger cautions against overstepping. “Energy consumers trying to regulate energy are only trying to get us gasoline lines. Thanks guys, we did that in the 70s,” he said.
“There is one thing that can be done to break this thing, and that is for the Federal Reserve Board to raise interest rates and signify that it is really worried about inflation. And it won’t do that.”