High Energy Prices Stoke Pressure to Regulate Trading

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.”

© 2008 CNBC.com

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