Anti-Energy Speculation Bill Stirs Fear
Financial industry executives are mustering on Capitol Hill to head off a Congressional effort to rewrite the rules for the nation’s energy markets, saying it could unsettle already nervous markets and push more energy trading abroad, beyond the reach of domestic regulators.
The primary focus of Wall Street’s concern is a bill entitled the Stop Excessive Energy Speculation Act of 2008, introduced on Tuesday by a group of Democratic senators led by Harry Reid of Nevada, the majority leader.
The bill would substantially broaden federal regulators’ authority over the vast marketplace for privately negotiated derivatives, called swaps. It also would limit the stakes that speculators and other noncommercial energy traders could take, both in private transactions and in the public futures markets, which allow oil producers and users to hedge their price risks.
And it would require regulators to distinguish between “legitimate” and “nonlegitimate” hedging transactions and subject the latter to increased scrutiny and tighter market limits.
Since the bill’s introduction, lobbyists for the futures industry and other institutional interests in the energy markets have significantly bolstered their efforts in Washington.
But their concerns are colliding with the determination of lawmakers, who have held more than 40 hearings on “excessive speculation” this year, to take some legislative action to address the economic pain being inflicted on consumers by soaring oil and gas prices.
“This issue is so serious,” said Gregory Zerzan, counsel and head of global public policy for the International Swaps and Derivatives Association, “that the senior businesspeople on Wall Street are weighing in to make sure that Congress is fully aware of the potential economic consequences of going too far.”
Supporters of the Reid bill say it will address the runaway speculation they blame for as much as 30 percent of the price of crude oil, which fell Thursday for the third consecutive day to about $129 a barrel. It would also substantially increase staff levels at the Commodity Futures Trading Commission, which regulates these markets.
“Right now, Wall Street traders can raise oil and gas prices simply by logging onto their computers and executing a few trades,” Mr. Reid said at a news conference Thursday.
“We’re not saying that all speculation is bad,” he added. “But without proper market oversight, speculation has gotten out of hand, and that is one reason for record gas prices.”
Privately, both lawmakers and lobbyists agree that the bill is one piece in a complicated Congressional chess game involving offshore drilling, the nation’s federally owned oil reserves and the November election.
A bill supported by Senate Republicans, led by Mitch McConnell of Kentucky, would also increase funds for regulators and require them to gather more information about trading activity.
But it focuses primarily on promoting deep-sea exploration and drilling, oil shale exploration and electric vehicle research.
“No reputable economist thinks speculators alone are the reason for the spike in gas prices,” Mr. McConnell said Thursday.
A focus in Congressional hearings on oil market speculation is the sharp increase in the amount of money that pension funds, endowments and other institutional investors have steered into the commodity markets.
Some of that money — hundreds of billions of dollars, by some estimates — has poured in through trades designed to hedge the obligations of funds that track popular commodity indexes.
That is a form of trading that some critics say should be banished from the commodity futures market entirely. The Reid bill does not do that, but does require that such index-hedging trades be subject to tighter speculative limits.
The difficulties of distinguishing among financial and commercial hedgers would be enormous, several critics of the legislation said. A farmer trying to hedge against a fertilizer price increase, for example, may rely on a natural gas futures contract — but, under these rules, he would be considered a speculator.
And so would the financial institutions trying to facilitate his trading, either on public exchanges or through private transactions in the “over the counter” swaps market.
In an open letter to Congress Thursday, Robert G. Pickel, chief executive of the swaps industry’s trade association, argued that the Reid proposal “could actually make things far worse” for consumers by impairing the effectiveness of the hedging markets.
Of concern to the swaps dealers, Mr. Pickel noted, is a provision in the bill that would allow commodity regulators to order companies to liquidate their swaps transactions if it concludes that a major market disturbance has occurred.
In effect, he said, this would require companies “to break their privately negotiated risk management contracts,” even if the swap complied with trading limits that were in place when it was originally negotiated.
The Futures Industry Association, which represents futures brokers and derivatives exchanges in more than 20 countries, has also expressed its opposition to the bill, saying it “would amount to liquidity-robbing, regulatory overkill.”
The bill also would limit the ability of investors in the United States to trade directly on foreign futures exchanges. Supporters say that most of those provisions codify information-sharing arrangements that regulators have already negotiated with their foreign counterparts. But some exchange officials have warned that foreign countries could retaliate by limiting the international expansion of exchanges based in the United States.
Professor James Angel at Georgetown, a financial markets specialist who testified at one of the many hearings examining the energy markets, had a more temperate view of the Reid bill.
“It’s a not-too-bad response,” he said, noting that it gives regulators enough discretion to avoid some of the most devastating consequences. “How it is implemented will be the test.”
According to several legislative aides, no vote is likely on the legislation until Tuesday, giving ample time for negotiation across the aisle and with sponsors of similar proposals in the House.
A speedy conclusion to the debate would be welcome in the markets, some commodity analysts said. Researchers at Barclays Capital, in their weekly oil market review, complained that “lawmakers are no longer largely neutral bystanders to the oil market but have instead become a source of uncertainty.”