Seeing the bigger picture must be the priority for US energy regulation, says Jim Kharouf
"It’s the speculators!" Like a medieval mob
scene, US legislators, market experts and a host of commercial
industry representatives gathered in Washington over the summer
to raise their fists and demand to know why crude oil and
gasoline prices have soared to record levels. The common target
was speculators. The common solution was to forge new
regulation that would route them from the markets.
Officials from Commodities Futures Trading Commission
(CFTC), Intercontinental Exchange (ICE) and others were pushed
from one congressional hearing to the next to explain what was
happening and who was responsible. Unfortunately for them, the
answer they provided often was not the one Congress was looking
Meanwhile, members of Congress proposed close to a dozen new
bills to address the energy markets, which ranged in value from
comical to draconian and feature names such as Prevent Unfair
Manipulation of Prices Act (Pump Act) and the No Excuses Energy
Welcome to energy-palooza, Washington 2008.
Industry experts say that the climate in Washington is
unlike any they have seen in recent history, and the often
neglected CFTC has suddenly been pushed to the forefront of the
debate to justify how it regulates, not to mention come up with
the right answer for what is driving oil prices near $140 per
barrel and pushing the average price of gasoline beyond $4 per
gallon in the US.
Walt Lukken, CFTC acting chairman, testified that
speculation may play some part in rising prices, but added
there is little evidence they are manipulating the market.
Lukken has also led the agency into more cooperative
information sharing agreements with Financial Services
Authority (FSA) in the UK, and received broader authority over
OTC and exempt commercial markets in its reauthorization,
through the recently passed Farm Bill of 2008.
In economic times such as these, Congress is dogged in its
determination to find the culprit. Over the first six months,
congressional committees held more than 40 hearings on oil
prices. Among the experts pushing for major regulatory change
in Washington is Michael Greenberger, a former head of the
CFTC’s division of trading and markets and also a
professor at the University of Maryland.
Greenberger’s blunt advice to congressional
committees is that CFTC needs to police the speculators in the
energy market and close the "Enron loophole". which is used to
describe Enron energy markets, or the exempt commercial market
that operated without regulatory oversight earlier this decade.
ICE maintains, though, that the Enron loophole has already been
closed as part of its reauthorization, and CFTC has authority
to monitor positions held on exempt commercial markets.
Greenberger added that if CFTC prohibited energy trading in
exempt commercial markets, crude oil prices would fall 25%
overnight. The problem is that there is virtually no crude oil
trading occurring on exempt commercial markets in the US.
Instead, ICE’s exempt commercial market trades
primarily in natural gas.
Nonetheless, US Senator Bill Nelson filed a bill in June to
bank unregulated speculative trading of energies, based on
Greenberger’s testimony about the Enron loophole.
It also would amend the Commodity Exchange Act, requiring that
energy commodities be traded only on regulated markets.
Meanwhile Senator Dianne Feinstein was preparing a bill to
regulate energy swaps and index funds tied to energy prices.
Senator Joe Lieberman is working on a proposal to ban large
institutional investors from commodity markets.
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