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Oil Trading: the Speculators’ Cut

June 16, 2008

IT’S frustrating enough when gas prices soar due to the unseen forces of global supply and demand. But it’s downright unfair when Wall Street speculators contribute to rising prices at the pump.

There’s growing evidence that investors looking to make a fast buck are causing oil prices to rise faster than can be explained by ordinary market forces. Congress, however, can do something about the situation. It can help to ease this problem, because it helped to create this monster.

In December 2000, Congress passed the Commodity Futures Modernization Act, which was signed into law by President Clinton just before he left office in January 2001.

Few people realized at the time that a loophole had been tucked into this 262-page bill at the last minute by then-Sen. Phil Gramm, R-Texas. It came to be known as the “Enron Loophole,” and it allowed Enron and other large energy traders to be exempt from federal oversight of over-the-counter transactions in energy markets.

Enron is no more, but the loophole lives on. It has allowed massive growth of unregulated trading on energy futures markets, where investors essentially “bet” on the price of oil at a certain date in the future.

Commodities markets ordinarily allow commercial buyers of goods that people need, such as corn, pork and energy products, to lock in a price for later delivery of those commodities. But in the unregulated environment spawned by the Enron Loophole, speculators increasingly treat commodities as if they were stocks. These investors don’t want to take delivery of the oil after they “buy” it; they just want the price to rise so they can make a huge profit. As the dollar weakens, oil becomes an even more attractive investment.

The details of these types of trades are largely hidden. Some contracts are negotiated between parties who don’t need to disclose them. Some contracts are made overseas, beyond the limited oversight of U.S. regulators.

As speculators flock to oil, they are creating artificial demand for the commodity, which drives up the price. Nobody knows how much speculators are adding to the cost of gasoline, but some analysts believe it’s as much as 50 percent of recent increases.

Other factors are probably contributing to $4 gasoline. Global oil supply has not increased, and there is growing demand from nations such as China and India.

Meanwhile the federal authority responsible for regulating such trading, the Commodity Futures Trading Commission, is virtually powerless to step in. The CFTC needs the regulatory authority and the staffing to make sure these markets are transparent and monitored.

The presumptive presidential nominees, Sens. Barack Obama, D- Ill., and John McCain, R-Ariz., haven’t paid notice to this factor in rising gas prices. Both candidates have chosen to pander to voters with politically popular ploys – McCain with a gas-tax “holiday” and Obama with a windfall profits tax on oil companies. Neither idea will likely affect prices at the pump in a meaningful way.

Instead, lawmakers should close the loophole that gave rise to heightened market speculation. Commodities are products that consumers need for their daily existence, and those markets shouldn’t be so vulnerable to greedy manipulation.

The Philadelphia Inquirer

(c) 2008 San Gabriel Valley Tribune. Provided by ProQuest Information and Learning. All rights Reserved.




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