Congress rushes to fill oil speculation loophole
Speculation can add $70 to the price of a barrel of oil, critics charge.
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In a scramble to find a fix for energy prices, Congress has tried (and failed) to strip tax breaks from Big Oil, to open protected sites for exploration and drilling, and to jump-start a new era in nuclear power.
Now, Capitol Hill is zeroing in on speculators and the legal loopholes that some lawmakers say are adding as much as $70 to the price of a barrel of oil.
"Energy speculation has become a fine growth industry and it is time for the government to intervene," said House Energy and Commerce Committee Chairman John Dingell (D) of Michigan, at hearing on Monday.
Fixes in the works on Capitol Hill range from new constraints on speculators – including a 50 percent margin requirement on financial speculators, full disclosure of all trading by investment banks in all markets, and prohibiting investment banks from holding energy assets – to more funding and regulatory mandates for the Commodity Futures Trading Commission.
Financial speculators – that is, hedge funds, investment banks, and other traders who do not take physical possession of the commodities – are surging into commodities markets. On that point, there is no dispute.
But experts differ widely on the impact these new players have on prices. Treasury Secretary Henry Paulson and many financial industry analysts say prices are still set by the fundamentals of supply and demand.
Many lawmakers, along with oil industry spokesmen, the Saudi oil minister, and the International Monetary Fund, say excessive speculation in the futures market is also a factor in the run-up of prices.
Since September 2003, traders holding crude-oil futures contracts jumped from 714 contracts traded to more than 3 million contracts traded in May 2008, says Rep. Bart Stupak (D) of Michigan, who chairs the House Energy and Commerce Subcommittee on Oversight and Investigation. His panel held its second hearing on energy speculation Monday.
Speculators now account for 71 percent of the oil futures market, up from 29 percent in 2000, he says, citing data from the Commodity Futures Trading Commission (CFTC). Overall, commodity index speculation has jumped from $13 billion in 2003 to some $260 billion today.
"Given this imbalance, you have to wonder if the regulator [CFTC] is missing the forest for the trees," Representative Stupak said Monday.
Many lawmakers insist that such a surge cannot help but contribute to the surge in oil prices.