Congress rushes to fill oil speculation loophole

"The [commodities] market is broken. It doesn't work. It is full of speculators and what they're interested in is to drive up the price. They don't give a rip about the damage to the economy," says Sen. Byron Dorgan (D) of North Dakota, who is chairing another hearing on speculation.

Many of these trades are exempt from CFTC oversight, and Congress is racing to pass laws to change that: The Enron loophole, the London loophole, the swaps loophole, among others, are on the blocks in bipartisan bills pending in both the House and Senate. (The Enron loophole to a 2000 law allows oil futures to be traded outside the jurisdiction of the CFTC.)

As recently as December, CFTC acting chairman Walter Lukken told Congress that "excessive speculation" was not a problem. But in response to mounting criticism, the CFTC this month launched a national crude-oil investigation to consider recent evidence on speculation. It also announced an agreement with the UK Financial Services Authority to expand the data received from institutions trading crude-oil products across borders – a bid to close the so-called London loophole.

"We've been slow to react and we're beginning to do what we need to do," said CFTC commissioner Bart Chilton in a phone interview.

Despite the surge in investment in commodities markets, the CFTC has only 448 staff, compared with 3,700 for the Securities and Exchange Commission.

"We are down 175 staff members from a high in 1992, despite a rising tide of hedge fund and pension fund investment in the commodities market," says Mr. Chilton.

But there is not yet a consensus within the CFTC that further steps to rein in speculation are needed.

"There's no evidence of speculative influence. Speculators are not contributing to the demand for physical oil as they almost always roll positions prior to delivery," says Craig Pirrong, a professor of finance at the University of Houston and a member of the CFTC energy markets advisory committee.

But at Monday's hearing, Michael Masters, portfolio manager of the hedge fund Masters Capital Management said: "This is an acute crisis. The time for studies and examinations is past."

A key witness in recent congressional hearings, Mr. Masters said in an interview that "even though speculators are not hoarding actual commodities, they have the effect of driving up the price for consumers around the world because of the linkage between the commodities market and the spot market."

"They have the same effect on price as if they were buying real physical commodities," he said.

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