By a vote of 273 to 124, the US House of Representatives approved a bill Sept. 18 designed to stop excessive oil commodities speculation. The measure, which now moves to the Senate, also could bring reforms to natural gas markets, two business groups said.
“This bill is just one part of a comprehensive Democratic energy plan, which includes steps to lower [gasoline] prices immediately, increased drilling for oil and natural gas, more fuel-efficient cars, and serious investment in the energy technologies of the future,” said House Majority Leader Steny H. Hoyer (D-Md.), following HR 6604’s passage. “I urge the Senate to take action so that we can get vital energy legislation to the president’s desk as soon as possible,” he said.
The House’s action came a week after its Agriculture Committee held a hearing on the subject hours after the Commodity Futures Trading Commission released a report on swap dealers and commodity index traders. Recommendations included removing swap dealers from the commercial trading category and creating a new classification for them.
“Our economists, as well as the interim task force report in July, did not find evidence that speculators were having an impact on crude oil prices. We’re continuing to look at it, but our position hasn’t changed,” acting CFTC Chairman Walter L. Lukken told the committee, adding, “Admittedly, it was for a limited period, but we’re still watching this.”
But critics in the Senate as well as the House argued that CFTC’s examination was too narrow and covered only a period from Dec. 31, 2007, to June 30, 2008, when oil prices soared, and not the time since mid-July when prices declined.
‘Doesn’t tell whole story’
Agriculture Committee Chairman Collin C. Peterson (D-Minn.) also criticized CFTC for not giving committee members time to examine the report before the hearing. “It provides us with the most accurate picture of index trading and swap dealer participation in the over-the-counter market to date. However, it still doesn’t tell us the whole story,” Peterson said.
“We need to examine the rise in commodity prices prior to 2008 and the fall in prices in July and August. I have asked the commission to look at these time periods so that we can see the complete narrative of the rise and fall of commodity prices,” Peterson said following the Sept. 11 hearing.
The bill, which passed the House on Sept. 18, was essentially the same measure Peterson introduced on July 24 and the House narrowly defeated on July 30 after 20 Republicans changed their votes at their leadership’s request.
It would require international exchanges trading US commodities to follow the same rules as US exchanges, direct CFTC to set position limits for commodities on designated contract markets, give CFTC new authority to impose position limits on currently unregulated over-the-counter markets, and limit hedge exemption eligibility to commercial traders.
HR 6604 also would require CFTC to define and classify index traders and swaps dealers and subject them to record-keeping and reporting requirements. It also would require CFTC to break out and publicly disclose data on the extent index funds and other investment participants use commodity markets. The bill also authorizes the addition of 100 fulltime employees to CFTC, where staffing currently is at its lowest level since the agency was created in 1974, sponsors said.
‘Vast amounts of capital’
In a floor statement, Peterson noted that commodity trading volumes have climbed dramatically in recent years. “This increase includes vast amounts of capital from parties that are not traditional futures market participants such as index funds, pension funds, and some hedge funds,” he said.
“The presence of this additional capital has raised concerns that the resulting futures market prices may not accurately represent the forces of supply and demand, nor may they be fundamentally supported at the local selling points where those in the producing and selling of commodities are doing business,” Peterson said.
The bill would go farther than the recommendations in CFTC’s swap dealers and index traders report. In addition to removing these market participants from the commercial trading category, the study recommended development and publication of a new periodic supplemental report on OTC swap dealer activity, creation of a new CFTC data collection office with enhanced procedures and staffing, and development of “long form” reporting for some larger traders to more accurately assess their type of trading activity.
Other recommendations included adding staff and resources, encouraging more clearing of OTC transactions, and reviewing swap dealer commodity research independence.
“Transparency is healthy to regulators, participants, and the market,” Lukken said at the Sept. 11 hearing. “Certainly, opening the drapes and shedding more light would be welcome. We were concerned that swap dealers had a loophole and were using it to get around reporting requirements. Having said this, we didn’t find a significant number doing this. However, 18 is 18, and they shouldn’t be allowed to do it,” he said.
Lukken said CFTC had not fully examined an independent report released on Sept. 10 which concluded that speculators were a likelier cause of oil price volatility in 2008 than underlying supply and demand. “My first impression is that there’s a lot of margin of error and reverse engineering in their numbers. Our staff is still studying it,” he said.
‘100% fiction’
Energy economist Philip K. Verleger Jr., president of PK Verleger LLC, issued a statement that day calling Michael W. Masters’ and Adam K. White’s report, The Accidental Hunt Brothers, Part 2, a “piece that is 100% fiction” and “the worst example of junk economic analysis published in a very long time.”
Verleger said oil prices rose during the first part of 2008 because light, sweet grades were in short supply because of continued US purchases and political problems in Nigeria. Prices came down after mid-July because new light, sweet crude production from Thunder Horse field in the Gulf of Mexico began, production in Nigeria stabilized, and the US finally stopped taking light, sweet crude off the market, he said.
But two business groups separately said on Sept. 18 that stronger commodity market regulation is needed to halt excessive speculation affecting natural gas as well as crude oil prices. “It has cost natural gas consumers over $40.4 billion from January to August 2008 when compared to the same time period last year,” said Paul N. Cicio, president of the Industrial Energy Consumers of America.
Cicio said the US Energy Information Administration reports that domestic gas production rose by 8.6% from January to August, demand was essentially unchanged from the previous year, and national inventories were within their normal range. “These facts prove that the price spike was not driven by supply vs. demand fundamentals,” Cicio said. He said HR 6604 was a good beginning but fell short of needed mandatory position limits in the OTC market.
American Public Gas Association Pres. Bert Kalisch said consumer confidence in the gas market has been shaken, and additional transparency measures are needed to restore trust. He also indicated that speculative investment played a role in pushing gas prices higher recently and stated that “consumers should not be forced to pay a ‘speculative premium.’”
