House passes bill aimed at increasing energy commodities regulation

The US House of Representatives approved a bill designed to stop excessive oil commodities speculation by 273 to 124 votes. The measure, which now moves to the Senate, also could bring reforms to natural gas markets, two business groups said.

Sep 19th, 2008

The US House of Representatives approved a bill designed to stop excessive oil commodities speculation by 273 to 124 votes. 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. I urge the Senate to take action so that we can get vital energy legislation to the president's desk as soon as possible," House Majority Leader Steny H. Hoyer (D-Md.) said following HR 6604's passage.

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. Admittedly, it was for a limited period, but we're still watching this," Acting CFTC Chairman Walter L. Lukken told the committee.

But critics in the Senate as well as the House argued that the CFTC's examination was too narrow and covered only a period from Dec. 31 to June 30 when crude 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 the 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," he maintained.

"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 offshore exchanges trading US commodities to follow the same rules as US exchanges, direct the CFTC to set position limits for commodities on designated contract markets, give the 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 the CFTC to define and classify index traders and swaps dealers and subject them to record-keeping and reporting requirements. It also would require the 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 full-time employees to the 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 continued.

The bill would go farther than the recommendations in the 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 over-the-counter 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 over-the-counter transactions, and reviewing swap dealer commodity research independence.

"Transparency is healthy to regulators, participants and the market. 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," Lukken said at the Sept. 11 hearing.

He said that the 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," Lukken 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."

He said that crude 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 the 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 indicated.

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.

He said that 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 versus demand fundamentals," Cicio said. He said that HR 6604 was a good beginning but fell short of needed mandatory position limits in the over-the-counter market.

American Public Gas Association President Bert Kalisch said that 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.'"

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