WATCHING WASHINGTON FUTURES MARKET ISSUES

In the past few months, higher oil prices have been more pronounced on the floor of the New York Mercantile Exchange than at the gasoline pump.

Sen. Joseph Lieberman (D-Conn.) called a hearing to explore that phenomenon. He complained "amateur guesswork" by futures traders is hurting the U.S. economy.

"Oil products are simply not like other commodities traded on the futures market," he said. "Unlike orange juice, people cannot go without heating oil in the winter, and our economy cannot survive without oil. If there are ways of moderating the volatility of oil futures in times like these, we must pursue them."

OPPOSITE VIEWS

Joan Claybrook, president of Public Citizen, said futures market capriciousness has resulted in a $10-15/bbl war premium in higher oil prices.

"Current prices do not accurately reflect the forces of supply and demand," Claybrook said. "The Commodity Futures Trading Commission should act to increase required margins and, if necessary, temporarily limit or suspend trading in oil futures."

Philip Verleger of Charles River Associates said fluctuations in prices probably have been excessive on some days but added, "The bottom line is that consumers have not been hurt by trading on futures markets."

He contended the growth of oil futures markets has reduced, not increased, price volatility. He called recent oil price increases "only modestly greater" than the increase that occurred during the 1979 crisis and much smaller than the one in 1973.

R. Patrick Thompson, Nymex president, insisted that speculation is not driving the price increases. He said speculators hold only 3.1% of the long and 6% of the short positions held by the top 25 participants.

Although speculators can hold as many as 7,500 crude oil futures contracts, Thompson said, only six held more than 2,000 contracts during Aug. 2-27. "Ironically, two were generally long and four were generally short."

Thompson said commercial entities such as airlines, utilities, and oil firms hold most Nymex futures. "Integrated oil companies, sometimes misperceived to be 'the market,' held a greater percentage of short positions than long positions-again, contrary to the notion that oil prices are being artificially inflated by buying pressure."

He said, "Oil prices have risen since the Iraqi invasion of Kuwait because of the very real threat of a conflict that would wreak havoc on production and distribution of oil and related products. This threat has produced an uncertainty that market participants cannot ignore."

William Albrecht, a CFTC commissioner, agreed. But he conceded to Lieberman that if war breaks out, CFTC might have to close oil futures trading to keep the lid on prices.

HESS'S HEDGING

The hearing's star witness was Leon Hess, chairman of Amerada Hess Corp., which made $213.8 million in the third quarter on oil futures trading.

That does not make Hess a futures enthusiast. "Paper trading is driving the worldwide price," he said. "With the advent of Nymex, the law of supply and demand is meaningless. I'd bet my life that if the Merc did not exist, there would be ample oil at reasonable prices all over the world."

However, hedging like a seasoned futures market player, Hess added, "I'm not against the Merc. It's there to stay. We have to learn to live with it."