As we pay more at the pump, oil trading curbs still on hold

No one knows exactly how much speculators have added to the price of petroleum.


Gasoline and diesel prices are shown Wednesday, March 2, 2011, in Portland, Ore. Oil prices rose above $102 a barrel Wednesday as fighting escalated in Libya and petroleum demand grew in the U.S.

Photo: Rick Bowmer, Associated Press - Ap

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WASHINGTON - As fuel prices hover at heights unseen since gasoline reached $4 a gallon in 2008, federal rules that were supposed to control rampant financial speculation of oil remain in limbo.

The lack of action frustrates experts and public officials who believe that wild betting on the future prices of oil has artificially inflated the cost of gasoline, jet fuel and heating oil.

In July 2010, Congress passed a law that would limit the number of oil futures contracts held by hedge funds, mutual funds and other institutions that weren't users of petroleum. Proponents say the rule would curb the speculative investing in oil futures that can drive up prices at a time when the United States doesn't necessarily have an oil supply problem.

The limits were supposed to have been in place by January.

Instead, enforcement remains months away while the economic consequences of rising oil prices are being felt now.

"Four-dollar-a-gallon gas will break the back of the [economic] recovery and break the back of the American people," said Michael Greenberger, a University of Maryland law professor. Greenberger is the former director of trading and markets at the Commodity Futures Trading Commission (CFTC), the government agency charged with implementing the rules.

No one knows exactly how much oil speculators have added to the price of petroleum products. CME Group, which operates some of the world’s largest exchanges trading oil futures, insists the current spike in oil prices can be explained by market fundamentals, not speculative futures trading.

"There is no empirical evidence that excessive speculation has affected prices," maintained Tom LaSala, CME's chief regulatory officer.

A growing cadre of lawmakers and policy analysts remain skeptical of such statements. Sen. Amy Klobuchar, D-Minn., has called for quick implementation of the trading limits. Last week, she sent a letter to CFTC Chairman Gary Gensler, asking him to impose the speculative trading rules with greater speed. On Friday, a group of 13 more senators, including Minnesota Democrat Al Franken, followed suit, sending a similar letter to Gensler.

Intense lobbying by the securities industry, which has spent millions of dollars to avoid regulation, has likely contributed to the delays, said Charlie Ebinger, director of the Brookings Institution's Energy Security Initiative.

"We need to get these rules done," Klobuchar said in an interview with the Star Tribune. "When you go up against big money, you can get to hand-to-hand combat. That's why I'm going to keep putting this out there. Delays can amount to doing nothing."

Greenberger acknowledges that political unrest in oil-producing countries and natural disasters in Japan account for much of the increase in petroleum prices -- but not all of it.

"Right now, there is more supply than demand for oil," he noted, adding that Saudi Arabia, the principal Mideast supplier of oil to the United States, is not in danger of regime change. "The problem," Greenberger posited, "is that Wall Street launched an advocacy campaign aimed at the CFTC."

Lobbying records show that in 2009 and 2010 two groups, one representing managed financial funds and another which operates commodity exchanges, poured $11.6 million into influencing trading rules in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Those two years the securities and investment industry overall spent $197 million lobbying to shape financial reforms, according to the Center for Responsive Politics.

CFTC won't say when new trading rules will be put in play. Asked why the commission missed the January deadline, a commission spokesman said, "We are not providing on-the-record responses."

The CFTC will collect comments on proposed rules until March 28. Then it will review those comments before putting out final rules and establishing a transition period. Any rules that emerge likely will come after they could have any impact on the current oil price spike.

Various groups fighting the regulation have submitted academic studies that they say refute the need for trading limits. Supporters of regulation have struck back with studies of their own, including a new one by Stanford business Prof. Kenneth Singelton that was commissioned by an airline industry trade group. Singleton charted trading activity and oil futures prices during the 2008 fuel price spike and found what he believes is proof that speculators drove the prices up.

Even if the CFTC immediately implemented its proposed rules, the move wouldn't do away with artificial price hikes, said Delta Air Lines general counsel Ben Hirst, who says the airline pays an extra $100 million a year for jet fuel for every $1 increase in the cost of a barrel of crude oil.

The CFTC's currently proposed limit on speculative positions -- 25 percent of available supply -- is far too high to change that, Hirst said.

"They are not proposing to adopt rules that will have any effect on speculation," he said of the CFTC. "They are only making sure no one can corner the market."

By contrast, CME's LaSala complains that the CFTC has unfairly excluded certain futures contracts from its definition of available supply, effectively reducing the number of contracts traders can hold.

'Just part of the market'

In Minnesota, Roy Abbott, a commodity speculator from Lake Elmo, called supporters of trading limits "naive."

"The speculator is just part of the market," Abbott said as he pumped $35 worth of gas into his car in Minneapolis. "The market's function is to find a price at which buyers and sellers will agree to make a transaction in a given commodity. Oil fuel is just a commodity."

In 2000, producers and end-users of petroleum controlled roughly two-thirds of the oil futures market and speculators controlled one-third, Greenberger noted. By 2008, those ratios had reversed and remain that way.

Jeff LeMunyon at Linwood Capital in Edina says he sees the effect of that trend. LeMunyon helps public transit agencies decide when to lock in fuel prices by buying futures contracts.

"Maybe they're not looking at the same data I am," he said of those who insist speculation doesn't influence costs. "It's entirely clear that these prices can be manipulated."

Congress originally set up the oil futures market to create price stability among petroleum producers and end-users, said Delta's Hirst. Now, "speculators try to anticipate what other speculators are going to do, and the market overreacts. It's not as though there's a shortage of product that caused the price to move up. It's a casino process with financial players betting on where the price is going to go. But it has an effect on [current] prices."

Hirst says the marginal cost of oil production is now $60 to $70 a barrel. At the end of trading Friday, generic oil futures cost $101.07 a barrel.

Free market advocates, such as Heritage Foundation energy economist David Kreutzer, say the markets should be allowed to play out without the trading limits. In fact, Kreutzer said, the new rules will backfire.

"Speculators provide a buffer," he said. "If we had no buffer capacity, price spikes would be worse."

As he filled up his Toyota SUV in Minneapolis last week, University of Minnesota art Prof. Lynn Gray realized he was paying more than he had ever paid for a gallon of gasoline "outside of Mexico." Average gasoline prices in Minnesota have been as high as $3.58 a gallon in the past month with some individual station prices flirting with $4.

If gas hits $4 a gallon, Gray said, he'd ride a bike to work.

Jim Spencer • 202-408-2752 Dee DePass • 612-673-7725

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