US Congress may hit dry hole over oil speculators
Reuters
First Posted 04:45:00 07/03/2008
Filed Under: Oil & Gas - Downstream activities, Legislation
WASHINGTON — US lawmakers have introduced a spate of bills to rein in market speculators blamed for pushing up crude oil prices, but time is running out and the White House is far apart from Congress on the issue.
Also, some experts fear that the proposals could do more harm than good.
Hedge funds, pension fund managers and other speculators have become public enemy No. 1 for many US consumers when they pull into the gasoline station and drain their wallets.
To appease their constituents, lawmakers have proposed a range of solutions. Of all the bills introduced, the legislation that could have the biggest impact and hurt speculators the most is the Senate's End Oil Speculation Act, which would increase the amount of money that some investors have to put up in order to buy and sell crude oil.
Democratic Sen. Byron Dorgan introduced legislation last week to raise the margins on speculators that trade oil futures to 25 percent of the value of the underlying commodity, sharply higher than the current margin of five to seven percent.
Dorgan's bill may be part of anti-speculator legislation that Democratic leaders plan to unveil when lawmakers return from their July 4 holiday recess.
"My hope is that we will bring up a piece of legislation that will drive a spike in the heart of all this excess speculation and begin to put some downward pressure on gasoline and oil prices," Dorgan told Reuters in a telephone interview from his home state of North Dakota.
However, time is running out for getting any bill cleared through both the Senate and the House of Representatives that would also be agreed to by the White House.
Lawmakers will soon be leaving town again, this time for their August recess. After that, the focus will be on the November presidential and congressional elections, a period when controversial legislation normally is pushed aside.
"It's going to be very difficult," Dorgan said. "We have a very short time in the month of July. We've got to try to move quickly."
Echoes of Enron
Like other pending bills to curb speculation, Dorgan's bill will have a hard time winning approval soon, especially since it faces opposition from Republican lawmakers.
Senate Republican leader Mitch McConnell "shows no willingness to crack down on speculators gone wild," said Daniel Weiss, energy expert at the Center for American Progress. "Without his support for increasing the margins for speculators, high oil prices are likely to continue."
Rather than only blame speculators, Republicans are pushing bills to boost domestic oil production and deliver more supplies to the market, which they believe would lower prices.
"When more supply is on the horizon developing our own energy reserves, speculators will have much less incentive to invest in oil commodities," said Republican Rep. Judy Biggert.
Republican legislation, which several Democrats support, also requires the government to collect more information on trading by speculators and boosts market monitors.
Much of the attention on speculators has centered on the unregulated energy trading markets, which critics say were given free rein after now-bankrupt Enron lobbied Congress to exempt such trades years ago from government oversight.
Industry experts and Bush administration officials warn that raising margin requirements and imposing other tough new regulations on investors could make things worse.
"I am not certain that raising margins would have the effect that people would like it to have—which is driving down prices," Walter Lukken, chairman of the Commodity Futures Trading Commission, told Congress. "It certainly would be a cost of doing business—may drive businesses overseas to London markets and unregulated markets. I think that is dangerous."
"They would lead to business exiting the United States and greater difficulties for US companies to manage the risks of rising prices," said Greg Zerzan, head of global public policy at the International Swaps and Derivatives Association.
Roadblock in the White House
However, other energy experts say that boosting margins would chase away the newer speculators and lower oil prices to about half their current levels. Oil hit a record price of almost $144 a barrel earlier this week in New York trading.
But there is also fear that a sudden rise in margin requirements could spark a disorderly oil price decline that would prompt a host of margin calls and require investors to find more money quickly to cover positions. That would tax financial markets already hit hard by the subprime mortgage crisis.
"If the prices go up an escalator and down an elevator shaft, volatility would likely increase and, yes, the margin goes up and it could exacerbate the down move," said Marc Chandler, analyst at Brown Brothers Harriman.
Still, many experts warn that something must be done.
"We are in a bubble," said Sean Cota, who runs a heating-oil company in Bellows Falls, Vermont. He says the higher prices for oil futures contracts make it difficult for retail companies like his to hedge against price changes.
"You do need to increase margins, but you need to do it worldwide," said Cota. "If you can't do it worldwide, then it's going to slip into other markets."
Dorgan said Congress has "a roadblock in the White House" with President George W. Bush opposed to reining in speculators.
"I don't underestimate the difficulties here. I think the Congress has to do what it can do. If the president will not support it, he has to explain that to the American people."
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