SPECIAL REPORT: Speculation blamed for one-third of fuel prices

| 6/3/2008

Tuesday, June 3, 2008 – A third of the price that American consumers are paying for diesel and gasoline is because of foreign-driven speculation in U.S. oil markets, and a recent attempt to close the “Enron loophole” hasn’t fixed the problem, several economic experts told U.S. senators on Tuesday.

However, those experts said that loophole could be closed by a “single action” of the U.S. Commodity Futures Trading Commission. The economists said that the commission should not allow foreign market exchanges in London and Dubai to police themselves in terms of speculation on U.S. oil products.

“They’re trading U.S. oil from West Texas,” Michael Greenberger said. “Thirty percent of the market is an exchange which has no specific limits.”

Greenberger, who is a professor at the University of Maryland School of Law and worked previously as the Justice Department’s principal deputy associate attorney general, joined multibillionaire George Soros to testify with three other panelists. They addressed the topic, “Energy Market Manipulation and Federal Enforcement Regimes,” during a hearing before the Senate Commerce, Science and Transportation Committee on Tuesday, June 3.

The recently approved Farm Bill includes language designed to close the “Enron loophole” that allows unregulated foreign speculation into U.S.-produced oil.

The Commodities Futures Trading Commission is an independent government agency charged with protecting the public from fraud and manipulation by market players.

Greenberger said he’s been told the Farm Bill will affect only one of countless oil trading contracts. He said the commodities commission needs to begin enforcing speculation standards for exchanges, adding that devaluation of the U.S. dollar would likely stop if “we can get our oil prices under control.”

By doing as little as issuing a letter, the commission could close the loophole and potentially help America’s economy, damaged recently by the housing market bubble, rising oil prices and the devaluing of the dollar.

“I think there is a correlation between the weak dollar and excessive speculation,” Greenberger said. “Turning this regulation over to Dubai and the English is a joke.”

Several senators and panelists decried speculators – who purchase little to no actual product and may possess few actual assets – driving up the price of oil and petroleum products by trading futures of crude oil.

Panelist Mark Cooper, director of research for the Consumer Federation of America, said he believes $40 of a $125 barrel of oil goes to processing; $40 of it goes to OPEC profits; and $40 goes to market speculation.

“Commodities markets have ceased to play their vital role (of providing liquidity to the market),” Cooper said. “Instead, they’ve become engines of speculation, which drive prices up and drive commercial traders out of these markets.”

Market manipulation includes some scenarios in which financial institutions buying up commodities in order to continue hedging their returns on speculation.

For example, Greenberger said Morgan Stanley recently became the largest holder of New England’s home heating oil supplies, and is one of many companies hording energy supplies rather than selling them while the dollar remains weak.

“They don’t want to release it if they can control the price,” Greenberger said. “(Even) if there’s a supply and demand problem, it’s a question of hording here.”

Soros said speculation is a problem, but said other underlying issues shouldn’t be forgotten.

“If we now head into a recession, the price of oil will come down,” Soros said. “But once you come out, the price will come back again. There is really a need to develop alternative sources of energy.”

Panelists told the senators several facts about oil trading, although conflicting opinions about regulation and the control of speculative trading and oil processing proved complicated even for many of the industry leaders and national policymakers in the hearing room.

Mike Joyce, OOIDA’s senior government affairs representative, watched Tuesday’s hearing while seated about 10 feet from Soros. Joyce said he was impressed with the meeting, led by Sen. Maria Cantwell, D-WA.

“The chair did a very good job of keeping it substantive and not letting it spiral into an attack on the White House, per se,” Joyce told Land Line. “I think they may be taking a tack that says, ‘You know what, this White House is a lame duck, and we’re just going to start moving past them.’ ”

Although recent congressional hearings have been viewed by many pundits as grandstanding, Joyce said he believes the senators at Tuesday’s hearing seemed willing to consider tightened regulation or oversight of energy trading.

“There’s oversight that’s lacking or not taking place – so the private market is taking advantage of that,” he said. “There are a lot of big, big dollars being spent in Washington to protect those who are making a lot of money in the marketplace. It’s going to take strong, tough-minded leadership to push through on some of these issues and legislative proposals.”

“We need more statesmen to stand up and do the right thing.”

– By Charlie Morasch, staff writer