Senate may give CFTC some bite to go with the bark

By MARJORIE KORN – MEDILL NEWS SERVICE

Wall Street groans when Congress gets involved in its day-to-day activities, but Main Street is applauding S. 3268, the Stop Excessive Energy Speculation Act of 2008, introduced by Sen. Harry Reid of Nevada.

The bill seeks to reduce the amount of speculation in the commodities markets by giving the U.S. Commodity Futures Trading Commission more power to root out speculators, allowing hedgers who take possession of the oil-namely airlines and other transportation companies-a better deal on oil.

In a press statement released Wednesday, James C. May, president and CEO of the Air Transportation Association, said, “This ensures that traders with no relationship to the physical product no longer can take advantage of existing loopholes” by requiring transparency and position limits in London and other overseas markets similar to those required for trading on U.S. exchanges.

The ATA contends that oil speculation is the root cause of higher food and gas prices and that “the price of commodities has increased out of proportion to marketplace demands.”

Brent crude oil futures have nearly doubled in the past year and set a record high of $146.60 per barrel July 3, but has seen some downward pressure, falling more than 7 percent from last week’s close of $145.08. (For the latest oil prices, click here.)

The ATA is the leader of the Stop Oil Speculation Now coalition, comprised of the international airline and ground transportation companies–some of the bill’s main supporters. The group expects the legislation to be brought to the Senate floor for a procedural vote this week.

Rising oil prices have been cast as the root of all evil: contributing to higher food costs, accelerated inflation and emaciated margins in the transportation industry.

But free-market advocates such as former Federal Reserve Board Chairman Alan Greenspan have credited oil market speculation for improving, rather than harming, the amount of oil supplies around the globe.

In his 2007 book The Age of Turbulence: Adventures in a New World, Greenspan argues that prior to oil speculation, there was not enough oil being pumped since there were not sufficient aboveground facilities to contain it.

As speculators got into the business, he said, the “shorts” -the oil producers-had to guarantee there was oil to be had for the “longs”- or buyers. In an energy bull market, it’s assumed that speculators mainly hold long positions.

“The consequence has been an accumulation of inventories that reflects both the traditional precautionary holdings of industry and the additional quantities held in ‘escrow’ by industry to fulfill obligations to investors under the terms of the futures contracts,” Greenspan asserts.

Translated out of Green-speak, that means that additional buying demand from investors pushed the price of oil up enough to make it profitable for the oil industry to increase production and build more infrastructure to store bigger quantities of the commodity.

Greenspan continues: “That is, the addition of investors to the oil market did not increase the supply of oil in the world, but their activities speeded the necessary price adjustment that moved some crude oil from OPEC reserves to the aboveground inventories of the developed world. This promoted greater oil security, which, I presume, will reduce price pressures over the long run.”

While Greenspan’s argument is that of a libertarian economist, such views are getting scant attention these days as Congress attempts to appease an American public trying desperately to cope with increasing prices at the pump.

Nick Kiousis, a broker at California-based Redlands Futures and Options, said of the Senate bill, “I think it’s a bad thing. Speculation is part of the system. A few people aren’t happy the prices are going up, but prices weren’t going up because of speculation, there’s an increase in demand.”

Kiousis said he does not believe that the bill will help airlines decrease costs, and that successful airlines, like Southwest Airlines Co., which said it had hedged its first-quarter jet fuel needs at $51 a barrel.

Investors have been waiting to see how the CFTC was going to “fix” what has been seen as out-of-control commodity prices, and legislation increasing the Commission’s authority may not stop at the Stop Excessive Energy Speculation Act.

That’s just what brokers like Kiousis fear. “Speculators and traders are what keep the market going,” he said.

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