Futures Oil and Gas Market Regulation Urged

By Published On: December 14, 2007

The cost of natural gas and oil is significantly impacted by unregulated and excessive futures trading, according to federal lawmakers and witnesses testifying under oath during a December 12 U.S. House Committee on Energy and Commerce investigative hearing. “Phony exchanges of contracts and the buying up of futures contracts has added $20-$30 to a barrel of crude,” said Representative Bart Stupak (D-MI). He and other members said that regulating natural gas and crude oil future trades would cut prices by one-third. “At a time when people everywhere in this country are paying record prices for gasoline and record prices to heat their homes, government has a responsibility to put an end to this speculative excess,” added Representative John Dingell (D-MI). Charles Vice, chief operating officer of Intercontinental Exchange–a company handling large volumes of unregulated gas and oil futures trading deals–said regulating the futures energy market would drive up costs. There is a middle road between regulated and unregulated activity, claimed Vice. The unregulated activity is called the “dark market.” Recorded calls of traders boasting about their schemes to drive up gas and oil prices to reap big profits without consequence were played during this week’s hearing. According to Michael Greenberger, University of Maryland professor of law, threatening to regulate the Intercontinental Exchange would cause prices to drop and end unscrupulous trading. “Traders will think someone will listen to their phone calls,” he pointed out. Only about 1 percent of the future deals involve actual fuel deliveries. In December 2000, energy futures trades were effectively exempted from regulatory oversight, creating what was dubbed the “Enron loophole.” During the 2000-01, Enron introduced numerous bogus trading schemes to drive up wholesale energy prices in California and reap hefty profits. That caused investor-owned utilities to bleed red ink and resulted in the state stepping in to buy power to ensure the lights stayed on in the Golden State. Since that time, unregulated future gas trades have soared, the price of natural gas and oil escalated, and along with them dubious future trading practices, witnesses claimed. They pointed to last year’s collapse of the natural gas futures hedge fund, Amaranth Advisors. Amarnath’s implosion is estimated to cost natural gas consumers as much as $9 billion from April to August 2006, according to the Industrial Energy Consumers of America. The Federal Energy Regulatory Commission is attempting to prosecute Amaranth, but its authority was challenged December 11 by financial groups. FERC was given prosecutorial power under the 2005 Energy Policy Act. However, the coalition, which is composed of the Futures Industry Association, Managed Funds Association, CME Group, New York Mercantile Exchange, and The International Swaps and Derivatives Association, argues FERC’s proceeding against Amaranth would harm the futures industry by creating two legal standards for determining when trading on futures exchanges should be construed as market manipulation. The group instead wants to see Commodity Futures Trading Commission jurisdiction over U.S. energy futures markets. FERC chair Joe Kelliher noted that EPAct gave his agency and the commodity commission joint market oversight of the energy futures market. He did not seek additional authority, noting FERC was given the necessary investigative and prosecutorial power two years ago. “However, it’s important that those tools not be taken away or diminished,” he stated. Dingell said he was “disappointed to see that the CFTC has challenged the federal commission’s authority to investigate and pursue energy market manipulators.” Utility representatives and academics asserted the CFTC allows secret and non- transparent gas trades, adding that excessive speculation is harming consumers. “We need to bring gas prices back to affordable levels and restore public confidence,” said Laura Campbell, representing the American Public Gas Association, a non-profit group. The market, she added, must be “fair, orderly and transparent.”

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