Congress Pursues $80 Oil With Trading Limits, Disclosure Rules

That the US Congress itself, a sort of hallowed temple for the
"free-market", has taken note of the role of the futures market in grossly
distorting price, even if of only one commodity - albeit of immense
salience, has to be treated as nothing less than a resounding slap in the
face of the market-fundamentalists.]

http://news.yahoo.com/s/bloomberg/20080723/pl_bloomberg/ai3kfj0v2ake

Congress Pursues $80 Oil With Trading Limits, Disclosure Rules

Daniel WhittenWed Jul 23, 12:02 AM ET

July 23 (Bloomberg) -- Congress may outlaw elements of oil futures trading
that lawmakers found distorted demand and contributed to the 69 percent
surge in prices in the past year.

U.S. legislators are considering limits on the number of oil contracts an
investor can hold and may increase disclosure requirements. Speculators such
as Goldman Sachs Group Inc. use the practices to bet on price swings, which
may drive up prices, though they have no intention of taking delivery of
underlying goods, lawmakers say.

Proposals being debated this week in the Senate would bring prices more in
line with demand, proponents say. Excluding the effect of speculation, oil
would be around $80 a barrel, 38 percent lower than yesterday's price,
according to Jesus Reyes Heroles, the chief executive officer of Petroleos
Mexicanos. Critics say restrictions may interfere with the functioning of a
$4 trillion annual market for crude oil.

``Americans are being taken advantage of not only by OPEC but by speculators
right here in our own country,'' says Senator Ted Stevens, an Alaska
Republican, referring to the Organization of Petroleum Exporting Countries.
``Historically, this has not been a bad problem. Only recently has
speculation reached these unsustainable levels.''

Investor control of contracts to buy crude oil in New York almost doubled in
April from five years earlier as prices climbed, according to the Commodity
Futures Trading Commission. Increased energy costs have slowed the economy,
reduced consumer buying power and angered voters.

Oil, Futures Decline

Crude oil for August delivery fell $3.09, or 2.4 percent, to settle at
$127.95 a barrel yesterday on the New York Mercantile Exchange. The number
of outstanding crude oil futures in New York fell to the lowest in 17 months
as the Senate began considering legislation to limit speculation in oil
markets.

Republicans in the Senate may allow a vote on limits as soon as tomorrow,
according to Alaska Republican Senator Lisa Murkowski. The House plans a
vote before members start a monthlong break in August. President George W.
Bush has signaled he will consider any resulting legislation.

At least 15 proposals are circulating in Congress. Measures proposed by
Democratic Senate Leader Harry Reid of Nevada and his Republican
counterpart, Mitch McConnell of Kentucky, would expand the CFTC's
enforcement staff and give it access to data for identifying
over-the-counter traders and those making U.S.- based transactions on
overseas exchanges.

Other proposals would require that oil traders report their holdings,
eliminating large, untraceable purchases by individuals. Capping the number
of contracts held by an investor would prevent small groups from pushing
prices higher or lower, says Representative Bart Stupak, a Michigan
Democrat.

Voter Anger

Lawmakers, who normally avoid major initiatives in an election year, are
moving to curb oil trading as higher costs anger voters, says Kevin Madden,
the former media strategist for one-time Massachusetts Governor Mitt
Romney's Republican presidential campaign. Congress got a 14 percent
job-approval rating in a Gallup survey last week, the lowest in the poll's
34-year history, partly because of gasoline prices.

``It's one of those issues that is motivating people to vote up or down on
their local legislator,'' Madden says. ``Members are looking to go home and
give voters some sort of legislative option.''

Goldman Says `Unwarranted'

Goldman Sachs and oil traders say a poorly designed measure won't reduce
prices and may remove investment options that serve as a hedge against
inflation. Speculators buy contracts to take on price risks that oil
producers won't want or aren't allowed to accept. Oil companies use futures
to hedge against price drops, says Craig Pirrong, head of the University of
Houston's Global Energy Management Institute.

In a June 29 report, Goldman, Wall Street's most profitable bank, argued
that the idea higher prices are part of a speculative bubble is
``unwarranted.'' The New York-based firm declined to comment through
spokesman Michael Duvally.

The price reflects demand from China and India, not manipulation or
excessive speculation, says William Adams, a managing director at JKV Global
in Chicago, a trader of energy, grains and metals.

``Thinking that you can legislate a position in the market or that you can
legislate a direction of the market would be true manipulation,'' Adams
says.

Acting CFTC Chairman Walter Lukken says he has seen no evidence of the type
of excessive speculation or manipulation lawmakers are targeting.

Trade Groups

Trade groups are pressing Congress for restrictions. Nineteen organizations,
including the Air Transport Association and the Consumer Federation of
America, wrote Congress June 11 urging ``meaningful reforms.''

Four signers -- the Associated Builders and Contractors, the Teamsters
Union, the Air Line Pilots Association and American Trucking Associations --
gave $4 million combined this year to candidates for federal office. The
combined amount would be the second-largest among contributors to federal
candidates.

``Sophisticated paper speculators who never intend to use the oil are
driving up costs for consumers and making huge profits with little to no
risk,'' the groups wrote. On June 6, when oil gained $10.75 a barrel, 22
barrels of oil were bought on paper for every barrel consumed, they said.

Reyes Heroles, the CEO of Mexico City-based Pemex, the third-largest
importer to the U.S., said in a July 21 interview that he agreed with
analysts who have estimated the price of a barrel of oil would be close to
$80 excluding the effect of speculation.

Congressional Probes

The House and Senate have held at least two dozen hearings on speculation
since early June, taking testimony from airline and trucking executives,
exchange officials and regulators, and conducted at least three oil-price
inquiries.

Chief executive officers of 12 U.S. air carriers including Delta Air Lines
Inc.'s Richard Anderson, AMR Corp.'s Gerard Arpey and UAL Corp.'s Glenn
Tilton said in a letter to customers on July 9 that ``normal market forces
are being dangerously amplified by poorly regulated market speculation.''

Lawmakers point to data from the CFTC, the federal commodities regulator,
showing that speculators controlled 71 percent of contracts to buy crude oil
on the New York Mercantile Exchange in April, up from 37 percent five years
earlier. Oil reached a record $147.27 a barrel on July 11.

McCain's `Reckless Speculation'

At least three Republicans -- Stevens and Maine Senators Susan Collins, and
Olympia Snowe -- signed on to proposals backed by Democrats to limit
speculation. McConnell has proposed meeting Democratic demands partway by
increasing oil-market oversight.

Tony Fratto, a spokesman for Bush, won't rule out that the president may
sign legislation to curb speculation, while cautioning that Congress should
avoid being ``too prescriptive with market regulation.'' Increasing domestic
oil production is ``the most important thing we can do'' to signal that
supply will rise to meet demand, he says.

Democratic presidential candidate Senator Barack Obama of Illinois on June
22 proposed an increase in government oversight of energy markets, a
requirement that oil futures be traded on regulated exchanges, development
of rules for overseas markets and federal investigations into any
questionable trades.

Republican candidate John McCain, a Senator from Arizona, called June 25 for
immediate steps to stop ``reckless speculation'' in oil futures. McCain said
he would impose new regulations to assure the integrity of the markets and
didn't give details.

To contact the reporter on this story: Daniel Whitten in Washington at
dwhitten2@bloomberg.net