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FINANCE: Lobbyists Enlist Public in Commodities Speculation Fight

Abid Aslam

WASHINGTON, Jul 14 2008 (IPS) - Energy traders and oil-consuming businesses are enlisting the public in a tug-of-war over proposals to tame fuel and other commodity prices.

At issue are measures that would curb financial speculation in commodity futures markets amid election-year worries about runaway prices and a flagging U.S. economy.

The price of crude oil has doubled in the past year and quadrupled since 2003. Congress has held some 40 hearings on surging prices so far this year and politicians are under pressure to take action before leaving on summer recess in August.

''We've got to do it now, because consumers and the economy are being hurt so much by the skyrocketing costs of fuel and food,'' said Senator Joseph Lieberman, an Independent from Connecticut.

Lieberman and others champion the Commodity Speculation Reform Act of 2008, introduced Jul. 11. The latest in a series of bills addressing commodities, this would limit certain types of investment in U.S. and overseas commodities futures markets.

Also on Friday, oil prices reached a new high of more than 147 dollars a barrel. Analysts attributed the surge to speculation that Israel is preparing to attack Iran and concern about supply disruptions in Nigeria and Brazil.

"There is little doubt that excessive speculation has had an effect on rising prices," said Lieberman. "Our bill will end that and help create a more orderly market for the industries and producers who must deal in commodities as a matter of business."

Airlines and haulers – both major oil consumers – are pressing for curbs on the buying and selling of futures contracts by institutional investors such as pension funds and investment banks.

In a typical futures contract, an investor agrees to buy or sell a certain amount of oil or some other commodity at a certain price on an agreed-upon future date.

Last week, the Air Transport Association and American Trucking Association lobbies launched a campaign Web site – StopOilSpeculationNow.com – appealing directly to the public to "tell Congress to act now to lower energy costs".

Airline chiefs also took what they called "the extraordinary step" of writing an open letter telling customers: "Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now."

Inflation is partly a response to the imbalance between soaring demand and static supply, they acknowledged, but "normal market forces are being dangerously amplified by poorly regulated market speculation."

Two decades ago, speculators bought roughly one-fifth of oil futures contracts but today they dominate two-thirds of the futures market, according to the airline executives.

Speculators sell each other contracts so many times before the oil is delivered and used that they drive up the price of a barrel by 30-60 dollars, the airline bosses said, citing figures used by some economic analysts.

"Consumers pick up the final tab," they added. "The nation needs to pull together to reform the oil markets and solve this growing problem."

At least one target of the proposed regulations is fighting back, however.

The Intercontinental Exchange (ICE) – an energy exchange founded by Wall Street and oil firms – warns on its Web site, OilFuturesMarketFacts.com: "If you make laws in a hurry, it's bound to end in tears."

Congress banned onion futures trading in the 1950s amid fears of increased price volatility, the site says, adding: "The law of unintended consequences then came into play."

"No longer subject to the discipline of the market, the onion's price has fluctuated wildly – soaring 400 percent in late 2006 and 2007, crashing 98 percent this past March, and surging 300 percent just a month later," visitors to the site are told.

"From oil to onions, well-regulated futures markets create stability and predictability by allowing consumers to hedge price risks," it adds.

Lieberman had favoured prohibiting institutional investors from taking positions in the futures markets. The bill introduced last week contains no such ban, however, because he was persuaded the idea would not garner enough support to succeed.

However, the bill sets limits on the amount of futures contracts institutional investors can buy or sell and would require them to file daily reports of their market activity. These position limits and reporting requirements would be extended to foreign and virtual exchanges that trade in U.S.-linked futures contracts. Those affected would include ICE, which maintains electronic trading platforms here and in Britain.

If enacted, the measure would extend existing rules to unregulated investment banks that deal as intermediaries in so-called "swaps", or deals involving players who place opposite bets on the future price of a commodity. It would also bolster oversight by the Commodities Futures Trading Commission.

Earlier this month, the Paris-based International Energy Agency blamed much of the past few years' rise in oil prices on tight refining capacity, geopolitical worries, and low spare capacity. Speculation, it said, played a marginal role.

"Money flows and speculation can have a day-to-day influence on prices, but it is not one that can be sustained for any length of time without a market imbalance being apparent," the agency said in a Jul. 1 report.