With the winter months just a few pages away on the calendar, the specter of $4 per gallon heating oil is looming again. The role of market speculation, rather than supply and demand, in driving up the price continues to be a concern.
Sens. Olympia Snowe and Susan Collins have targeted energy speculators in recent years, and that diligence has paid off. The Commodity Futures Trading Commission will now regulate energy speculators who previously dodged oversight and were able to intentionally drive up the price of crude oil, natural gas and gasoline.
Until recently, most of the purchase of energy commodities was by those who sold it to consumers. But in the late 1990s, large investment banks like Goldman Sachs and Morgan Stanley began to buy energy futures the way investors purchased soybean and orange juice futures, betting on rising prices for those commodities.
Most energy trading occurred on the New York and Chicago mercantile exchanges, which are regulated by the Commodity Futures Trading Commission. But as energy trading heated up, and electronic trading became possible through the Internet, Congress in 2000 passed and President Bill Clinton signed the so-called Enron Loophole that allowed such “over-the-counter” trading to avoid regulator scrutiny.
In response to the rise of electronic trading, the Intercontinental, or ICE Exchange, was created and based in Atlanta. U.S. traders also used ICE’s European exchange based in London. Neither was subject to regulation.
One of the chief aims of regulators is to limit the amount of a commodity an individual investor can purchase. Given the size of some investment banks, Sen. Snowe’s staff explained, the price of heating oil, for example, could be driven up by the investor if enough was purchased.
It’s more than a hypothetical. Amaranth Advisors, a hedge fund, purchased natural gas futures in July 2006 that equaled the amount of the fuel actually used by U.S. consumers in the following January. That sort of control of a commodity is not good for consumers or investors (Amaranth ended up losing $4.3 billion on the deal.)
The changes effected by Sen. Snowe and her Democratic colleague, Sen. Maria Cantwell of Washington, extend the Commodity Futures Trading Commission’s control over U.S.-based energy contracts in Atlanta and London. Sen. Snowe called the move “a welcome step in taking back control of our energy futures market.”
The price of fossil fuel will continue to fluctuate as sources are exhausted, as policymakers push industry and consumers away from reliance on it for environmental reasons, and because of conflict in the Middle East. Most of us can accept that the laws of supply and demand drive price. Far less acceptable is when that price is driven, at least in part, by investors.
It’s not clear how much of recent price spikes are tied to speculation. But as one observer put it, when crude oil goes from $147 a barrel to $30 and then to $70 in a 12-month period, something is not right. The senators’ work on the issue is valuable, and scrutiny of speculators should continue.