Here’s something worth getting out of bed for at 6 a.m. (Pacific time) teleconference. The federal Commodity Futures Trading Commission is holding a day of hearings Tuesday on what are called "dark markets." These are the unregulated trades in futures markets for oil, gasoline, natural gas and other energy commodities. A Senate investigative report last year saw such market speculation adding "as much as $20-$25 to the price of each barrel of oil." Senators Norm Coleman and Carl Levin called for closing loopholes in a 2000 law that exempted many energy trades from regulatory oversight at the behest of then-powerful Enron.
The Senate investigation, despite last year’s $75 a barrel oil prices, didn’t get much traction-perhaps because the economy was in better shape. A bill by Sen. Dianne Feinstein (S. 577) to increase the transparency and oversight of energy futures trading has languished.
Then last week’s $80 oil, even as OPEC announced a supply increase, made analysts’ heads swivel as they searched for a solid reason. A small hurricane in the Gulf? A drop in U.S. oil imports? Not good enough.
From Bloomberg last Thursday:
Oil’s gain this week, after a production increase by the Organization of Petroleum Exporting Countries, shows bullish sentiment is driving prices, rather than the usual seasonal decline in U.S. fuel demand, Access Trading’s [Bob] Frye said. November oil may reach $86, he said.
“ You’ve got a bunch of people basically panting looking for any reason to buy,” he said. “The OPEC thing was not bullish.”
OPEC pumps about 40 percent of the world’s oil and had been expected to leave output unchanged when the group met in Vienna this week. Members will increase production by 500,000 barrels a day from November to help ensure adequate fourth-quarter supplies, the group said Sept. 11.
Oil prices have risen 31 percent this year as hedge funds and other speculators bet on surging energy demand.
“A lot of this increase in the oil price has been due to fund investment,” said Gavin Wendt, senior resources analyst at Fat Prophets in Sydney. “If they are pumping a lot of money into the market that has to be a positive sign for the price because they’ve looked at the tea leaves and deduced that oil is a good investment even at $80 a barrel.”
Oil has dropped a couple of bucks since then, but has been high enough that Big Oil will make up on the oil side for any easing of refinery profits in the third quarter, ending this month.
Energy futures trading is a form of gambling, yet far less regulated than Las Vegas. Unlike what happens in Vegas, speculative pricing comes out of the pockets of Vermont families trying to heat their homes in a long winter and Western drivers emptying their pockets for $60 fill-ups.
One of the chief critics of the "dark market" is James Collura of the New England Fuel Institute. In a Boston Globe opinion article in July, he wrote:
The energy commodity markets perform an essential economic function if they are transparent, accountable, and subject to the rule of law. But as Dr. Michael Greenberger, former CFTC enforcement officer and professor of law at the University of Maryland, said in testimony this month, "failure to regulate these markets properly has distorted and sabotaged free market principles [and] cut those markets off from the moorings of economic fundamentals."
Some environmentalists see high oil prices simply as a good way to drive down demand. No, it’s not, if profits all go to speculators and oil companies while Grandma shivers through the winter under an afghan to save on heating oil.
It’s a shame that the CFTC hearing was scheduled on the day the Federal Reserve meets. It may be riveting, and it has as much to do with the nation’s economic future as the credit crisis.