Agency finds oil answers slippery
“Recent substantial increases in the price of crude oil and other commodities have put considerable strain on American families, farmers and businesses,” said Walter Lukken, acting commissioner of the Commodity Futures Trading Commission. “We share public concerns about the need for the utmost transparency and integrity in the energy futures markets.”
It’s a time-honored Washington ritual. When the price of oil goes up, so does the blood pressure of politicians. And that means government agencies must do something, even if all they do is offer sympathy.
So it was Tuesday for the CFTC -- normally one of the quietest areas of the federal government and an agency traditionally more focused on the price of soybeans and pork bellies than energy.
With Congress rumbling about the possibility that speculators might be contributing to higher prices, the commission convened the first meeting of a newly minted Energy Markets Advisory Committee.
One by one, other commissioners expressed similar concern for consumers at the committee hearing, while representatives of the beleaguered heating oil, utilities and airline industries expressed anguish over the soaring energy costs.
And then, after hours of discussion about the laws of supply and demand and the technical details of commodities trading, the hearing adjourned.
“This has been a great day,” Lukken said.
Since many economists agree that oil prices are rising primarily because of supply and demand pressures in the global marketplace that national governments can do little to change, at least in the short term, the hearing gave government officials and others a chance to show that they’re worried about the problem.
What remains to be seen is whether the concern turns into regulatory action. As a possible first step, the CFTC announced the formation of an interagency task force that includes the Federal Reserve and others, though its mission is to ensure the free flow of market information, not intervene.
“I’m concerned about $140-a-barrel oil. I know people who are literally choosing between food and fuel,” said Bart Chilton, one of the CFTC’s four commissioners.
Last week, after months of congressional prodding, the CFTC announced that it was investigating whether large index traders such as pension funds and sovereign wealth funds that had entered the oil futures market in recent years had helped spur the price increases with their large trades.
The CFTC regulates futures, and for years that chiefly meant agricultural futures because farmers, food processors and others needed to protect themselves against sudden price swings for grains or livestock. Futures markets eventually developed in other areas including oil and metals, and the commission acquired jurisdiction over all of them.
In recent years, large institutional investors have increasingly turned to commodities markets as a way to diversify their portfolios. In fact, they are so large, ordinary users of petroleum fear they are outweighed by the investors.
Sean Cota, who runs a heating oil company in Bellow Falls, Vt., and is a member of the new advisory committee, said he worried that sovereign wealth funds and pension funds were putting money into oil futures as a hedge against the value of the dollar.
“There are now three world currencies -- the dollar, the euro and commodities, especially oil,” Cota said in an interview.
Among the advisory committee’s two dozen members are representatives of five large brokerage firms with institutional traders as clients: Goldman Sachs & Co., Lehman Bros. Holdings Inc., Morgan Stanley, JP Morgan Chase & Co. and Merrill Lynch & Co.
Laura Campbell of Memphis Light, Gas & Water quizzed the brokerages as to why their clients were so interested in commodities futures.
“Why not just invest in an oil firm like Exxon Mobil?” she asked. “Why do you have more people rolling to the commodities instead of equities?”
William McCoy of Morgan Stanley offered a simple answer: “Broad diversification.”
Commissioners acknowledged that in the area of oil futures, they don’t have the information they would need to probe who is trading how. Last week, the commission announced that it would require monthly reports from traders on index trading and swaps -- cash deals based on commodities indexes.
In a lengthy presentation to committee members, John Fenton, deputy director of the CFTC’s market surveillance division, made clear that the panel had little of the information it needed to examine such deals. “We don’t have a complete handle on index trading,” Fenton said.
Other speakers at the hearing were clearly worried about Congress, which considered but rejected a bill Tuesday afternoon that would have imposed a windfall profits tax on oil companies
“I think these are issues that need to be addressed and, quite frankly, should be addressed quickly,” said James Newsome, president of the New York Mercantile Exchange, one of the two largest commodities markets for oil. “In lieu of action by the commission, some action could be taken by Congress that could be damaging to the markets.”
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