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Unregulated Energy Trading Blamed for Much of Gas Price Gusher

Public Citizen asks Congress for tighter regulation

July 11, 2008
At a time when Americans are reeling from high energy prices, Congress must provide relief by restoring transparency to the futures markets, Public Citizen’s Energy Program Director Tyson Slocum told the U.S. House of Representatives Committee on Agriculture today.

Contrary to the assertion of oil companies and the Bush administration, this era of high energy prices isn’t simply a case of supply and demand, Slocum said.

Weak or non-existent regulatory oversight of energy trading markets provides energy companies and financial institutions the opportunity to price-gouge Americans. At least $30 of the current cost of $145 per barrel of oil is pure speculation, unrelated to supply and demand, according to a recent congressional investigation.

Unregulated trading is on the increase. For instance, trading on the IntercontinentalExchange has skyrocketed, with 138 million contracts traded in 2007, a 230 percent increase from 2005.

A May 2006 Citigroup report on the monthly average value of speculative positions in American commodity markets found that the value of speculative positions in oil and natural gas stood at $60 billion, forcing Citigroup to conclude that the hike in speculative positions was "a key driver" for the latest surge in commodity prices.

Stronger regulations over energy trading markets are needed to reduce the level of speculation and limit the ability of commodity traders to engage in anti-competitive behavior, Slocum said.

"People are reeling from the economic crunch from high prices, and uncompetitive actions continue to pick their pockets," Slocum said. "The oil companies and energy traders enjoying record profits are not investing those earnings into sustainable energy or alternatives to help us break our addiction to oil."

Slocum highlighted the lack of adequate regulatory oversight over entities like Goldman Sachs that invest in and acquire significant physical oil assets like refineries and pipelines while holding substantial positions in the futures markets.

Controlling these assets affords a company’s energy trading affiliates an "insider’s peek" into the physical movements of energy products unavailable to other energy traders. Currently, there are no effective federal rules prohibiting anti-competitive communications between these types of affiliates.

Public Citizen recommends four broad reforms to the Commodity Exchange Act to rein in speculators and help ensure that energy traders do not engage in anti-competitive behavior:

• Increase the amount of information about trading activities that market participants must provide to federal regulators;

• Raise margin requirements so market participants must put up more of their own capital to trade energy contracts;

• Require foreign-based exchanges that trade U.S. energy products to be subjected to full U.S. regulatory oversight; and

• Impose legally binding firewalls to limit energy traders from speculating on information gleaned from insider information, while at the same time allowing legitimate hedging operations.

"There is no question that speculators and unregulated energy traders have pushed prices far beyond the supply-demand fundamentals and into an era of a speculative bubble in oil markets," Slocum said. "Reforms to strengthen regulatory oversight over America’s energy trading markets are needed to restore true competition to America’s oil and gas markets."

In addition, lawmakers should repeal subsidies now going to the fossil fuel industries and use that money to give households better access to alternative energy sources, he said. Helping families afford fuel-efficient vehicles, solar panel installation and energy efficiency improvements in homes, and providing better mass transit, would empower households to avoid the brunt of energy prices.

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