The Government’s Latest Efforts to Rein in Oil Speculators

The rising oil prices have forced the government to act. Many experts have blamed the recent increase in oil prices on speculation. The government is planning to introduce a legislation – the Stop Excessive Energy Speculation Act – in an attempt to rein in speculations in the oil market. Will the legislation in its present form achieve its goal?

The legislation requires the Commodity Futures Trading Commission to eliminate excessive speculation in oil. It aims to do this by restricting the amount of trades by certain participants. The CFTC will have to differentiate between “legitimate” and “non-legitimate” hedging by market participants and gather data on over-the-counter and index traders and swap dealers. It will increase transparency and disclosure requirements so as to equip the CFTC to more effectively carry out its proper role of commodity market oversight.

The legislation also authorizes the CFTC to increase its staff by 100 to fulfill its new responsibilities.

The legislation will place sensible checks on the influence of speculators by placing reasonable limits on large, over-the-counter trades and by closing the loopholes that have permitted traders to make large-scale speculative trades through overseas exchanges. It will compel U.S.-based traders to abide by the U.S. regulatory regime when placing trades on foreign exchanges.

The legislation is sponsored by Senate Majority Leader Harry Reid (D-Nev.) and Sens. Dick Durbin (D-Ill.), Patty Murray (D-Wash.), Charles Schumer (D-N.Y.), and Amy Klobuchar (D-Minn.).

Critics point to a provision in the legislation that would allow the regulator to order companies to liquidate their swaps transactions if it concludes that a major market disturbance has occurred. In reality, this would require companies to break their privately negotiated risk management contracts, even if the swap complied with trading limits that were in place when it was originally negotiated. In its present form it is likely to face strong opposition, especially from the Republicans, unless it includes provisions for expanding domestic oil drilling. The legislation could drive commodity markets out of the U.S. and make it more expensive for bona fide hedgers to protect themselves from volatile prices, according to the group.

This legislation is not the only effort underway to rein in speculators. Collin Peterson (D-Minn.), House Agriculture Committee Chairman, is working on a bill to tighten regulation of over-the-counter and swaps trading in the agricultural and energy futures markets. The Chairman of the House Energy and Commerce Subcommittee on Oversight and Investigations Rep. Bart Stupak (D-Mich.) has introduced legislation to curb participation by investors and other financial players in the energy markets.

Is it just speculation or is there more to the rise in oil prices? On July 18, oil prices tumbled below $130 a barrel for the first time in more than a month. Did the proposed legislation have anything to do with this? What will happen if the oil prices increase after the proposed legislations is passed?

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