Energy Trading Oversight Awakens from its Slumber with Anticipated BP Settlement

Writing as recently as in this Sunday's Washington Post, David Cho noted that commodity trading, known as "the Wild West of Wall Street," is currently subjected to almost no oversight at all, even though many of the products that are traded --- oil, gas, uranium, and the like -- are critical to our national security (not to mention the damage inflicted on our economy by sky-high fuel prices).

Since 2000, when some of the biggest energy companies, including the defunct and notorious Enron, got Congress to deregulate the energy trading markets, CFTC has been shackled by flat budgets, short staffing, outdated technology, and revolving-door leadership and an appalling lack of a clear mandate. That would be a recipe for trouble at any oversight agency, but given the six-fold growth in energy trading volume, the greater complexity of the markets brought about by derivatives, electronic trading and a widening network of international exchanges, not to speak of the heightened impact of single trader wunderkinds with access to enormous leverage (as in the $6.6 billion natural gas trading debacle brought about by Amaranth Advisors last year) a neutered and defanged CFTC is an open invitation to disaster.

As I've pointed out in previous posts (see "CFTC Files Action Charging Manipulation . . . And What About Oil?" 7-26-07), by divorcing oil trading from the actual physical product itself, and from the producers who once needed to maintain cordial and trustworthy commercial relations with their buyers/users, oil traders now in the largely unregulated futures trading markets are concerned only with price. And any producer with the wherewithal to trade in futures contracts -- at $90 per barrel, show me a producer who doesn't have the necessary resources -- can readily manipulate prices higher, and that without fear of getting caught, since the identities of both buyer and seller are often unknown and unknowable under the current trading structure.

This potential for mischief by those who have a vested interest in ever higher oil/energy prices, has been exacerbated exponentially by the emergence of "sovereign wealth funds." These funds control some $2,200bn, or 1.3 percent of the stock of global financial assets and whose operations and lack of transparency is of such growing concern that it was discussed at the European Union's Lisbon summit last week. It is no surprise that a number of OPEC members, as does Russia, rank high on the list of the largest sovereign funds.

I have long contented that oil prices are being manipulated higher by oil interests and their allies (see "An Energy Agenda For A Newly Energized Congress, Part IV. . . ," 12-11-06). Now comes a sweeping validation of these contentions. According to today's Wall Street Journal the Justice Department is expected to seek indictments against four former BP PLC traders, while BP itself is expected to pay $303 million to settle civil charges and avoid criminal prosecution for allegedly manipulating and cornering the U.S. propane market in 2004. The settlement does not include a specific assurance, which BP had sought, by the CFTC or the Justice Department that they will not take future action against BP stemming from a longstanding investigation of BP's crude oil trading.

Given the CFTC's meager and stripped down capabilities it begs the question what else is out there that has been overlooked or for which resources are lacking to assure proper follow up. By my estimation, a great deal. The key to this ongoing imbroglio is, as Sen Levin has put it, is whether to "put a cop back on the beat... to stop excessive speculation and trading abuses." Senator Levin has led the fight in the Senate for more market oversight and transparency to curb any such illegal activity. His bill would require largely unregulated exchanges like London's Intercontinental Exchange (ICE), which figured prominently in the Amaranth collapse, to register with the CFTC and set trading limits on investors. Several of Levin's colleagues and even some oil industry figures now agree that more regulation is urgently needed.

Naysayers claim that it's simply impossible to enact meaningful rules in fast-changing energy markets. To which an aide to Senator Levin responds that traders "hesitate when somebody's watching. And when nobody's watching, traders will go wild."

We've all seen the wildness in oil prices that have skyrocketed by over 80 percent this year alone from $49.90/bbl in mid January to over $90/bbl recently. With triple-digit oil looming just on the horizon, we can ill afford any more complacency nor half-hearted measures. Our economy and our national security are fundamentally tied to these issues. The CFTC must be given the necessary resources and clear marching orders by Congress to do its job. Now!

Raymond J. Learsy is the author of "Over a Barrel -- Breaking Oil's Grip on Our Future."

Comments

[mmckinl]

Is lack of regulation a problem ? Of Course ...

But the basic problem with the oil market is Peak Oil. Supply is now stagnant and soon will drop iin the face of ever increasing demand.

Read :"Beyond the Age of Petroleum" by Michael T. Klare
http://www.thenation.com/doc/20071112/klare

[mmckinl]

Is the lack of regulation a problem ? Of course. However the elephant in the living room is "Peak Oil"

The supply of oil is running out. The ability to fully replace diminishing supply is nonexistent. Depletion will out run new supply from here on out.

The Oil Drum on "Peak Oil"
http://www.theoildrum.com/node/2693#more

Today in the Nation on line : "Beyond the Age of Petroleum" by Michael T. Klare
http://www.thenation.com/doc/20071112/klare

Cheap energy is over. We are faced with an ever declining supply of oil at the same time as demand is going through the roof. Food and fuel will place ever increasing demands on consumer spending starving all other areas of the economy of demand. Layofffs will follow this demand destruction undermining the financial system in a relentless trend downward.

This damage can be miitigated with political action on fuel economy and plug in vehicles , but the trend will never reverse. There may be pauses due to recessions or depressions but that will just postpone the slide of oil availablity.

[LeftRight]

But, but, but, its the market! the market will solve everything!! Just leave it to the market, everything will be fine!!!

[TRYKER]

No "oversight" whatever on anything is the mantra of this admin and WHY they skate is beyond all reason.
De-regulation hasn't shown anything but disaster...you'd think that would wake everybody up, instead we get more dumbing down. All heil this admin.

[Bluesman48]

Welcome to Lagos, D.C.!

[Geo]

This is the worst sort of misinformation on Peak Oil, one of the two catastrophic challenges--the other Global Warming--facing humanity today. Sure, traders are taking advantage of global oil markets. But remove those extra profits and the fundamentals remain. Soaring supply and dwindling demand are driving the price of oil.

World oil production has plateaued at about 85 million barrels per day for roughly a year. It might inch up, but industry geologists agree that we've taken 1/2 of the world's recoverable oil. That means we've taken the best quality oil, the easiest to obtain, the nearest to the surface, etc. What remains is costlier to extract, of lesser quality, and requires more energy to get energy.

The problem with the "blame the traders" is that it points to a false solution: regulate the markets and we're back on easy motoring street.

Since 1900, US supply has always been greater than demand. Our economy was built on endless (we thought) gushers of cheap oil. Around 1970, US oil production peaked and has declined yearly since. Now the world has peaked But at the same time, rapidly growing economies--chiefly China and India--as well as our own voracious energy appetite are driving demand ever higher. Hence, rising prices.

To greatly simplify, the solution is a total restructuring of energy use including massive conservation. The cars have to be scrapped in favor of electrified rail. Economies have to localize so that food and goods are produced close to home. Our use of oil has enabled us to massively grow the earth's population. Oil is the real feed stock of industrial agriculture. As it dwindles, we will be hard-pressed to feed 6.7 billion mouths.

First step in addressing the immense peak oil challenge is obviously to understand it. Mr. Learsy's misinformation--however well-intended--only serves to keep us in the dark.

[timeforachangenow]

I saw a good question and answer seesion on the tube last night with Gary Kasperov reference to this entire fiasco...

it seems that it is in the interest of the oil companies and others to promote destabilization of the entire mideast area in order to promote the unstable situation thereby driving up the price of oil for all...

seems to make a lot of sense to me...

who benefits...Russia...oil companies...this administration when it is sidelined...

what do you think it would take for those concerned to be made accountable for this mess...

looks to me like it is TimeforachangeNOW...

and SOON!