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Enron, got Congress to deregulate the energy trading markets, CFTC has been shackled by flat budgets, short staffing, outdated technology, and revolving-door leadership and an appalling lack of a clear mandate.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."