Thursday, April 03, 2008

Congress Heard Us

Well forgive the conceit but we did call here for draconian measures to quash the oil speculation that is driving inflation higher, making stagflation a possibility and hindering the recovery of the economy and injuring the overall health of the Republic.

It sounds as if Congress may have heard us.

WASHINGTON, April 3 (Reuters) - Key U.S. senators on Thursday said they are weighing legislation to require U.S. commodity exchanges to boost margin requirements on energy contracts like crude oil and natural gas to rein in soaring
prices.

The Senate Energy Committee held a hearing to examine whether a flood of buying interest from noncommercial, institutional investors was a key factor in pushing U.S. crude oil futures prices to a record $111.80 a barrel last month.

"This is a 24-hour casino with unbelievable speculation," said Democrat Byron Dorgan of North Dakota, who said he is pursuing possible legislation that would require U.S. commodity exchanges like the New York Mercantile Exchange to boost margin
requirements for buying and selling crude oil contracts.

Raising margins - collateral payments deposited by customers to insure against adverse price moves - could staunch the flood of money pouring into crude oil, gold and agricultural contracts, Dorgan said.

"I think there should be an increase in margin requirements," Dorgan told reporters, noting that crude oil contracts can be bought or sold for about 5 percent of their
nominal value, while stock purchases require a higher up-front cash outlay. Dorgan did not specify where he would like to see margins set.

In effect, someone who wants to speculate can control $100,000 worth of oil by investing only $5,000 to $7,000, Dorgan said.

Currently, exchanges set their own margin requirements, and raise and lower them as they see fit. A spokesperson for the New York Mercantile Exchange was not immediately available for comment.

Low margin requirements for crude oil and other commodities give market players "tremendous" leverage to control high-dollar contracts for a small amount of cash, said Sean Cota with the Petroleum Marketers Association of America.

Sarah Emerson, managing director of Energy Security Analysis Inc, agreed that crude oil margin requirements should be raised.

"That's one tool that Congress has," Emerson said, noting that the profit potential afforded by low margin requirements for crude oil is "striking."

"There really aren't any other easy fixes," Emerson said.

Sen. Jeff Bingaman, the committee's chairman, was noncommittal on the idea, though he said he was concerned by one panelist's observation that crude oil has become "the new gold" as a hedge against inflation and a weak U.S. dollar.

"I don't need to go buy gold every day to get to work," Bingaman said, asking panelists if Congress needs to "discourage investment in oil strictly as a refuge against volatility elsewhere" by "folks that have no earthly need to be
buying oil."

The California Public Employees Retirement System, the largest U.S. public pension fund, in February said it plans to invest up to $7.2 billion through 2010 in commodity markets.

An economist for the Commodity Futures Trading Commission told lawmakers that the share of outstanding NYMEX oil contracts held by speculators has increased only marginally -- from 31 percent to about 37 percent over the last three years.


Even the cries for higher margins grow louder the possibility itself may start to wring marginal players out and make institutions more leery of allowing clients this type of leverage.

It's the right move and Congress should act. (And encourage UK authorities to act similarly regarding the International Petroleum Exchange in London)

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