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James Collura

How traders gamble with your energy dollars

IN A SERIES of hearings last week on Capitol Hill, members of Congress shed light on the most significant source of volatile energy prices -- excessive speculation and manipulation on the unregulated energy commodity futures markets.

Seven years ago, Enron lobbyists sought to free their new experiment in electronic trading, "Enron Online," from oversight by the principle regulator of energy futures and derivatives, the Commodity Futures Trading Commission. They managed to drop a loophole into an appropriations bill that has effectively exempted all electronic over-the-counter energy commodity markets from US regulation. Before this bill was passed, crude oil was under $25 per barrel and motorists enjoyed affordable gasoline.

Since then, energy commodity traders and hedge funds have poured billions of dollars into these "dark markets." According to a bipartisan report published by the US Senate Permanent Subcommittee on Investigations, excessive speculation may be responsible for as much as $20-$25 of a barrel of crude oil. Between 50 cents to $1 per gallon of gasoline may be a direct result of irrational and unethical behavior in the commodity markets. Enron may be long gone, but its legacy remains.

Few Americans realize the extent to which futures trading on dark markets determines the price they pay for energy. Daily trading has an immediate impact on the price of gasoline, heating oil, natural gas, and other fuels. A large majority of futures trading -- as much as 75 percent, according to experts -- is conducted on unregulated dark markets, as opposed to trading on regulated markets, including the New York Mercantile Exchange.

The Federal Trade Commission concluded last year that retail price gouging is not only hard to define but is virtually nonexistent, whereas "price gouging" on the commodity markets is very real. Insufficient or nonexistent US oversight has given profiteering traders and hedge funds the wiggle room they need to distort prices for personal profit -- at the expense of the American consumer.

A Senate committee investigation into the multi-billion-dollar collapse of hedge fund giant Amaranth Advisors, LLC in September 2006 illustrates the profound effect one company can have on rising energy prices. That summer, Amaranth controlled 100,000 contracts -- roughly 5 percent of the entire US annual consumption of natural gas. When the regulated New York Mercantile Exchange platform upon which they held their positions ordered them to liquidate, Amaranth traders simply moved positions to the electronic InterContinental Exchange, which is unregulated by the Commodity Futures Trading Commission.

Shortly thereafter, Amaranth's market holdings collapsed when the market turned against them, and the extraordinarily high natural gas prices -- a direct result of Amaranth's control of the market -- plummeted. As Democratic Senator Carl Levin of Michigan, the committee's chairman, said last week, Amaranth "simply wanted to speculate and hopefully make a lot of money . . . they took users and consumers of natural gas along for the ride." And it is these consumers who paid the highest price.

The energy commodity markets perform an essential economic function if they are transparent, accountable, and subject to the rule of law. But as Dr. Michael Greenberger, former CFTC enforcement officer and professor of law at the University of Maryland, said in testimony this month, "failure to regulate these markets properly has distorted and sabotaged free market principles [and] cut those markets off from the moorings of economic fundamentals."

A bill called the "Oil and Gas Traders Oversight Act" would close this loophole and bring accountability to the dark markets. Congress should pass this bill, put an end to the real "price gouging," and tell commodity market profiteers to stop playing with their constituents' wallets.

James Collura is vice president for government affairs at The New England Fuel Institute.