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By Jason Simpkins
The price of oil edged up again yesterday (Tuesday), before settling at $137 a barrel flat, as concerns about short-term supplies continues to overwhelm Saudi Arabia's recent pledge to boost production. With Saudi Arabia offering some, albeit limited, cooperation, Congress has turned its ire on speculators and investment banks.
First, demand from China and India was to blame for soaring oil prices. Then the weak dollar, the member nations of OPEC, Big Oil, and now investment banks take their turn in the rotation as politicians scramble to find a suitable scapegoat in an election year.
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Lawmakers have introduced nine different bills concerning speculation in the oil market. Four separate hearings have been scheduled for this week, including Monday's hearing before the House Energy and Commerce Committee concerning foreign trade regulation.
"I have dark suspicions about the effects that unchecked speculation and possible market manipulation are having on the price of crude oil and petroleum products," Committee Chairman John Dingell said. "Congress should act to determine the precise effects that manipulation and speculation are having on energy prices, and work to identify where there are gaps in regulation that allow this rampant speculation."
Dingell suggested Congress set firm limits on the size of energy speculators' positions, require full disclosure of all energy trading from investment banks, and prevent pension funds from investing in commodities to diversify their holdings.
Five of the nine proposed bills involve the regulation of foreign oil trading. Some proposals would allow only American investors to trade oil on regulated exchanges, while others would have the U.S. Commodity Futures Trading Commission collect data from foreign trade boards.
For support, the committee turned to a panel of energy-market participants who testified that tighter regulation of the market would take the air out of oil prices.
"We're not talking about [an oil price] bubble; we're talking about a tumor," said Michael Masters, of Masters Capital Management. "It grows and grows, and it's hurtful as it expands. But now we have discovered the tumor and we should take it out immediately."
Masters said that proper regulation of oil futures trading would cut prices back down to $70 a barrel in 30 days.
"I firmly believe that the current record oil price in excess of $135 per barrel is inflated," Fadel Gheit, managing director and senior oil analyst at Oppenheimer & Co. (OPY), said. "I believe, based on supply and demand fundamentals, crude oil prices should not be above $60 per barrel."
Afterwards, Rep. Bart Stupak (D-Mich.) asked Gheit if there was an "actual or apparent conflict" when the commodities research divisions of Wall Street investment banks project oil prices to rise beyond $150 and $200 a barrel at the same time the firms are investing their own money in the market.
"Unequivocally and absolutely yes," was Gheit's response, according to BusinessWeek.
The Energy and Commerce subcommittee also released new data it said came from the Commodity Futures Trading Commission that showed speculators have increased their share of futures contracts to about 70% in April from 37% in 2000.
However, not every analyst believes speculators are the only ones to blame, or that tighter market regulation is the answer.
"There is no evidence that the current price of oil is being driven by speculators or hedge fund activity, or by anything else that's going on the financial side," Severin Borenstein, who heads the University of California Energy Institute, told NPR. "Every day, real supply and real demand are meeting in the physical oil market and trading at prices of $130 a barrel. It's hard to see how financial traders could be causing that to happen."
"There's a good chance trading will be done overseas if [the] U.S. market becomes overly regulated," a spokesman for the Futures Industry Association, told CNNMoney. "If you make life too difficult for people to do business in [the] U.S., they'll just leave, because it's much more difficult to regulate phone conversations in Dubai."
Who's Paying the Price
While market analysts and members of Congress try to determine just who is most responsible for high oil prices, businesses and consumers are picking up the tab.
The United States consumes, on average, 21 million barrels of oil per day. According to Forbes Magazine, at $135 a barrel, the United States is spending roughly $1 trillion a year on oil, which is equal to 15% of the combined $6.8 trillion of income of everyone who pays taxes.
Things could get even worse as hard-pressed companies continue to trim payrolls. The national jobless rate ticked up to 5.5% in May, versus 5% the month before. And the Gerson Group recruiting firm recently estimated another 175,000 jobs could be shed from the financial sector in the next 12 months.
"The worst is yet to come," Russ Gerson, head of the New York based group told Bloomberg News. "We are going to have a major contraction. This is affecting all areas of the investment banking universe and it's affecting all areas globally."
If you think multimillion-dollar corporations are getting off easy, think again. High oil prices have hammered airline companies who are losing customers because they are forced to pass the fuel costs on. Both United Parcel Service Inc. (UPS) and FedEx Corp. (FDX) have found themselves in similar situations and have been forced to lower their second-quarter earnings expectations.
The Dow Chemical Co. (DOW) said yesterday that soaring costs for energy and raw materials are forcing the company to charge as much as 25% more for its products, beginning in July.
"The staggering increase in our costs over the past few months have forced us to take these further measures in order to restore our margins," Dow Chief Executive Officer Andrew Liveris said in a statement.
Dow raised prices for June by 20%, and that was the biggest boost in the company's 111-year history.
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