W.C. Fields, noted American comic and actor, when caught reading the Bible, was quoted to have said: "I'm looking for loopholes." A loophole is also what Senator Barack Obama, presumptive Democratic presidential nominee, aims to plug, among other things, in his proposed four-step program to curb oil speculation and stabilize skyrocketing gas prices. This thing currently in Obama's crosshairs is called the "Enron loophole."
Eight years ago, the influential energy trading lobby was able to push legislation exempting their electronic trades of energy futures from US regulation. This so-called "Enron loophole," is being blamed by Sen. Obama's camp on former Sen. Phil Gramm, a Texas Republican, who allegedly inserted a provision into a bill in late 2000, which was later signed into law by the last Democratic president, Bill Clinton. It is widely estimated that the speculative component in the currently skyrocketing oil prices accounts for some $20 to $25 per barrel.
The latter is, more or less, consistent with testimonies recently made at U.S. congressional hearings, as reported by CNNMoney.com:
Near-record oil prices could quickly fall by half if Congress were to rein in speculators, according to testimony Monday from a hedge fund manager and oil company adviser on Capitol Hill.
Michael Masters, of Masters Capital Management, told a subcommittee of the House Energy and Commerce Committee that - with greater regulation - oil prices could drop to $65 or $70 a barrel within about 30 days.
"That's half of where prices are today, and gas prices would reflect that," he said.
Roger Diwan, an adviser to oil companies at Washington, D.C.-based PFC Energy, agreed that regulation could lead to a drop in prices. He said it would take no more than 30 days for speculation in the oil market to decrease and gas prices to fall.
With more regulation, "prices will reflect closer the marginal cost of producing oil," Diwan said.
This is why I get so confused reading this report on Prime Minister Gordon Brown's position at the recently concluded one-day summit of oil producers and consumers convened by Saudi Arabia:
Gordon Brown clashed with leading oil-producing nations yesterday, insisting that surging demand from the developing world rather than speculative pressures was driving up oil prices and creating an oil crisis to match those of the 1970s.
Where is he coming from? No less than the OPEC president, Chakib Khelil, said on the same conference that, "the price is disconnected from fundamentals" and that, "It is not a problem of supply." Following the same line of argument, the Indian finance minister, Palaniappan Chidambaram, was more specific:
"Surely demand and supply cannot explain what has happened over the last 12 months," he said. "Oil prices were $70 a barrel in August 2007 and how is it that they've doubled when there has been no dramatic change in demand?"
Then again, the "Enron loophole" reconciles everything in my mind. Sen. Obama should really make good on closing that sneaky legacy from an unscrupulous corporate titan which met an ignominious end. It's time he changed the rules--for the benefit, not just of U.S. consumers, but of consumers the whole world over.
3 comments:
There is a grassroots viral marketing-campaign to close the Enron Loophole. This website makes it easy for you to email your Senators and voice your opinion, and viral campaigns can multiply like a virus and have a huge impact if they reach the tipping point.
Thanks for that info, James.
I have little doubt, though in the markets there is always some ;), that oil is being driven by speculation... I suspect even more than the $20-$25 you have qouted here. Certainly the fundamentals don't seem to stack up from a demand and supply perspective. In additon long term intermarket correlations are unwinding. The size of departure from the 'norm' is just too big to account for any underlying market changes. I am waiting to short Crude, and will do so when my models give me the signal.
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