U.S. legislators are considering limits on the number of oil contracts an investor can hold and may increase disclosure requirements. Speculators such as Goldman Sachs Group Inc. use the practices to bet on price swings, which may drive up prices, though they have no intention of taking delivery of underlying goods, lawmakers say.
Proposals being debated this week in the Senate would bring prices more in line with demand, proponents say. Excluding the effect of speculation, oil would be around $80 a barrel, 38 percent lower than yesterday's price, according to Jesus Reyes Heroles, the chief executive officer of Petroleos Mexicanos. Critics say restrictions may interfere with the functioning of a $4 trillion annual market for crude oil.
``Americans are being taken advantage of not only by OPEC but by speculators right here in our own country,'' says Senator Ted Stevens, an Alaska Republican, referring to the Organization of Petroleum Exporting Countries. ``Historically, this has not been a bad problem. Only recently has speculation reached these unsustainable levels.''
Investor control of contracts to buy crude oil in New York almost doubled in April from five years earlier as prices climbed, according to the Commodity Futures Trading Commission. Increased energy costs have slowed the economy, reduced consumer buying power and angered voters.
Oil, Futures Decline
Crude oil for August delivery fell $3.09, or 2.4 percent, to settle at $127.95 a barrel yesterday on the New York Mercantile Exchange. The number of outstanding crude oil futures in New York fell to the lowest in 17 months as the Senate began considering legislation to limit speculation in oil markets.
Republicans in the Senate may allow a vote on limits as soon as tomorrow, according to Alaska Republican Senator Lisa Murkowski. The House plans a vote before members start a monthlong break in August. President George W. Bush has signaled he will consider any resulting legislation.
At least 15 proposals are circulating in Congress. Measures proposed by Democratic Senate Leader Harry Reid of Nevada and his Republican counterpart, Mitch McConnell of Kentucky, would expand the CFTC's enforcement staff and give it access to data for identifying over-the-counter traders and those making U.S.- based transactions on overseas exchanges.
Other proposals would require that oil traders report their holdings, eliminating large, untraceable purchases by individuals. Capping the number of contracts held by an investor would prevent small groups from pushing prices higher or lower, says Representative Bart Stupak, a Michigan Democrat.
Lawmakers, who normally avoid major initiatives in an election year, are moving to curb oil trading as higher costs anger voters, says Kevin Madden, the former media strategist for one-time Massachusetts Governor Mitt Romney's Republican presidential campaign. Congress got a 14 percent job-approval rating in a Gallup survey last week, the lowest in the poll's 34-year history, partly because of gasoline prices.
``It's one of those issues that is motivating people to vote up or down on their local legislator,'' Madden says. ``Members are looking to go home and give voters some sort of legislative option.''
Goldman Says `Unwarranted'
Goldman Sachs and oil traders say a poorly designed measure won't reduce prices and may remove investment options that serve as a hedge against inflation. Speculators buy contracts to take on price risks that oil producers won't want or aren't allowed to accept. Oil companies use futures to hedge against price drops, says Craig Pirrong, head of the University of Houston's Global Energy Management Institute.
In a June 29 report, Goldman, Wall Street's most profitable bank, argued that the idea higher prices are part of a speculative bubble is ``unwarranted.'' The New York-based firm declined to comment through spokesman Michael Duvally.
The price reflects demand from China and India, not manipulation or excessive speculation, says William Adams, a managing director at JKV Global in Chicago, a trader of energy, grains and metals.
``Thinking that you can legislate a position in the market or that you can legislate a direction of the market would be true manipulation,'' Adams says.
Acting CFTC Chairman Walter Lukken says he has seen no evidence of the type of excessive speculation or manipulation lawmakers are targeting.
Trade groups are pressing Congress for restrictions. Nineteen organizations, including the Air Transport Association and the Consumer Federation of America, wrote Congress June 11 urging ``meaningful reforms.''
Four signers -- the Associated Builders and Contractors, the Teamsters Union, the Air Line Pilots Association and American Trucking Associations -- gave $4 million combined this year to candidates for federal office. The combined amount would be the second-largest among contributors to federal candidates.
``Sophisticated paper speculators who never intend to use the oil are driving up costs for consumers and making huge profits with little to no risk,'' the groups wrote. On June 6, when oil gained $10.75 a barrel, 22 barrels of oil were bought on paper for every barrel consumed, they said.
Reyes Heroles, the CEO of Mexico City-based Pemex, the third-largest importer to the U.S., said in a July 21 interview that he agreed with analysts who have estimated the price of a barrel of oil would be close to $80 excluding the effect of speculation.
The House and Senate have held at least two dozen hearings on speculation since early June, taking testimony from airline and trucking executives, exchange officials and regulators, and conducted at least three oil-price inquiries.
Chief executive officers of 12 U.S. air carriers including Delta Air Lines Inc.'s Richard Anderson, AMR Corp.'s Gerard Arpey and UAL Corp.'s Glenn Tilton said in a letter to customers on July 9 that ``normal market forces are being dangerously amplified by poorly regulated market speculation.''
Lawmakers point to data from the CFTC, the federal commodities regulator, showing that speculators controlled 71 percent of contracts to buy crude oil on the New York Mercantile Exchange in April, up from 37 percent five years earlier. Oil reached a record $147.27 a barrel on July 11.
McCain's `Reckless Speculation'
At least three Republicans -- Stevens and Maine Senators Susan Collins, and Olympia Snowe -- signed on to proposals backed by Democrats to limit speculation. McConnell has proposed meeting Democratic demands partway by increasing oil-market oversight.
Tony Fratto, a spokesman for Bush, won't rule out that the president may sign legislation to curb speculation, while cautioning that Congress should avoid being ``too prescriptive with market regulation.'' Increasing domestic oil production is ``the most important thing we can do'' to signal that supply will rise to meet demand, he says.
Democratic presidential candidate Senator Barack Obama of Illinois on June 22 proposed an increase in government oversight of energy markets, a requirement that oil futures be traded on regulated exchanges, development of rules for overseas markets and federal investigations into any questionable trades.
Republican candidate John McCain, a Senator from Arizona, called June 25 for immediate steps to stop ``reckless speculation'' in oil futures. McCain said he would impose new regulations to assure the integrity of the markets and didn't give details.