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Washington: Congress may outlaw elements of oil futures trading that lawmakers found distorted demand and contributed to the 69 per cent surge in prices in the past year.
US 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 per cent 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 [Organisation of Petroleum Exporting Countries] but by speculators right here in our own country," says Senator Ted Stevens, an Alaska Republican, referring to the Organisation 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.
Crude oil for August delivery fell $3.09, or 2.4 per cent, 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 signalled 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 US- 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.
Voter anger
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 per cent 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 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.
Restrictions: Trade groups
Trade groups are pressing Congress for restrictions. Nineteen organisations, 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, On June 6, when oil gained $10.75 a barrel, 22 barrels of oil were bought on paper for every barrel consumed, they said.
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