House passes bill to reverse oil price increases
Posted
Jun 27 2008, 01:49 AM
by
Andrew Horowitz
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After the close of the markets Thursday, as the fear of a continued parabolic rise in the price of oil was still fresh on the minds of investors, the U.S. House of Representatives approved a bill that that could help to reverse the direction of oil prices.
The bill would provide for the Commodity Futures Trading Commission (CTFC) to enact emergency measures to “maintain or restore orderly trading.” Concurrent to the bill’s approval, the CTFC released a notice that spells out the broad powers granted by Congress that have been used when the commodity markets have been manipulated in the past. Yes, manipulation.
This is not a new discussion, as it has been the focus of several congressional panels that have convened to discuss the potential price manipulation that is occurring within the energy markets. They have focused on the "Enron Loophole" that was partially closed with the recent passage of the Farm Bill. Partially because the loophole that was supposed to close in order to curb excess speculation and add regulatory oversight aimed at energy speculators, only included the natural gas market. Not oil futures!
(Click HERE for more on the Enron Loophole and the history of the CFTC Reauthorization Act)
What happened to the oil component? Good question indeed…
One of the most outspoken on the subject of these questions and commodity manipulation has been Professor Michael Greenberger. The former Director of the Division of Trading and Markets for the CTFC has been openly critical about the “dark market” trading of oil futures that has gone unregulated since the 2000 Enron Loophole was opened. He has been testifying before Congress over the past several months and is convincing in his thesis.
Could this bill's passage be the solution that will tame this raging commodity market, which left unchecked, will surely bring our economy to its knees? Greenberger has said that a good 25% will come off the price of oil if the manipulative speculation pressures are removed.
One thing we do know is that the CTFC isn't fooling around. Only a few times in history have they enacted their special powers. Each of the past conditions were excessive and out of control as well:
-- November 1976, Maine Potatoes Traded on NYMEX: This involved a threat of manipulation in an expiring contract. In November 1976, the Commission declared an emergency and ordered the exchange to impose 100% margins on all accounts and to limit trading in this contract to liquidation only.
-- December 1977, Coffee Traded on New York Coffee and Sugar Exchange: This again involved a threat of manipulation in an expiring contract. In November 1977, the Commission, in conjunction with the exchange, declared an emergency and ordered a phased liquidation of all positions subject to a prescribed schedule.
-- March 1979, Wheat Traded on CBOT: This again involved a threat of manipulation in an expiring contract. In early 1979, the Commission declared a market emergency and ordered a one-day suspension of trading so the exchange could take further regulatory action. Subsequently, based on its belief that an emergency continued to exist, the Commission ordered the exchange to suspend all further trading in the contract and to settle any contracts remaining after the delivery period expired at the last prevailing settlement price for that contract.
-- January 1980, Soviet Grain Embargo: In January 1980, when President Carter imposed the Soviet grain embargo after the USSR invaded Afghanistan, the Commission declared an emergency and suspended trading for two days in futures for wheat, corn, oats, soybeans, soybean meal and soybean oil that were traded on four different exchanges. The Commission acted because, in its view, the sudden shock to the market and uncertainties concerning unannounced USDA plans to compensate those affected by the embargo would render the markets temporarily incapable of accurately reflecting the forces of supply and demand. The two-day suspension gave the markets time to consider the USDA support programs in light of the embargo action.
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Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
