The quaint portrait of a silver-haired farmer overlooks the hearing room of the House Agriculture Committee at the Capitol in Washington. It's a throwback to the days when the committee's business was most concerned with whether a drought might wipe out the season's corn crop, or whether an early frost could drive orange juice prices through the roof.
But these days the delegates of the National Association of Wheat Growers have company. Slick-dressed representatives of commodities exchanges prowl the halls of Congress, lobbying against a slew of legislation aimed squarely at the heart of their enterprises.
At the latest round of committee hearings July 10-11, tanned and fresh-faced Charles Vice, president and chief operating officer of IntercontinentalExchange (ICE), warmly greeted Greg Zerzan, head of global public policy for the International Swaps & Derivatives Assn. (ISDA). James Newsome, president and CEO of the New York Mercantile Exchange (NMX), arrived looking a bit weary as he greeted colleagues with a smile; he'd had to rearrange plans with his family to attend the hearing. Aides and assistants swirled around them, tapping into BlackBerrys and talking hurriedly on Bluetooth devices.
In this summer of torrid gas prices, a veritable witch hunt has been launched to determine a culprit for the oil price surge. Various congressional committees and subcommittees have convened more than a half-dozen hearings in recent weeks on the issue of oil markets. The Agriculture Committee, venue of the latest public skirmishing, has oversight of commodity futures trading. So far this year, lawmakers have proposed 19 bills that would increase scrutiny or regulation of commodities trading.
In response, notoriously tight-lipped hedge funds and derivatives traders and other investors are stepping forward to explain why they do not deserve to be the whipping boys for a public confused and angry over exorbitant fuel prices. Executives and lobbyists are urging politicians to stop the finger-pointing. They have been stating their well-reasoned cases that speculation is actually good for the market's integrity—not to mention for consumers and retirees whose pension funds are profiting from lucrative commodity investments.
The Honorable Skeptic from Minnesota
At the two-day hearing, trading executives explained that supply and demand are inflating the price of oil; the market is merely the messenger of an unpopular reality. "No one likes to pay $5 [per gallon] for gas, but at the end of the day it's not the market's fault," Zerzan told the committee. On July 11, the hearing's second day, the messenger delivered another milestone: Crude prices reached a new intraday trading high of $147.27 per barrel, before settling at $145.08.
The ISDA, which Zerzan leads, is the trade group for over-the-counter derivatives traders, and has been among the leaders in the lobbying effort against greater oversight of oil trading. Atlanta-based IntercontinentalExchange operates a commodities exchange, with physical operations in London and New York but an electronic platform that stretches across the world.
Representative Timothy Walz (D-Minn.) greeted the speculators' arguments with skepticism. At one point, he noted that U.S. airlines are among those industries under serious threat from soaring energy prices, and they are calling for more oversight of oil trades. He asked Zerzan, the swaps and derivatives chief, what explanation he could offer Walz's constituents and large companies based in Minnesota, such as Northwest Airlines (NWA).
"Northwest should have gotten a swaps agreement," said Zerzan, referring to the successful use of hedging in the oil markets (BusinessWeek.com, 5/7/08) by Southwest Airlines (LUV). Because of extensive hedging contracts on its fuel purchases, Southwest is the only major U.S. carrier that has remained profitable. The airline also has much of its expected fuel use covered for 2009 at prices far below the current market rate. Walz pressed him further, pointing to the growing chorus of voices targeting speculation: "So ExxonMobil (XOM), consumers, Northwest Airlines…everybody's wrong but the commodities traders?" asked Walz. "We haven't found a better method [than trading] to determine prices," Zerzan replied.
Battle Lines for the Media Campaign
The speculators' defense has expanded beyond the halls of Congress and into the media. IntercontinentalExchange has begun an aggressive advertising campaign in The Washington Post (WPO), Web site Politico, and other venues warning of "unintended consequences" if Congress acts hastily to boost regulation of oil trading. Next to a large picture of an onion, the headline of the ad reads: "If you make laws in a hurry, it's bound to end in tears."
The text of the campaign points to Congress' 1958 ban on futures trading in onions as farmers blamed futures markets for price fluctuations. What followed was a rocky road for onion prices, which increased 400% in late 2006 and 2007, crashed 96% this past March, and surged 300% in April, according to the ad. "From oil to onions, well-regulated futures markets create stability and predictability by allowing consumers to hedge price risks," the print ad reads. "So maybe when you peel the onion, the futures markets work a little better than some people think."
At the same time, a coalition of transportation interests led by a dozen large U.S. airlines has launched a campaign to enlist Americans' support in pressing Congress to curb oil futures trading. "As largely unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands," says the group's Web site, www.stopoilspeculationnow.com. And so the debate rages.