Oil: Wall Street vs. Main Street

It's the interests of pension-fund managers against those of waitresses as Congress digs into the controversy surrounding oil speculation

Are oil speculators just making sure they retire comfortably—or bleeding working Americans? It depends on your perspective.

On a day when oil futures prices shot up more than $5 per barrel, to $141.65, a congressional hearing on oil speculation heard from both proponents of unfettered commodity trading and those who would rein it in.

Representatives of Wall Street traders told the House Agriculture Committee at the July 10 hearing that more oversight of the oil market would cause consumers more pain than relief. Barring certain types of investors from commodities markets would send investment offshore, they said. And because much of the money being invested in oil futures contracts is coming from pension plans, such a move would "put at risk the retirement funds of the very workers it intended to help. In effect, it would be robbing Peter to pay Paul," said Robin Diamonte, on behalf of the Committee on the Investment of Employee Benefit Assets (CIEBA), the lobbying group for corporate pension plans.

But other witnesses said that the massive influx of investment into commodity markets is taking a great toll on working Americans. Representative Steve Kagen (D-Wis.) spoke of a waitress in his district earning $2.43 an hour plus tips who is spending 25% of her paycheck on gas and having trouble raising her children. "We are in a very real crisis, and we have to take it seriously," said Kagen.

A Painful, Rising Cost

The hearing was the latest public airing of a debate over the role speculators are playing (BusinessWeek.com, 7/9/08) in boosting oil prices, and what government should do, if anything, to stop them. For the past two months, Congress has been roiling over the politics of oil as pressure mounts for the U.S. government to relieve consumers and businesses from the sting of $4-a-gallon gasoline, high-priced jet fuel, and other fast-rising petro prices. On July 9 six members of Congress laid out bills aimed at curbing speculation. Testimony will continue July 11.

Also on July 10, Acting Chairman Walter Lukken said the Commodity Futures Trading Commission would issue a report on its oil markets investigation in the coming weeks. The final report is due on or before Sept. 15. He told a House Appropriations subcommittee that the CFTC has seen no evidence so far that speculators are driving record oil prices.

At the House hearing, some little-seen members of Wall Street pleaded their case. Greg Zerzan, counsel and head of global public policy for the International Swaps & Derivatives Assn. (ISDA), and Charles Vice, president and chief operating officer of IntercontinentalExchange (ICE), defended the current trading regime and talked of the virtues of speculation.

They urged Congress to trust the market to allocate resources. Far from undermining the interests of Main Street, Zerzan and Vice argued, banks like Goldman Sachs (GS) and Morgan Stanley (MS) are actually helping airlines and pension funds hedge against inflation when they engage in swaps deals for oil trades. "Removing swap dealers [from the market] would mean their clients wouldn't be able to obtain their protection," said Zerzan. "That risk would be passed on to consumers."

Working to dispel the notion that speculators are the enemy of consumers, the CIEBA's Diamonte said commodities investing helps companies effectively manage $1.5 trillion in assets on behalf of 17 million beneficiaries. "We owe it to working Americans and their families to ensure that any contemplated policy changes, no matter how well-intentioned, do not undermine their retirement," Diamonte said. Participants should be able to follow "modern portfolio theory" and not "subjugate the retirement of millions of Americans and their families to other social or political concerns." In other words, the government should not "intrude" to "micromanage pension plan investments."

Does the Market Allow Distortions?

At the heart of the debate is a fundamental disagreement on whether the architecture of the market allows for price distortions. It is clear that more investor dollars are flowing into the oil markets; investments by institutional investors such as pension funds rose from $13 billion in 2003 to $260 billion in 2008.

Does such movement in itself raise prices beyond what supply and demand would dictate? The ISDA's Zerzan told Congress it can't. Since there is a buyer and a seller (BusinessWeek.com, 7/8/08) for every contract, trading is a "zero sum game" that itself cannot push prices higher.

Proponents of more oversight disagree.

"Is there any market in which $260 billion in new investment doesn't move the price higher?" said Jeffrey Korzenik, chief investment officer of Vitale Caturano "I don't think so."

Different Conclusions

Representatives of various industries also testified in support of more government oversight of the market.

"Consumers should not be forced to pay a 'speculative premium,'" said Michael Comstock, director of the Arizona Gas System, on behalf of the American Public Gas Assn. Companies including Dow Corning, Goodyear (GT), BASF (BASF.DE), U.S. Steel (X), Tyson Foods (TSN), and International Paper (IP) have signed on to support Representative Bart Stupak's (D-Mich.) 2008 PUMP Act, which would close alleged loopholes "allowing speculators to artificially inflate energy prices." Also, several large U.S. airlines have sent letters to frequent fliers asking them to lobby Congress in favor of greater regulation of oil speculation.

After hours of testimony, members of Congress were still trying to understand how the market actually functions, and how to proceed. "We have thoroughly knowledgeable people reaching different conclusions," said House Agriculture Committee Chairman Collin Peterson (D-Minn.).

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