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'Enron loophole' enables oil speculation

By Patrice Hill (Contact) | Tuesday, June 24, 2008

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The speculative trading that has helped drive oil prices over $135 a barrel continues largely unchecked despite much talk and repeated attempts by Congress and regulators to rein it in this year, top analysts say.

As much as 99 percent of the market for U.S. premium crude oil is dominated by big financial firms, hedge, pension and index funds seeking short-term profits from oil's rise. The speculative free-for-all is enabled by a regulatory exemption called the "Enron loophole," after the now-defunct Houston energy trading firm that successfully lobbied for its enactment in 2000.

Charles Biderman, chief executive officer of TrimTabs Investment Research, which tracks the flow of money into oil investments, said the more than $2 billion a month flooding into commodity index funds and other oil investments has the potential to create a financial disaster.

"At current oil prices, the U.S. is going broke, and the rest of the world is sure to follow," he said. "At $135 per barrel, the U.S. will spend $1 trillion per year on oil, which is equal to 15 percent of the $6.8 trillion in take-home pay of everyone who pays taxes."

Mr. Biderman said regulators need to take aggressive action to burst the speculative bubble, but have not done so despite much talk at the Commodity Futures Trading Commission about investigating and pursuing illegal manipulation in the oil market.

"Oil prices would collapse if regulators increased" the cash requirement for oil futures contracts to 25 percent from the current 7.5 percent, he said. Other analysts suggest raising the cash requirement as high as 50 percent and imposing an overall limit on participation by financial players in oil trading on the New York Mercantile Exchange.

The commodity commission imposes minimal standards on speculators in New York and allows as much as 30 percent of oil trading to escape U.S. regulation altogether by exempting trades routed through overseas electronic exchanges. The commission has given control over those transactions to regulators in London and Dubai who have been granted jurisdiction over the leading U.S. oil contract for West Texas Intermediate crude.

The foreign exchanges gained control over oil trading through the Enron loophole, which granted an exemption from regulation to electronic energy trading, which was a small part of the market in 2000. But since that time, electronic trading has burgeoned to the point that even the New York exchange last year sought to join those escaping regulation by teaming up with the Dubai Mercantile Exchange.

"I'm sure that American consumers will take little comfort that they are being protected from manipulation and excessive speculation driving up gas prices - not by U.S. regulators but by the Dubai government," said Michael Greenberger, a University of Maryland law professor and former head of the commodity commission's division of trading.

Congress sought to close the "dark markets" created by the Enron loophole in a provision of the farm bill that was enacted over President Bush's veto this month.