January 18, 2022

Delegation examines oil futures Lawmakers may change electronic trading rules

AUGUSTA – Members of Maine’s congressional delegation are supporting legislation that would regulate the oil futures market the same way as other commodities, but some economists are skeptical of the proposals.

“What we are now discovering is that many traders are avoiding oversight by the Commodity Futures Trading Commission by over-the-counter or through international exchanges or by trading electronically,” Sen. Olympia Snowe said. “They could, single-handedly, contribute to raising oil prices per barrel $20 to $25. It could have anywhere from 30 to 50 cents a gallon increase for individuals.”

Snowe said she will push her legislation in the Finance Committee next month. The measure would close what she describes as a loophole in current laws. The large majority of energy trades occur on two markets, the New York Mercantile Exchange, which is regulated by the CFTC, and electronic exchanges such as the InterContinental Exchange, which are not. Most trading is on the InterContinental Exchange.

“If you make a trade on the New York Mercantile Exchange, a record is kept, an audit trail is there. But if you make a trade on an electronic trading platform, no records are kept, and there is no audit trail,” Snowe said. “Therefore manipulation and fraud are more difficult to discover. In essence, the federal government is blind. This is what we found in the California energy crisis.”

First District Rep. Tom Allen agrees. He is co-sponsor of similar legislation in the House, but he doubts it will be considered this session and thinks that if the issue moves forward it will be in the Senate.

“I don’t expect that it will move, but it is something that should happen,” he said. “It’s there for other commodities, I think it ought to be there for oil, particularly for the impact it has on our economy.”

Both measures would require commodity traders that are not reporting information to the CFTC to start following the same reporting requirements as those that do trade on the regulated exchange. Both the CFTC and the Justice Department could require the dealer to provide those records for inspection.

Commodity or futures trading is very different from most investments. When a person trades in futures, he does not actually buy or own anything. He is speculating on the direction the price of a particular commodity will take and can lose big as well as profit greatly.

“With gas prices at outrageous levels even one year after Hurricane Katrina and Rita devastated the Gulf Coast region, it is imperative that the Congress take action to ensure market prices for crude oil are not being unfairly manipulated,” Rep. Michael Michaud said.

He supports the measures and hopes Congress will act on the bills when they return to session next month.

“I strongly support that approach,” Sen. Susan Collins said. “But frankly, what I would rather see the Finance Committee concentrate on is to repeal the tax breaks that the oil and gas industry receives.”

Snowe said she has offered several proposals to repeal the oil industry tax breaks and said the tax breaks are certainly targets for repeal in the committee.

But while the delegation supports the regulatory effort, some economists are not sure that will address the problem of fluctuating oil prices that are reflected at the gas pump. Jim Hughes, an economics professor at Bates College in Lewiston, is not sure the measure will have an impact on oil prices.

“As it is the most heavily traded of global commodities, whatever you can’t do here, you can do in other world markets, so the capital will just flow elsewhere,” he said. “In and of itself, regulation of oil futures by the CFTC may or may not be a good idea.”

University of Maine economics professor Jonathan Rubin shares that opinion. He said having more “sunshine” in the trading of oil futures is good in his opinion, but whether that will result in lower oil prices is not certain.

“I really don’t expect that it will have any significant impact on oil prices,” he said. “Having more openness in trading is a good thing, but I don’t think that will have an impact on prices.”

Hughes said the futures market has been working properly. He suggested a better way to address the price issue would be policies that remove more of the risk from the marketplace.

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