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Transparency Sought as Speculators' Activity in Oil Market Grows

The last time the U.S. experienced an oil crisis was in 1973 when OPEC imposed an oil embargo against the U.S. and other nations. These Washington Post photographs, taken in the Washington region during that time period, document the crisis at the pump. Today's pain at the pump, however, is the result of a gradual tightening of the oil markets.

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By David Cho
Washington Post Staff Writer
Monday, July 28, 2008

Big Wall Street firms representing the interests of pension funds, endowments and wealthy individuals around the country have grown in just a few years from minor participants in the oil markets to their most dominant force.

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These financial firms -- whose holdings of oil contracts are now larger than the collective demand of airlines, trucking firms and other companies that need oil to run their businesses -- have become the focus of an intense debate in Washington over whether their exponential growth is contributing to the surge in oil prices.

The agency that regulates commodity trading has been tracking some of the activities of these investors. But a year and a half ago, the Commodity Futures Trading Commission decided to keep that information secret, rebuffing thousands of requests from industry groups and individuals to make the data public. The CFTC noted in a report that only one group supported this decision: the International Swaps and Derivatives Association, which lobbies on behalf of the Wall Street firms.

The biggest financial speculators, called swap dealers, trade "futures contracts" that allow them to make money by betting on the price commodities will fetch in the future. They rarely take delivery of the goods themselves. In 2000, swap dealers held about 140,000 oil contracts, according to CFTC data obtained by a House Energy and Commerce Committee investigation. That has surged to about 1.8 million today, including a three-fold jump since 2006.

The swaps association said it was worried the release of detailed data on the activity of these dealers would reveal too much proprietary information about their holdings and trading strategies. Their investment activities are also so complex -- sometimes the trading involves commercial firms and much of it occurs on unregulated markets -- that publishing the data from just the regulated exchanges could have misled the commodity markets, the CFTC added.

At the time, the decision was little noticed on Capitol Hill. But with fuel prices breaking records this month, some lawmakers and industry associations are now accusing the CFTC of protecting the interests of Wall Street firms at the expense of consumers and other businesses that depend on oil. Critics of the CFTC noted that the former chief lobbyist from the swaps and derivatives association was appointed to the five-member commission last summer.

"We have been calling continually for greater transparency in the energy futures markets, and anything short of full disclosure to the general public fails to meet the definition of transparency," said Air Transport Association of America chief executive James C. May. "We understand the need for CFTC to process the data it is collecting, but it is imperative to share that data with the American public with the utmost speed."

CFTC officials denied they have been anything less than forthright. "The agency has always been and continues to be committed to market integrity and to market transparency," a CFTC spokesperson said in an e-mail.

The agency formed a task force that has made an "unprecedented" request for detailed trading information from Wall Street brokers about the extent of their activities in both regulated and non-regulated markets, the e-mail said. The CFTC plans to submit a report to Congress by Sept. 15 that will "include recommendations for improved practices and controls, should they be required," it said.

The report will also include "some form" of the data found by the agency, said CFTC spokeswoman Ianthe Zabel. She said she could not be more specific because the information was still coming in.

Last week, the CFTC released an interim report that stated oil speculators had no impact on prices. But the report sparked criticism within the agency. Bart Chilton, a Democratic commissioner, said the Republican-dominated CFTC was only developing data that support the Bush administration's view that oil prices are unaffected by speculation.

"Senior Administration officials, including but not limited to the Secretary of Treasury and the Secretary of Energy, have already opined in recent weeks and months that speculators are not having an impact on the record rise in crude oil prices," Chilton said in an e-mail. "I'm not surprised, therefore that the staff who work for them, and who comprise the staff of the 'task force,' have not contradicted their superiors in this study."

CFTC acting chairman Walter Lukken, as well as top regulators such as Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke have testified in Congress that the growth of commodity speculators does not necessarily translate into higher prices because about half of these investors are betting the price of oil will fall and the other half believe it will rise. These trades cancel each other out, the regulators say. Some of the nation's most prominent economists and financial analysts have expressed divided opinions on the issue.

That hasn't stopped lawmakers from pursuing the matter. Democrats have proposed more than a dozen bills in recent weeks targeting speculative activity. These lawmakers say regulators may be blind to the activities of speculators because much of oil trading occurs on overseas markets, which are lightly regulated. Dozens of Wall Street firms have also obtained exemptions from the CFTC and from regulated exchanges to hold more oil contracts than laws allow.


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