Easy Money Investing

When it comes to high energy prices, OPEC is quickly losing its status as Public Enemy No. 1. Alongside Big Oil, where profits are fattening as gas prices rise, a new bogeyman has emerged: the oil speculator. With the stock market in retreat so far this year and the dollar crumbling, these investors have flooded the commodities markets in hopes of cashing in on (BusinessWeek.com, 1/17/07). High oil prices are creating a ripple effect of inflation that’s angering consumers; gasoline prices topped yet another new record on May 14, an average of $3.76 per gallon.

“We are witnessing a substantial influx of speculative money into energy markets,” Senator Jeff Bingaman (D-N.M.) said May 12 on the Senate floor. “It is bidding up the price of oil beyond any reasonable level. Every consumer can see it at the pump. But we do not have any serious effort to regulate that speculation, or even to notice it.” Tighter Regulation on Onions

Now Bingaman and other members of Congress say they’re ready to shed regulatory light on the international oil market. On May 7, Senate Majority Leader Harry Reid (D-Nev.), Bingaman, and others unveiled the Consumer-First Energy Act, which they say addresses the oil price spike at its root. The proposal would mandate higher cash collateral for energy-futures trading and call for greater oversight of overseas trading. The bill, which contains four other provisions, could come to a vote by Memorial Day.

Would U.S. legislation to curb oil futures accomplish its goal? With so little information not only on oil trading but also (BusinessWeek, 5/14/08), it’s impossible to say exactly what impact the legislation could have. But considering the vast size and scope of the global oil market, it’s unlikely the bill would significantly rein in prices. Still, debate about the bill and Congressional investigations on speculation may offer more data on a market that is both poorly understood and immensely important to the global economy.

“We regulate the trading of onions much more closely than the trading of oil,” says Mark Cooper, research director for the Consumer Federation of America, a nonprofit advocacy group, referring to federal rules covering agricultural commodities. “Regulation will bring some discipline to this raw speculation.” Changed Market, New Fundamentals

The explosion in the number of financial players in the energy markets has occurred especially in the past two years, which also happened to be a period of soaring energy prices. There are now 634 energy hedge funds, up from just 180 in October, 2004, says Peter Fusaro, founder of the «investing.businessweek.com», an energy-trading information firm. Of the total funds now, 210 are strictly energy commodity funds trading oil or oil futures and options, as opposed to the stocks of energy companies such as ExxonMobil («www.businessweek.com») and Chevron («www.businessweek.com»). Large financial institutions such as Goldman Sachs («www.businessweek.com») and Morgan Stanley («www.businessweek.com») have also stepped up their participation in the energy markets.

More money has flowed into commodities as a hedge against the falling value of the dollar and as an investment alternative to a rocky stock market. These fund flows have influenced oil prices heavily, leading some analysts to conclude that the dollar’s value and interest rates are the new fundamentals in the oil markets, replacing supply and demand.

Trading takes place on exchanges such as the New York Mercantile Exchange («www.businessweek.com») and the London-based Intercontinental Exchange («www.businessweek.com»). The New York Mercantile Exchange is regulated by the U.S. Commodity Futures Trading Commission (CFTC), and ICE is regulated by the «investing.businessweek.com». Neither NYMEX nor ICE disclose the proportion of oil futures trades they oversee. Philip Verleger, an energy economist and president of Aspen, (Colo.)-based consulting firm PKVerleger LLC, estimates that the global futures market in petroleum is currently valued at about $500 billion. Trading also occurs in the electronic or over-the-counter (OTC) market, which neither the U.S. nor the U.K. regulates. Verleger estimates the OTC market for petroleum is valued at between $1.5 and $3 trillion.

When it comes to high energy prices, OPEC is quickly losing its status as Public Enemy No. 1. Alongside Big Oil, where profits are fattening as gas prices rise, a new bogeyman has emerged: the oil speculator. With the stock market in retreat so far this year and the dollar crumbling, these investors have flooded the commodities markets in hopes of cashing in on (BusinessWeek.com, 1/17/07). High oil prices are creating a ripple effect of inflation that’s angering consumers; gasoline prices topped yet another new record on May 14, an average of $3.76 per gallon.

“We are witnessing a substantial influx of speculative money into energy markets,” Senator Jeff Bingaman (D-N.M.) said May 12 on the Senate floor. “It is bidding up the price of oil beyond any reasonable level. Every consumer can see it at the pump. But we do not have any serious effort to regulate that speculation, or even to notice it.” Tighter Regulation on Onions

Now Bingaman and other members of Congress say they’re ready to shed regulatory light on the international oil market. On May 7, Senate Majority Leader Harry Reid (D-Nev.), Bingaman, and others unveiled the Consumer-First Energy Act, which they say addresses the oil price spike at its root. The proposal would mandate higher cash collateral for energy-futures trading and call for greater oversight of overseas trading. The bill, which contains four other provisions, could come to a vote by Memorial Day.

Would U.S. legislation to curb oil futures accomplish its goal? With so little information not only on oil trading but also (BusinessWeek, 5/14/08), it’s impossible to say exactly what impact the legislation could have. But considering the vast size and scope of the global oil market, it’s unlikely the bill would significantly rein in prices. Still, debate about the bill and Congressional investigations on speculation may offer more data on a market that is both poorly understood and immensely important to the global economy.

“We regulate the trading of onions much more closely than the trading of oil,” says Mark Cooper, research director for the Consumer Federation of America, a nonprofit advocacy group, referring to federal rules covering agricultural commodities. “Regulation will bring some discipline to this raw speculation.” Changed Market, New Fundamentals

The explosion in the number of financial players in the energy markets has occurred especially in the past two years, which also happened to be a period of soaring energy prices. There are now 634 energy hedge funds, up from just 180 in October, 2004, says Peter Fusaro, founder of the «investing.businessweek.com», an energy-trading information firm. Of the total funds now, 210 are strictly energy commodity funds trading oil or oil futures and options, as opposed to the stocks of energy companies such as ExxonMobil («www.businessweek.com») and Chevron («www.businessweek.com»). Large financial institutions such as Goldman Sachs («www.businessweek.com») and Morgan Stanley («www.businessweek.com») have also stepped up their participation in the energy markets.

More money has flowed into commodities as a hedge against the falling value of the dollar and as an investment alternative to a rocky stock market. These fund flows have influenced oil prices heavily, leading some analysts to conclude that the dollar’s value and interest rates are the new fundamentals in the oil markets, replacing supply and demand.

Trading takes place on exchanges such as the New York Mercantile Exchange («www.businessweek.com») and the London-based Intercontinental Exchange («www.businessweek.com»). The New York Mercantile Exchange is regulated by the U.S. Commodity Futures Trading Commission (CFTC), and ICE is regulated by the «investing.businessweek.com». Neither NYMEX nor ICE disclose the proportion of oil futures trades they oversee. Philip Verleger, an energy economist and president of Aspen, (Colo.)-based consulting firm PKVerleger LLC, estimates that the global futures market in petroleum is currently valued at about $500 billion. Trading also occurs in the electronic or over-the-counter (OTC) market, which neither the U.S. nor the U.K. regulates. Verleger estimates the OTC market for petroleum is valued at between $1.5 and $3 trillion.