The Enron Loophole

What hilarious pageantry that Bush asks Saudi Arabia to increase production and they concede, as though current oil prices were based on supply and demand. When in fact, they are based on a derivatives market practically invented by the Bush family and perfected by John McCain's economic advisor, Phil Gramm.

From Jason Leopold at

Sen. John McCain says he opposes the $307 billion farm bill because it would dole out wasteful subsidies, but his chief economic adviser Phil Gramm also wants to stop its proposed regulation of energy futures trading, a market that was famously abused when Enron Corp. manipulated California’s electricity prices in 2001...

Democrats have dubbed that gap in energy futures regulation the “Enron loophole,” but it played a part, too, in the more recent attempt by the Amaranth Advisers hedge fund to corner the national gas market by shifting trades to the unregulated “dark markets” of the Intercontinental Exchange.

The “Enron loophole” also has become part of the debate over the soaring price of oil. Last week, a study sponsored by Sen. Carl Levin, D-Michigan, concluded that speculative futures markets were partly to blame for the surge in oil prices that have pushed gas at the pump toward $4 a gallon...

In 2006, the “Enron loophole” allowed Amaranth Advisers hedge fund to shift its trades from the regulated New York Mercantile Exchange (NYMEX) to the unregulated Intercontinental Exchange (ICE) in Atlanta.

That let Amaranth corner the natural gas market, betting that futures prices would rise. The hedge fund lost about $6 billion and imploded as natural gas prices fell to a two-year low in September 2006.

Meanwhile the neolibs, er rich, continue to rake it in:

Volatility in the financial markets induced by the credit crisis has helped Icap, the FTSE 100 inter-bank broker, post pre-tax profit growth of more than 30pc...

Mr Spencer shed little light on rumours that Intercontinental Exchange (ICE), the US futures and derivatives giant, was eyeing Icap for a potential takeover tilt - speculation that saw Icap shares jump 4.6pc late last week.

From F. William Engdahl at Huntington News:

in January 2006, the Bush Administration’s CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London – called “ICE Futures.”

Previously, the ICE Futures exchange in London had traded only in European energy commodities – Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange...

Then, in January 2006, ICE Futures in London began trading a futures contract for West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. ICE Futures as well allowed traders in the United States to trade US gasoline and heating oil futures on the ICE Futures exchange in London.

Despite the use by US traders of trading terminals within the United States to trade US oil, gasoline, and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts.

Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation. It may just be coincidence that the present CEO of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts.

A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controlled by a USA company based in Atlanta Georgia.

In January 2006 when the CFTC allowed the ICE Futures the gaping exception, oil prices were trading in the range of $59-60 a barrel. Today some two years later we see prices tapping $120 and trend upwards. This is not an OPEC problem, it is a US Government regulatory problem of malign neglect.

By not requiring the ICE to file daily reports of large trades of energy commodities, it is not able to detect and deter price manipulation. As the Senate report noted, “The CFTC's ability to detect and deter energy price manipulation is suffering from critical information gaps, because traders on OTC electronic exchanges and the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.”

The report added, “ICE's filings with the Securities and Exchange Commission and other evidence indicate that its over-the-counter electronic exchange performs a price discovery function -- and thereby affects US energy prices -- in the cash market for the energy commodities traded on that exchange.”

From Moira Herbst at Business Week:

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...

There are now 634 energy hedge funds, up from just 180 in October, 2004, says Peter Fusaro, founder of the Energy Hedge Fund Center, 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 (XOM) and Chevron (CVX). Large financial institutions such as Goldman Sachs (GS) and Morgan Stanley (MS) 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 (NMX) and the London-based Intercontinental Exchange (ICE). The New York Mercantile Exchange is regulated by the U.S. Commodity Futures Trading Commission (CFTC), and ICE is regulated by the UK Financial Services Authority. 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.

The problem with the proposed legislation is that for the U.S. CFTC to monitor all global oil trades in this vast market, it would need the cooperation of other governments. More regulation of U.S. oil trades would "mean nothing without cooperation from all other countries," says Fadel Gheit, senior energy analyst for Oppenheimer (OPY). "You cannot close one window and leave the other windows open." Still, proponents of the new legislation argue that the U.S. should take the lead and clean up its own backyard, setting a precedent for others.

Second, upping margin requirements—or the cost of taking positions on oil futures contracts—might not stop the speculators with the deepest pockets and could send investors to less regulated markets, which could send oil prices in any direction. The "substantial increase" in margin requirement would be adjudicated by the CFTC, and there have been suggestions that it would rise anywhere from the current levels of 5% to 7% to half of the value of the transaction.