Gas could fall to $2 if Congress acts, analysts say Limiting speculation would push prices to fundamental level, lawmakers told WASHINGTON (MarketWatch) -- The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress on Monday. Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135. Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants agreed with Masters' assessment at a hearing on proposed legislation to limit speculation in futures markets. Krapels said that it wouldn't even take 30 days to drive prices lower, as fund managers quickly liquidated their positions in futures markets. "Record oil prices are inflated by speculation and not justified by market fundamentals," according to Gheit. "Based on supply and demand fundamentals, crude-oil prices should not be above $60 per barrel." Futures trading in London has not been a major factor in rising oil prices, testified Sir Bob Reid, chairman of the Chairman of London-based ICE Futures Europe. Rising prices are largely a function of fundamental supply and demand, not manipulation or speculation, he said. "Energy speculation has become a growth industry and it is time for the government to intervene," said Rep. John Dingell, D-Mich., chairman of the full committee. "We need to consider a full range of options to counter this rapacious speculation." It was Dingell's strongest statement yet on the role of speculators. Dingell introduced a bill on June 11 that would ask the Energy Department to gather the facts on energy prices, including the role played by speculators. See full story. There are two kinds of speculators in the futures markets, Masters said. Traditional speculators are those who need to hedge because they actually take physical possession of the commodities. Index speculators, on the other hand, are merely allocating a portion of their portfolio to commodity futures. Index speculation damages price-discovery mechanisms provided by futures markets, Masters added The committee will likely consider legislation that would rein in index speculation by imposing higher-margin requirements; setting position limits for speculators; requiring more disclosure of positions; and preventing pension funds and investment banks from owning commodities. Both major presidential candidates have supported closing loopholes that encourage speculation in the energy markets. Read more on Election Blog. However, other witnesses said that pure speculators have had little impact on energy prices, which have doubled in the past year to about $135 per barrel. Both Treasury Secretary Henry Paulson and Energy Secretary Samuel Bodman have dismissed the impact of speculators on prices paid by consumers. Speculators now account for about 70% of all benchmark crude trading on the New York Mercantile Exchange, up from 37% in 2000, said Rep. Bart Stupak, D-Mich., chairman of the investigations subcommittee. Stupak introduced a bill on Friday that would limit index speculation. There has been much discussion recently about how big a role speculators have been playing in the sharp rise in energy prices, though no consensus has emerged on this point. Congress, however, has grown increasingly concerned over speculative investors' role in the energy market in comparison with those buying futures contracts to hedge against risk from price changes. Lawmakers are expected to consider legislation to set strict limits -- or in some cases, an outright ban -- on speculative trading in energy futures in some markets. Dingell is looking into any legal loopholes that may have contributed to speculation in energy markets. In 1991, according to documents provided by the Commodity Futures Trading Commission to the committee's investigators, the agency authorized the first exemption from position limits for swap dealers with no physical commodity exposure. This began what Dingell said was "a process that has enabled investment banks to accumulate enormous positions in commodity markets." Is Congress barking up the wrong tree? Neal Ryan, manager at Ryan Oil & Gas Partners, said that if Congress develops regulations to cut back speculative trading, speculation will just find a new home. "Speculation is the root of capitalism," he said. "If the speculation is forced out of the U.S. exchanges, it'll simply show up on other exchanges that are OTC like the ICE, or new exchanges will pop up to allow for the spec trades to continue functioning." Ryan said he does see a reason for Congress to look at eliminating aspects such as allowing West Texas intermediate crude oil futures to trade on foreign markets and the "Enron loophole," but "these exchanges are currently functioning as they are supposed to in a free marketplace." The creation of a comprehensive U.S. energy policy that tackles issues of increasing domestic supply and reining in consumer demand via conservation should be Congress' focus, Ryan said. "Instead we're on bended knee begging the Saudis to put more oil on the market and talking about shutting down spec trades." http://www.marketwatch.com/news/story/gas-could-fall-2-if/story.aspx?guid={2673C102-68E0-41D9-9C9A-10EE2E723948}
congress better ****ing act!!!! they pay high schoolers minimum ****ING WAGE and expect us to fill our gas tanks with that BULL****.. wtf man /rant
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Things are really starting to get out of hand. I own a few coffee shops and just last week our coffee bean prices went up 25%!!!!!!! Starbucks is blaming gas prices!!!!!!!!
Can congress act to control this? Is that the way to go, or is it to let all those speculators lose their pants? DD
I don't think I fully understand "speculation" but it does seem to fly in the face of basic supply/demand logic. It's like magic ...as with anything so complex there is opportunity for people to go unnoticed while they take advantage of the system. Take ...mortgage crisis. Mortgage companies sell crappy loans who immediately lump up a bunch of customers and sell it to another company who then sells them to investment companies. All those transactions weren't just cooincidental ...but pre-planned. It's boarderline criminal. ...lust like Enron came up with a super complex scheme. Oil speculation fly's in the face of supply/demand. It just doesn't "smell right." As Judge Judy always says, if it doesnt make sense then...
I can imagine that $2 gas would do wonders for the economy. Remember when Nancy Pelosi's whole push for a democratic congress was to 'clean Washington up?' This is a good place to start since it doesn't seem like congress has done anything but investigate sports the last couple years.
I suspect that Bush would sign the legislation. A veto of legislation aimed at lowering prices at the pump would mark the death of any chance the Republicans have to win any election in the short term. Bush knows that. The political pressure to sign it would be very great. What I wonder is whether there would be enough votes to override a veto.
I know this is a bit on the negative side, but guys I gonna hold my breath and hope p!ss turns into gold, before we see below $2.00 again. Very unlikely. Can't believe it would drop $2.75 in price over 30 days? Maybe, I am pessmistic, but it would be a first.
I don't think gas will be hitting $2 anytime soon. Saudi Arabia promised more output, but that news was outweighed by fears of more attacks on oil sites in Nigeria. Everything seems to be based on speculation, and I think oil will hit $150-$175/barrell before retreating it a little bit. All the large banks have large stakes on oil reaching $150 so more than likely it will.
i am going to stick a gun in my throat and pull the trigger if i hear more people blame "speculators". this guy michael masters is a complete hack. the "speculator" blame is the laziest cop out way of viewing energy prices. almost 40% of oil's price is the weak dollar. why in the hell won't congress call someone who knows a freaking thing to testify? if you want to understand things then just go to cnbc.com go to their video section and type in rick santelli. he is one of the single best commentators on the action in the market. he is almost always right and he is very easy to understand. http://www.cnbc.com/id/15840232?video=753754816&play=1 WATCH THE VIDEO and please try to learn something guys....don't believe the bs
You know... interest rates have fallen but liquidity hasn't changed a whole lot. The price of oil- the dollar's value (and our trade deficit) are chicken and egg to me.
The thing is that the futures markets don't determine oil prices - it's the spot market. Speculators play in the future market - not in the spot market. The spot market is actual oil changing hands - it's purely based on supply and demand. So unless speculators start actually buying oil, they don't impact the currently price of oil. They don't. They play in the futures market - in which no oil actually really changes hands. It's just pieces of paper. How can the future price affect the spot price? It doesn't. A supplier isn't going to say, ya know what, I'm going to leave my ship in port and hold onto this oil because it's price will go up in 3 months. No way, the carrying cost is too high. What we are seeing is a inelastic demand curve in which demand isn't going to be affected much in the short-term by changes in supply or prices. We've also had a supply shortage as some non-Opec producers have been underproducing. Compounding that is a weak dollar. Will oil hit $200 a barrel - not this year. I think we're seeing a peak. Oil supply should increase in the later half, and demand while increasing, will eventually taper off as people learn to deal with less gas. Also, I can't imagine the dollar sinking further as the Fed has made it clear it's done with the interest rate cuts. But in the long term, so long as China and India continue to drive up global demand - we'll see high prices. Luckily, we might be in for a break as supply does seem to be increasing - just in time for the election in november. This legislation won't do much, because again, the price you pay at the pump isn't based on future contracts, it's based on the spot market. The real question is,
What about the housing boom of the past decade? Why didn't Congress act to stop speculation of speculators flipping houses and effectively pricing out millions of poor families.
