Bill would rein in trading in energy futures

San Francisco's own Sen, Dianne Feinstein is introducing legislation forbidding recipients of federal bailout largess ? Wells Fargo got $25 billion, you will recall ? from using any of that money for lobbying purposes.Senate Intelligence Committee member Sen. Dianne Feinstein, D-Cailf., talks with reporters on Capitol Hill in Washington, Thursday, April 24,2008, following a closed-door briefing of the committee. (AP Photo/Susan Walsh) less San Francisco's own Sen, Dianne Feinstein is introducing legislation forbidding recipients of federal bailout largess ? Wells Fargo got $25 billion, you will recall ? from using any of that money for lobbying ... more Photo: Susan Walsh, AP Photo: Susan Walsh, AP Image 1 of / 1 Caption Close Bill would rein in trading in energy futures 1 / 1 Back to Gallery

As gas prices continue to soar, Congress is preparing to rein in speculative trading in energy futures markets by major institutional investors and hedge funds, which is seen as a key factor in driving up oil prices.

Legislation introduced Friday by Sens. Dianne Feinstein, D-Calif., and Ted Stevens, R-Alaska, would require the Commodity Futures Trading Commission to set limits on how much these investors - including pension and retirements funds - can invest in certain commodity markets.

The commission already sets limits on the holdings any one investor can have in a commodity to prevent speculation. But many larger institutional investors have exploited an exemption that allows them to bypass those limits if they make the trades through dealers or brokers.

"This gives institutional investors an unfair advantage in the marketplace - and is contributing to the skyrocketing energy market prices," Feinstein said. "It's time to level the playing field and require position limits for all investors."

Major institutional investors have flocked to invest in commodity markets in recent years.

Since 2003, investment in commodity index funds, run by banks like Goldman Sachs, has grown from $13 billion to $260 billion, a twentyfold increase. Energy expert Daniel Yergin has said, "Oil has become the 'new gold' - a financial asset in which investors seek refuge as inflation rises and the dollar weakens."

But lawmakers and some energy analysts say the avalanche of investment has distorted these markets and raised the prices that consumers pay for gas and food staples like rice and corn.

Michael Masters, a portfolio manager, told Congress last month that index speculators had bought the equivalent of 1.1 billion barrels of oil - eight times as much as the United States has added to the Strategic Petroleum Reserve over the last five years. Speculators also had purchased enough corn futures to fuel the entire U.S. ethanol production for a year.

Masters said the strategy is to buy futures contracts for items in limited supply and hold them - which he called "virtual hoarding."

"Individually, these participants are not acting with malicious intent," he said. "Collectively, however, their impact reaches into the wallets of every American consumer."

The Feinstein-Stevens bill would require the commodities commission to review the trading practices of these major investors within 30 days to make sure that speculation is not undermining the markets. The measure also would determine whether more regulations are needed and ask the commission to recommend legislation that would enhance its enforcement powers.

But the bill is modest compared with some proposals being considered by lawmakers: Sen. Joe Lieberman, independent-Conn., who has been holding hearings on speculation, said he is working on legislation that would bar large institutional investors from the commodity markets.

The commission announced last month that it plans to increase its monitoring of traders and investors in commodity markets to "ensure that the U.S. energy futures markets function properly and operate free from manipulation and abuse."

Feinstein also has co-sponsored a bill with Sen. Dick Durbin, D-Ill., and other Senate Democrats that would increase the agency's regulatory authority and boost its enforcement budget. Durbin said this week that the bill is a way to put more cops on the beat to investigate possible market manipulation.

"At this point, we simply don't know what role speculation or manipulation is playing in price increases," he said. "We simply can't waste any more time before getting to the bottom of this."

Market speculation proposals may be the most likely legislation to pass in a Congress that has been sharply split over energy policy along partisan lines. Democrats have blocked Republican efforts to boost drilling, and the GOP has defeated efforts by Democrats to impose a windfall profits tax on the oil industry. But several GOP senators said last week they were open to new measures to target speculation.

Stevens, a longtime ally of the oil industry, indicated Friday that he is ready to bring the hammer down on Wall Street interests that have profited from the run-up in oil prices.

"These unsustainable fuel prices are crippling the economy, and runaway speculation has a hand in bringing the cost of a barrel of oil towards $150," Stevens said.