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TaoPoohBear -> RE: Issue: Fuel Costs (6/22/2008 11:10:41 AM)
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ORIGINAL: wing2000
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The problem is that the futures market can be just as easily manipulated from Dubai or Iran or wherever as it can from inside the US. And the US only has jurisdiction over its territory.
If we regulate the futures industry, the most we can do is just move the manipulation offshore. In the meantime, you're going to put the honest traders based in the US at a disadvantage while the market manipulators move offshore.
Did this occur prior to the Enron days....or was Enron the "pioneer" in energy futures trading?
A little info on that -
International Petroleum Exchange
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Until the 1970s, the price of oil was relatively stable with production largely controlled by the biggest oil companies. The 1970s transformed the industry forever. Two oil price shocks meant that price volatility became a fundamental feature of the market, short-term physical markets rapidly evolved, and the need to hedge emerged.
A group of energy and futures companies founded the IPE in 1980 and the first contract, for Gas Oil futures, was launched the following year. In June 1988, the IPE successfully launched Brent Crude futures. Volumes rapidly took off and the Exchange has experienced incremental growth, year-on-year for almost its entire history. New trading instruments such as swaps, futures and options have grown up. The modern business, though complex, is efficient, flexible and fast moving.
The International Petroleum Exchange, based in London, is one of the world's largest energy futures and options exchanges. Its flagship commodity, Brent Crude is a world benchmark for oil prices, but the exchange also handles futures contracts and options on gas oil, natural gas, electricity (baseload and peakload), coal contracts and, as of 22 April 2005, carbon emission allowances with the European Climate Exchange
The IPE was acquired by the IntercontinentalExchange in 2001. The IPE was an open outcry exchange until April 7, 2005, when its name was changed to ICE Futures and all trading was shifted onto an electronic trading platform.
As far as Enron -
Deregulation of Energy Futures
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In the past, the Commodities Futures Trading Commission acted as the cop on the beat, ensuring that buyers in the market were not distorting or manipulating prices beyond what supply and demand normally dictate. Certainly, if a hard frost hit Florida and cost growers an orange crop, then bidding up the price of the remaining oranges was both a wise investment and allowed under the trading rules. Right now investors know that if they borrow and invest huge amounts in commodities futures, they can create a shortage on paper – which drives prices up just like an actual shortage of any given product would. What kept traders from cornering the market that way in the past were the government’s anti-manipulation rules.
Lay, DeLay, Gramm, Gramm & Clinton
The late, infamous Enron head, Ken Lay, realized in the eighties that he could make more money bidding up energy in the futures market than by actually creating and selling energy. But, under then-current rules, how much you could make swapping paper was limited. Fortuitously, Lay had excellent Texas political connections; and in November of 1992, the head of the Commodities Futures Trading Commission moved to exempt energy-derivative contracts and related swaps from any government oversight.
A vote was hurriedly put together before the Clinton White House would take over, and so Lay could finally start "dark" – unregulated – futures trading. The head of the CFTC was Wendy Gramm, wife of Texas Senator Phil Gramm; five weeks after she left, she became a board member of Enron in Houston.
Fast-forward to late 2000 and H.R. 5660, the Commodity Futures Modernization Act of 2000, sponsored by Republican Congressman Thomas Ewing of Illinois. That bill went nowhere, even though Tom Delay’s wife Christine was then working for a Washington lobbying firm, Alexander Strategies – which Enron had paid $200,000 to push through legislation for permanent energy deregulation in these "dark" markets.
Six months later came Senate Bill 3283, also named the Commodity Futures Modernization Act of 2000. This time around the sponsor was Republican Sen. Richard Lugar of Indiana, and now Phil Gramm was listed as one of the bill’s co-sponsors. Like it had in the House, this bill was destined to go nowhere until, late one night, it was attached as a rider to an 11,000-page appropriations bill – which was signed into law by President Clinton.
Now traders had an officially deregulated market for energy futures. Worse, that bill also deregulated many financial instruments – including the collateralized debt obligations that are at the center of today’s mortgage crisis, which may well cost us more than $1 trillion before it’s over.
Everybody Was Warned!
As USA Today wrote of this fiasco in January of 2002, "But, as a power marketer, [Enron] could buy enough energy-futures contracts in a region to create a virtual monopoly." That’s right: As early as the winter of 2002, it was widely known that the 2000 Commodities Futures Modernization Act had created a monster, capable of running up energy prices outside of the normal law of supply and demand. Worse, our government had been warned this was going to happen. Representatives of the Federal Reserve, the Securities and Exchange Commission and the CFTC had already told Congress not to deregulate energy because "the market was ripe for manipulation." Everybody was warned; that’s why this deregulation bill was stealthily inserted into that appropriations bill without a floor debate.
When Enron failed and took its private, unregulated energy exchange to the grave, another rose to take its place. The Intercontinental Exchange (ICE) was the brainchild of Morgan Stanley, Goldman Sachs, British Petroleum, Deutsche Bank, Dean Witter, Royal Dutch Shell, SG Investment Bank and Totalfina. In 2001 ICE purchased the International Petroleum Exchange in London; renamed ICE Futures, it now operates as an "exempt commercial market" under section 2(H)(3) of the Commodity Exchange Act. As the Senate hearings pointed out in the summer of 2006, "Both markets operate outside of any CFTC oversight."
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