In a victory for transportation interests who've charged that commodity speculators, not economic fundamentals, have caused the price volatility in oil markets during the past three years, the massive financial reform bill heading to President Obama's desk curtails speculation on energy pricing. The legislation, known as the Wall Street Transparency and Accountability Act, restricts the betting on the direction of energy prices to so-called commercial end-users who use sophisticated trading tools to reduce risk associated with managing their business.
The measure, which won congressional approval after passing the Senate on July 15 and which is expected to be signed into law this week, is the most sweeping overhaul of the nation's financial rules since the Great Depression. Embedded in the controversial 2,300-page bill is language that limits the role of speculation in the $615 trillion financial derivatives market.
The transport sector keyed in on a provision in the bill that allows only companies with what are being termed legitimate commercial interests to enter into derivatives transactions, or "swaps," without regulatory oversight. Many of these companies traditionally use the derivatives markets to hedge against fluctuations in energy prices that may affect their profit margins.
In a statement, the American Trucking Associations (ATA) said it "applauds Congress's decision to curb excessive commodity speculation while protecting the ability of the trucking industry to hedge its exposure to increased fuel prices. The legislation will help ensure that fuel prices are linked to the market forces of supply and demand."
The Air Transport Association, which represents the nation's major passenger and cargo airlines, also hailed passage of the bill, saying the law will ultimately reduce the risk of cost spikes associated with speculative trading and will align energy prices more closely with supply and demand fundamentals.
"The passage of the financial- and commodities-reform bill achieves all [of the group's] objectives on this issue," said James May, president of the air carriers group. "The bill is the culmination of many years of hard work by our members and is a significant win for airlines as consumers of oil."
Industry backlash over oil price fluctuations took root in 2007 as prices began skyrocketing, culminating in July 2008 with a record $147 per-barrel price for crude oil. Prices then began an equally rapid decline along with the economic downturn, plunging as low as $34 a barrel in February 2009. Today, the price of a barrel of crude is quoted on the New York Mercantile Exchange at slightly more than $76.
At the peak in July 2008, diesel fuel prices reached $4.76 a gallon, threatening the survival of many smaller trucking firms and causing anguish among truckers and shippers alike.
U.S. airlines spent $58 billion on jet fuel in 2008, nearly $20 billion more than the year before, according to Air Transport Association data. The run-up in 2008 "was not [based on] supply and demand fundamentals," said David Castelveter, the group's chief spokesman.
"Excessive speculation has caused dramatic increases in the price of crude oil, which harms end-users like America's trucking industry," Richard Moskowitz, ATA's vice president and regulatory affairs counsel, said prior to the bill's passage in the Senate. Moskowitz advised Congress not to expand the right to engage in these complex swaps to "entities that neither produce nor consume the physical commodities upon which the derivative contracts are based."
ATA is a member of the Commodity Markets Oversight Coalition (CMOC), an alliance of consumer advocates and commodity producers, marketers, and end-users that use derivatives to hedge commodity price fluctuations and to insulate their businesses and consumers from risk.
In a letter sent in early May to Senate Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.), the coalition said that "hedge funds, investment banks, and insurance companies have begun to use commodity derivative contracts to hedge the risk of a declining dollar or rising interest rates." While these financial entities "have a legitimate interest in hedging their risk, they are not producers, distributors, or end-users of physical commodities," the coalition said.
The legislation had been reported out of the Senate Agriculture, Nutrition and Forestry Committee. The Committee's chairwoman, Sen. Blanche Lincoln (D-Ark.), had championed the language reining in the unfettered use of derivatives.