U.S. Senator Seeks Curb on Oil Speculation

NEW YORK-(Financial Times)--Political pressure to combat speculation in oil markets increased on Tuesday as a senior U.S. senator called for restrictions on pension funds and other big institutional investors investing in energy and farming commodities.

The proposal is one of three put forward yesterday by Joseph Lieberman, a Democratic-turned-independent senator from Connecticut. It is the latest in a series of calls for tougher regulation, amid growing U.S. worries over food and fuel costs.

Politicians fear that traders might be exploiting the more lightly regulated London oil and oil-futures markets – via the “London loophole” – to trade in a way that might be artificially boosting prices. An act to close that loophole was proposed by five U.S. senators last week.

Many politicians attach much of the blame to financial investors, including pension funds, which have poured billions of dollars into the futures market in recent years, largely through commodity indices. The two leading presidential candidates, Barack Obama and John McCain, have also weighed in, pledging to propose remedies to rein in market speculation.

On Tuesday, Mr Lieberman, a close ally of Mr McCain, said he was “persuaded” that speculators were a “significant contributing factor to the economic distress now being felt by American consumers every time they stand in the grocery store checkout line or pay for a fill-up at the gas pump”.

Amid growing political pressure, the Commodity Futures Trading Commission, the chief futures regulator, imposed limits last week on the size of speculative positions that could be taken out on London’s ICE Futures Europe exchange. About 15 per cent of futures trading on the benchmark West Texas Intermediate oil contract takes place there.

The limits would bring oversight of traders’ behaviour on the London ex-change in line with oversight on domestic markets.

Yet that is unlikely to stop legislators who are considering proposals to extend U.S. regulation over the “London loophole” or to close it.

Despite seven congressional hearings into “excessive speculation” in the past three months, there is little agreement on whether speculation is causing food and energy price inflation. The commodities regulator has repeatedly said that fundamental supply and demand factors are mainly behind the recent price movements – though it is stepping up its focus on the potential impact of speculators and commodity index traders.

Some observers say lawmakers have not explained how speculators or pension funds are boosting commodity prices or why the price of raw materials such as iron ore, rice or coal – in which speculators have limited access – are also booming.

On Tuesday, William Quinn, chairman of the Committee on the Investment of Employee Benefit Assets, which represents 110 of the largest U.S. pension funds, told senators that pension funds were long term investors – not speculators.

“We are deeply concerned about the prospect of any legislation that would bar pension plans from investing in certain types of assets,” he said.

Video: Oil Prices, Floods Push Food Prices Up

Consumers feel the trickledown effect of rising oil and corn prices. NBC's Brooke Hart reports.

Study: Biofuel Policies Affect Commodity Prices; Oil Prices Matter More

COLUMBIA, Mo.-(Univ. of Mo.)--Government biofuel policies affect fuel and farm commodity prices, but the price of a barrel of oil can have even larger effects.

Tax credits, import tariffs and mandates on usage encourage increased production of biofuels, but so do rising oil prices, according to the University of Missouri Food and Agricultural Policy Research Institute (FAPRI).

A new study presents biofuel scenarios based on 500 random draws of possible weather, production and other market influences.

"The impact of biofuel policies depends not just on the policy but very much on the market context," said Pat Westhoff, FAPRI co-director.

The 68-page report, an update of a report released in March, looks at biofuel provisions of the 2008 Food, Conservation and Energy Act, known as the farm bill, and the Energy Independence and Security Act of 2007, the energy bill.

FAPRI maintains computer models of U.S. agriculture and is linked to international agricultural models at Iowa State University.

The models run extensive "what-if" scenarios based on current policy compared to proposed changes. FAPRI examined 13 scenarios, ranging from a pre-farm-bill scenario that keeps current policies in place to scenarios that eliminate biofuel tax credits, tariffs and use mandates.

The report, "Biofuels: Impact of Selected Farm Bill Provisions and other Biofuel Policy Options," was published online June 12.

The energy bill mandated use of various biofuels, including ethanol from corn, biodiesel from soybeans and ethanol from cellulose sources such as wood chips.

"Mandates have little market impact when high petroleum prices contribute to high biofuel prices and production levels." Westhoff said. "On the other hand, mandates can be important when petroleum prices are low or crop supplies are reduced."

The 2008 farm bill extends a 54 cent per gallon tariff on imports of ethanol from non-Caribbean countries through 2010. That tariff was to expire at the end of this year.

Secondly, the farm bill cuts the tax credit from 54 cents to 45 cents per gallon for those who blend ethanol with gasoline. That credit is set to expire at end of 2010.

Continuing the tariff discourages imports, but does not have big impacts on biofuel production or farm commodity markets, FAPRI suggests. The small change in the tax credit also has modest market impacts.

The most extreme scenario allows current tax credits and tariffs to expire as scheduled and would not enforce the energy bill mandates. In this scenario, without most current biofuel policies, corn prices would decline 14 percent on average compared to a scenario that continues current support measures.

Researchers will conduct a new analysis including higher oil prices and new crop production estimates this summer.

You can view the full report HERE.

World Ag Officials Consider Food v. Fuel Issue

The "Food vs. Fuel" issue is certainly not limited to the U.S. The topic is now being addressed from a global perspective at the highest levels. Here's the latest from the ongoing U.N. Summit in Rome...

U.S. Agriculture Secretary: Biofuels Deal Possible

ROME-(AP)--U.S. Agriculture Secretary Ed Schafer said Wednesday that progress is being made at a U.N. summit on determining the role that biofuels are playing in driving up food prices to the point of provoking riots in some countries.

"It looks as though consensus on this important issue is in reach," Schafer said in a statement acknowledging there had been "some confusion" on earlier comments in which he sounded doubtful an agreement would be found by the end of the three-day summit in Rome.

Click HERE to read the whole story.