Legislators taking hard look at oil trading

Democrats, who led the charge for increased oil market regulation, will return to Washington in the new year with solid majorities in Congress, a friendly White House and the determination to tighten regulation across America's financial markets. They will likely take another look at oil.

"This will remain an issue," said Sen. Byron Dorgan, D-N.D., who introduced oil market legislation this year. "Because when the price of oil has gone from $50 to $147 and back, it's clear to me and everyone else that this has nothing to do with supply and demand. It has to do with speculation."

In addition, the investment banks that have opposed oil market regulations in the past have far less clout than before.

"The banks are in a much weaker position right now, and they were the ones really fighting this," said Tyson Slocum, director of the energy program at the Public Citizen watchdog group.

President-elect Barack Obama even made cracking down on oil speculation part of his energy platform during the campaign. But he offered few specifics and gave the issue far less attention than he gave to renewable power and alternative fuels.

Among possible changes, Congress may try to assert more authority over unregulated oil swaps that don't take place on any formal market. Limits on the number of oil contracts a speculator can hold could be extended to cover those swaps as well as trading on electronic exchanges and overseas markets.

There's still disagreement over how much speculators influence oil's price.

The Commodity Futures Trading Commission, a federal agency that regulates much of the American oil market, tends to downplay the role of speculators. A commission task force concluded that the tight worldwide balance between petroleum supply and demand caused the price spike, not speculators.

Plenty of oil analysts disagree. Many factors helped shove prices higher, including the growth of China's economy and the decline of the American dollar. But oil kept rising even as gasoline sales fell in the United States, the world's largest oil consumer. That wouldn't have happened if supply and demand really were driving the market, many analysts say.

"The entire move from $70 (per barrel) to $147 was people fleeing the dollar and looking at oil as an asset class," said Amy Myers Jaffe, an energy research fellow at Rice University's Baker Institute. "It was speculators, so when they exited the market, we went right back to $70."

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