Source: US News

Last Wednesday, I spoke on behalf of American Trucking Associations (ATA) at a press conference sponsored by the Derivatives Reform Alliance. This organization is advocating for tougher regulation of commodity derivatives trading, which includes crude oil and refined products like diesel fuel.

If that sounds like some arcane financial manipulation practice, you’re right. But it affects anyone who uses diesel fuel, since the effect of this practice is to encourage excessive speculation in the trading and pricing of energy-based commodities.

Transportation companies already are under pressure from tight margins, excess supply and slack demand for services. Throw in volatile diesel fuel prices and it’s no wonder many companies are struggling to stay afloat. To deliver virtually all of the country’s consumer goods, the trucking industry consumes 34 billion gallons of diesel fuel annually. Fuel is generally considered the second highest expense incurred by trucking companies. Every one-cent increase in the price of diesel fuel costs the trucking industry an additional $340 million a year.

One year ago, the price of oil was $42 a barrel. Today that price is up over 70 percent, despite the fact that global demand is down, crude oil inventories are well above average, and the dollar has declined by only 8 percent relative to the Euro. What’s driving the higher prices? Excessive speculation is the only other variable left unaccounted for.

While there is no good metric that will quantify how much of the volatility and increased price of crude oil can be attributed to the influence of excessive speculation, it’s clear that this is part of the problem. To address this market disconnect, we believe that the federal government should take steps to increase the transparency of the derivatives markets. Reasonable aggregate position limits should be set. The Commodity Futures Trading Commission (CFTC) has proposed position limits for energy trades on certain commodities exchanges; however, this step by itself is insufficient to curb the problem of excessive speculation. There are still loopholes which allow destructive practices and leave the buyers of diesel fuel – and ultimately consumers – on the hook for the cost.

It is time for Congress to strengthen the Commission’s authority and eliminate trading loopholes. We encourage mandated transparency and stated aggregate position limits for all markets (including over-the-counter and foreign exchanges) that trade energy commodity derivatives. If we do not enforce position limits, the practice of excessive speculation will continue beyond the control of government regulators.

Importantly, the CFTC or Congress also must clarify and define the difference between a commercial participant and a legitimate hedger. A commercial participant — such as a trucking company — must take physical possession of a petroleum product. The trucking industry typically hedges diesel fuel by purchasing heating oil and crude oil derivatives. Recognizing these hedging surrogates is important in determining the status of various commercial participants. Those who purchase petroleum derivative contracts as a hedge against inflation — but who never take possession of the products — are more akin to pure speculators and should not be considered commercial participants. This destructive practice cries out for more legislative or regulatory oversight.

Transparency that distinguishes between commercial and non-commercial participants has no potential downside. Trading markets are improved and the price of oil remains unaffected. Tougher regulation would likely reduce speculative bubbles, restore investor confidence and strengthen the link between commodity prices and market fundamentals. We call on Congress to do the right thing and protect the commodities markets from destructive, excessive speculation through derivatives practices that add no value.