WASHINGTON (Dow Jones)--Oil prices could fall to half their current levels if Congress puts strict limits on financial investment in energy commodity futures, a panel of experts told a House Committee Monday.
Energy experts said the drop in the price of retail gasoline, currently over $4 on average in the U.S., would drop proportionately.
Lawmakers in both the House and Senate are aggressively acting to rein in what they believe is excessive speculation driving skyrocketing oil prices.
"Prices would probably drop over a reasonably short period of time back to somewhere closer to the marginal production cost of oil, to $65 to $70...and I think gas prices would reflect that in a relatively short order," said Mike Masters, a hedge fund manager testifying before a Congressional panel probing speculation in the energy markets.
Benchmark light, sweet crude futures on the New York Mercantile Exchange were trading Monday just below $138 a barrel.
Fadel Gheit, managing director and senior oil analyst at Oppenheimer & Co., said prices could come down to a range of $45 to $60 a barrel.
Edward Krapels, a special advisor at the consultancy Energy Security Analysis Inc said he would expect the retreat from energy markets to be fairly fast.
"I think the amount of speculation is really substantial, (and) I don't think it would take 30 days after the President signed the bill, it would happen more quickly than that...as soon as Congress passed it, commodity funds would withdraw their positions," he said.
Under growing pressure from constituents angry over gasoline prices threatening to hit $5 a gallon and airline and trucking industries that are being crippled from high fuel costs, lawmakers from both parties are sponsoring legislation that would create much tough regulations of the energy futures markets.
Many are seeking to curtail - or, in some cases, outright ban - swaps and bilateral trading in the energy futures markets, and set limits on investments on foreign exchanges operating in the U.S.
Eye On Investment Banks
House Speaker Nancy Pelosi, D-Calif., said she's planning to schedule a vote on an energy bill that includes measures to combat speculation within the next few weeks, and aides say Senate leadership may also seek a vote on proposals soon.
The House Energy and Commerce subcommittee on Oversight and Investigations Monday unveiled new data from the government watchdog agency, the Commodity Futures Trading Commission that showed speculators have increased their share of futures contracts to 71% in April from 37% in 2000.
"We are told that we should be grateful to speculators for providing liquidity that allows the futures market to operate, but this data suggests that the oil futures market is drowning in liquidity," said Rep. Bart Stupak, D-Mich, the subcommittee's chairman.
Using newly processed data Stupak and other politicians argued at the hearing that speculative trading by investment banks, hedge funds and pension funds now represents a majority of energy futures trading, evidence aimed at eroding a key defense of the administration, which says that speculation has played a very limited role in recent price rises.
Seeking diversification and a hedge against inflation, institutional investors such as pension funds and endowments have invested some of their billions into financial contracts passively tracking indexes composed of a basket of commodity futures. Often they buy index contracts through a privately-struck swap agreement with a large investment bank. Critics charge their presence helps drive up commodity prices as the banks enter futures markets to insulate against their swap risk.
Stupak also released data that showed the number of contracts to buy benchmark oil futures contracts on the Nymex held by swap dealers tripled to 31% in 2008, from 10% of the contracts in 2000.
In prepared testimony, the CFTC responded that swaps dealers as a whole are close to flat in the crude oil markets - "meaning that they are almost equally long and short in the marketplace."
Krapels argued against that: "That's true, but at what price does the short have to be short in order to meet the demand?"
While the Nymex, owned by Nymex Holdings Inc. (NMX), has strict limits on the amount of speculation any participant can take, some Wall Street banks such as Goldman Sachs (GS) and Morgan Stanley (MS) have been granted exemptions from these limits in their roles as swap dealers.
Eliminate Exemptions
Lawmakers on both sides of the aisle - with bipartisan support - have offered proposals that would eliminate exemptions for swaps dealers, and restricting index traders from using commodity futures markets.
"Make no mistake about it, the excessive speculation in commodity markets is having a devastating effect at the gas pump that is rippling throughout our entire economy," said Stupak. "If we do not act now with swift diligence, we risk having our economy brought to its knees."
Full Committee Chairman John Dingell, D-Mich., is also pushing for tougher regulation: "Energy speculation has become a growth industry, and it is time for the government to intervene."
Source: Ian Talley, Dow Jones Newswires, 202-862-9285; ian.talley@dowjones.com