In a refrain that has grown louder and more frequent over the last two years, two large industrial associations urged the federal government last Wednesday to take action that directly addresses high natural gas prices, price volatility and domestic natural gas supply.
The American Chemistry Council (ACC), which represents the nation’s largest gas consumers, called on the Minerals Management Service (MMS) to put new initiatives into its five-year leasing plan that speed up gas exploration and development. And the Industrial Energy Consumers of America (IECA) sent a letter to four members of Congress urging them to produce legislation that would grant the Commodity Futures Trading Commission (CFTC) more oversight of the natural gas futures and over-the-counter markets. However, CFTC Chair Sharon Brown-Hruska indicated last week that the agency believes it already has the tools it needs to oversee the commodity markets.
The CFTC’ reauthorization will be taken up by Congress in 2005 and the IECA believes a significant regulatory “tune-up” is in order. IECA Executive Director Paul Cicio told Sens. Thad Cochran (R-MS) and Tom Harkin (D-IA) and Reps. Jerry Moran (R-KS) and Collin Peterson (D-MN) in a letter that legislative changes made in 2000 have allowed speculators to take on an increasingly dominant role in the natural gas market, which is driving up the price of natural gas and the volatility in the marketplace.
“Energy markets have changed drastically and regulatory oversight, transparency and limits to rampant speculation by traders, particularly unregulated hedge funds, [are] needed to meet the challenge,” said Cicio. “Changes made to the Commodity Futures Modernization Act of 2000 (CFMA) were well intended but did not anticipate these rapid market changes or the problems it would cause by relaxing CFTC regulatory oversight.
“Now, instead of the market serving the greater public good, it serves the investment interests of ever-growing unregulated billion-dollar hedge funds that are completely disconnected from the consumer and manufacturing market.”
According to the IECA, the hundreds of unregulated hedge funds trading energy, many of which are of international origin and are not registered with the Securities and Exchange Commission, don’t “care what effects their actions have on consumers of natural gas and oil products such as gasoline.”
IECA noted the recent record high gas and oil prices and the substantial rise in volatility this year, which will impact consumers through higher home heating and transportation costs and lost manufacturing markets and jobs.
The association, whose members include BASF Corp., Bayer Corp., Dow Chemical, Dow Corning, Eastman Chemical, Huntsman Corp., Tyson Foods and many other industrial and food processing corporations, claims that the CFMA allowed Nymex to make changes in the futures market that led to the higher prices and volatility.
“There is no longer an advance review in place to determine the economic effects of such changes [made by Nymex] and there is no opportunity to consider public comment… The changes a ‘self-regulated’ Nymex has made to the futures contract in response to further market pressure contributed to the significantly increased volatility, speculation and market that is susceptible to manipulation,” Cicio said in his letter.
“We respectfully request that you strongly consider reexamination of the CFTC’s role in the critical energy marketplace with the notion that their regulatory powers need to be restored and strengthened…,” Cicio said. “IECA has several detailed recommendations that could form the basis for legislative provisions in your work to reauthorize the CFTC.”
However, the CFTC chair indicated last week in a speech last week to the International Swaps and Derivatives Association that the existing provisions of the CFMA should remain in place. “In my view, duplicative and prescriptive regulation is neither necessary nor well suited to address the problems being experienced in the energy sector and instead may exacerbate a liquidity shortage in the energy complex by unnecessarily imposing costs on industry participants and creating regulatory and legal uncertainty,” said Brown-Hruska.
She also challenged the notion that speculative funds were “somehow artificially inflating prices… Our analysis indicates that funds are not driving prices, but instead, by bringing information into the markets, which is critical to the price discovery process, they bring vital liquidity to markets.”
ACC: Moratoria Should Be Reexamined
Meanwhile, in a separate call for government action last week, the American Chemistry Council (ACC), which is represents the nation’s largest industrial consumers of natural gas, called on the MMS to make more areas of the Outer Continental Shelf (OCS) available to natural gas exploration and development. The council said that historically high natural gas prices are destroying the competitiveness of U.S. chemical manufacturing.
“Natural gas prices have nearly tripled in recent years, sending our industry’s gas bill up by $10 billion in two short years. Chemical manufacturing operations in other regions of the world have not had to absorb these kinds of cost increases,” ACC noted in a written statement filed with MMS. “We have lost $50 billion in business to overseas manufacturers over the past five years. More than 90,000 good-paying American jobs have disappeared in that time.”
The ACC is urging MMS to make some changes to its OCS leasing plan, including publishing an inventory of potential natural gas in the OCS “so the public and decision makers understand the opportunities we have for using our own resources to increase supply and help address the nation’s energy challenges.”
It also is urging MMS to prioritize the areas in the OCS with the greatest natural gas potential and move them forward in the leasing program. ACC wants MMS to streamline its environmental review process, work with states to make coastal zone reviews smoother, and to “hold staff accountable for processing lease sales and permits for exploration and development in the least time consistent with appropriate stewardship of the environment.”
ACC said MMS needs to work closer with energy companies to address other impediments to the leasing, exploration and development process.
Another action suggested by ACC is to revisit Planning Area 181 in the Eastern Gulf of Mexico, which is under a drilling moratorium. “With its strong potential for significant and near-term natural gas production, it should be at the top of the list for exploration and development.”
But ACC also believes that other areas currently under moratoria also should be included in MMS’ five-year leasing plans. “With the country facing some of the highest prices and highest levels of energy imports in history, these unfortunate limitations on domestic resources should be reexamined,” the association said.
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