Holding to their word to rebuff an energy package offered up by Senate Republicans last week, Senate Democrats Wednesday rolled out energy legislation that would revoke $17 million in tax breaks for energy companies, impose a windfall profits tax on energy companies that don’t invest in renewable energy sources and impose federal penalties for energy price gouging. The legislation proposal drew immediate criticism from the New York Mercantile Exchange (Nymex) and the National Association of Manufacturers (NAM).

The legislation would impose a 25% windfall profits tax on companies that don’t invest in renewable energy. In addition, the legislation would prevent the U.S. Department of Energy from filling the Strategic Petroleum Reserve until crude oil prices average $75/bbl or less for 90 days.

The Consumer-First Energy Act of 2008 was put together by Senate Majority Leader Harry Reid (D-NV) and several top Democrats. It follows a package of energy legislation introduced last week by Sen. Pete Domenici (R-NM) and 19 Republican cosponsors that would dramatically increase domestic production of oil and natural gas by unlocking restricted areas for exploration (see Daily GPI, May 5).

“The Bush administration has led us down the path of the most significant energy crisis we have had in decades, if not in all time,” Reid said Wednesday. “Big Oil is making money hand over fist while doing little to invest in alternative fuels yet Bush Republicans want to keep handing them huge tax breaks.”

In a summary of the legislation, Democrats noted that gasoline prices have more than doubled since George W. Bush took office in 2001. At the same time, “Big Oil” companies made more than $500 billion in profits. Besides taxing energy companies, the bill would revive a plan passed earlier by both the Senate and House of Representatives to allow the federal government to sue OPEC for price manipulation.

The bill seeks to revive a plan already passed by both the Senate and the House of Representatives that would allow the federal government to sue OPEC — source of one-third of global oil supply — for price manipulation. In addition, the legislation would seek to prevent oil market speculation and would prevent companies that trade U.S. oil futures from routing transactions through offshore markets to evade position limits. It also seeks to require the Commodity Futures Trading Commission (CFTC) to boost margin requirements for all oil futures transactions.

Nymex took umbrage to the Senate Democrats’ bill, noting that the subsection dealing with margins is “misguided.” The exchange said it recognizes that there is broad concern over current crude oil price levels and it supports the legitimate work that Congress is doing to address high energy prices and to protect consumers.

Regarding the subsection dealing with margins, Nymex found four points of concern. Nymex noted that in a highly transparent, regulated and competitive market, prices are affected primarily by fundamental market forces, and imposing more onerous margin levels will not affect price levels. The exchange pointed out that uncertainty in the global crude market regarding geopolitical issues, refinery shutdowns and increasing global usage, as well as devaluation of the U.S. dollar, are now market fundamentals. Second, Nymex said that in futures markets margins function as financial performance bonds and are employed to manage financial risk and ensure financial integrity, not restrict or manage trading activity. In Nymex’s third point, the exchange said data consistently indicates that the percentage of open interest in Nymex crude oil futures held by noncommercial participants (relative to commercial participants) actually decreased over the last year even while prices were increasing. Finally, Nymex said that given the reality of global competition in energy derivatives, increasing crude oil margins on futures markets regulated by the CFTC inevitably will force trading volume away from regulated and transparent U.S. exchanges onto “dark unregulated venues” and onto less transparent overseas markets.

The exchange said the proposed margin provision would constitute “a significant step backward in transparency and market integrity.”

Also chiming in on the legislation, NAM said the bill introduced by Reid would impose onerous taxes, mandates and regulations. “That’s not the way to reduce energy prices and create more jobs,” said NAM CEO John Engler. “This bill will have the unintended consequences of fewer jobs and higher energy and food costs.”

©Copyright 2008Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.