In a departure from the prevailing hands-off approach, regulators on both sides of the Atlantic are weighing new restrictions on traders in the commodity markets.
Policymakers on both sides of the Atlantic launched an effort to crack down on what they called speculation in oil markets, underscoring concerns that a sharp rise in oil prices could worsen the global economic downturn.
In Washington, the Commodity Futures Trading Commission, the main U.S. futures-market regulator, said it is considering tougher regulation of oil-futures markets. The proposed rules, which drew immediate criticism from traders, would seek to curb the influence of speculative investors such as hedge funds and investment banks by limiting how much money any single trader can bet on any one commodity at a time.
In an opinion piece submitted to The Wall Street Journal, meanwhile, British Prime Minister Gordon Brown and French President Nicolas Sarkozy wrote that governments need to act to curb a "dangerously volatile" oil price that defies "the accepted rules of economics" and "could undermine confidence just as we are pushing for recovery."
The moves come at a time when the hotly debated idea that speculative investors are driving up prices is gaining credence, and political momentum is building to stop them.
In recent months, oil producers and Asia's biggest oil-consuming nations have called for regulators to address the issue of price volatility, and the U.S. Senate has blamed speculators for high commodity prices.
On Tuesday, Democratic Sen. Byron Dorgan, a backer of a bill introduced last year to limit speculation, called the CFTC's action "a positive first step" to curbing "oil speculators looking for a quick buck at the expense of American consumers."
The price of oil recently bounced back to some $73 a barrel from a 2009 low of nearly $34, despite a slump in demand, bulging supplies and a world economy in the doldrums. Crude, which closed at $62.93 Tuesday, reached $145 a barrel last summer. Higher prices could affect the prospects for economic recovery: A sustained 10% rise in the price of oil can knock as much as 0.4 percentage point off global economic growth over the subsequent 12 months, estimates Jim O'Neill, chief economist at Goldman Sachs.
Much trade in oil futures is carried out by commercial traders such as oil companies, utilities and airlines seeking to protect their profits against swings in energy prices. In recent years, big noncommercial traders such as hedge funds and investment banks have poured money into oil and other commodities. Such investors typically put their money in indexes that track the value of futures contracts, in which investors promise to pay a certain amount in the future for oil and other commodities.
As of last July, financial investors had about $300 billion riding on such indexes, roughly four times the level in January 2006, according to the International Energy Agency, a watchdog headquartered in Paris. Money drained from oil and other commodity markets during the second half of 2008, but investments have since surged, partly as a hedge against inflation and a weaker dollar: JPMorgan Chase analysts estimate that a net $25 billion was poured into commodities in the first half of 2009.
Oil-market analysts question the idea that speculative investments have pushed up prices. They attribute the current volatility to uncertain prospects for economic recovery -- and the long-term rise to a surge in demand from China, India and other developing economies.
"No one has a clear expectation of what the future price is going to be," said David Kirsch, an oil-market analyst at PFC Energy. "Putting limits on financial investment is only going to have a limited effect on overall volatility."
In Congress, though, there is growing consensus that investors may be distorting prices.
A recent report from the Senate Permanent Subcommittee on Investigations blamed speculators for driving up wheat prices, and recommended the CFTC enforce position limits on index traders in the wheat market.
In a statement, CFTC Chairman Gary Gensler said the agency will hold public hearings to gather views from consumers, businesses and market participants on whether it should propose limits on trading in energy-future contracts.
The CFTC also plans to require swap dealers and hedge funds to report holdings, including those traded at overseas exchanges, in a separate and routine way. Except in certain agricultural markets, many of these players now aren't subject to position limits or required to report off-exchange holdings.
Energy traders say they are concerned that the regulations could stunt trade, increase costs in the marketplace and potentially scare away some players from the oil-drilling business as well as trading markets.
"Speculators play a crucial role in the futures market by providing liquidity to hedgers," such as oil producers and airlines, said Addison Armstrong, director of exchange-traded markets at TFS Energy Futures, a broker in Stamford, Conn. "Traders don't want rules that are going to change the game."
The interventionist line represents a significant shift for both the CFTC and the U.K. government, both of which previously took a more free-market approach and stopped short of calling for action on speculators.
The U.K.'s Brown and France's Sarkozy called on the International Organization of Securities Commissions to look at improving transparency and supervision in oil-futures markets. An umbrella organization for global securities regulators, IOSCO helps to set global standards and advises national bodies on regulation. In March, it set out guidelines on how regulators can beef up supervision and enforcement of behavior in commodity markets.
The French and British leaders hoped to get backing for their drive this week at the summit of the Group of Eight leading industrial countries in Italy. Politicians in energy-importing nations around the world worry about the effect of rising oil prices on the recovery potential of their economies. In recent weeks, many companies have complained that the rise in oil prices has, or will, hurt profits.