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WASHINGTON, May 09, 2008 (Houston Chronicle - McClatchy-Tribune Information Services via COMTEX) -- Democrats are meeting stiff resistance to efforts to rein in speculation on the oil markets as they try to push through a broader energy package ahead of the start of summer driving season.

But pressure continues to build on Capitol Hill to force President Bush to stop the flow of oil to the Strategic Petroleum Reserve.

When unveiling their latest energy package this week, Senate Democrats knew they were resurrecting a number of proposals that had died in the past -- from efforts to hit up the oil companies for higher taxes to taking a largely symbolic swipe at OPEC.

But arguing that "rampant speculation" in the oil markets has helped drive up crude prices, Senate Democrats proposed a new measure that would increase the amount of money traders would have to put down when buying oil futures.

"With gas and oil prices at record levels, it makes no sense to allow this growing bubble of speculation to take place," said Sen. Byron Dorgan, D-N.D., who is championing the measure. "By increasing the margin requirement, we will send a message to speculators that they will no longer be allowed to artificially drive up the price of oil and gas."

Currently, traders must put down anywhere between 5 percent and 7 percent when making energy futures trades, compared with 50 percent for stocks.

The legislation does not specify how high that new margin requirement should be. It would instruct the Commodity Futures Trading Commission to require a "substantial increase" in the amount.

'Blunt instrument'

The proposal came under fire in some quarters.

White House spokesman Scott Stanzel called it a "blunt instrument" that would discourage legitimate trading, while a commission spokesman argued it could send traders to unregulated markets overseas.

"In the futures market, margin is designed to ensure financial integrity of all traders and the system as a whole," the spokesman said. "Increasing margin for the purpose of trying to lower futures prices may take liquidity and information out of the markets -- two critical components to price discovery and risk management."

Jim Newsome, the New York Mercantile Exchange's chief executive officer, weighed in as well, warning if the goal is to try to lower crude oil prices "increasing the margin will have absolutely no impact on that." Instead, he argued, the opposite might be true, since "less liquidity could lead to more volatility and higher prices."

Circumventing tactic

The Democratic proposal would address the issue of traders trying to flee to other markets by barring traders of U.S. crude from routing transactions through offshore markets to circumvent the new limits.

Exchange officials question whether speculators are the negative influence so often described. They say the number of crude oil futures held by "noncommercial participants," traders with no real interest in taking actual delivery of any barrels, has declined over the last year, even as oil prices rose.

Craig Pirrong, a finance professor at the University of Houston, said research hasn't shown a connection between margin levels and speculators and hedgers in commodity markets. Raising margins may actually squeeze out the hedgers -- companies who are trying to manage their exposure to changing prices -- and not the speculators who bet on the changing prices, he said.

Republicans tout own plan

Early next week, the Senate is slated to vote on another Dorgan proposal to block the administration from adding oil to the Strategic Petroleum Reserve at least through year's end, with no future barrels being added until crude prices drop below $75 a barrel for 90 days.

President Bush has long argued the nation must keep filling the reserve to protect against a severe supply disruption.

But Senate Republicans, led by Sen. Kay Bailey Hutchison, R-Texas, are pushing their own proposal to stop filling the reserve for 90 days.

Kevin Book, senior analyst for energy policy oil and alternative energy for FBR Capital Markets Corp., estimates some kind of language halting oil to the reserve could garner 70 votes in the Senate, more than the 60 needed to avoid a filibuster.

In the House, Rep. Nick Lampson, D-Stafford, and Rep. Chet Edwards, D-Waco, are pushing language to require the Energy Department to swap 10 percent of the light, sweet crude in the reserve for heavy oil.

Lampson argues this would not only help provide some relief to the oil markets by bolstering supplies of light, sweet crude but also raise revenue, because the light, sweet grade typically sells for about $12 more than heavy sour.

Lampson said his proposal would send a signal to speculators while also having a "positive impact on the price of oil."

New tax on profits

While the Bush administration is sounding no more receptive to Lampson and Edwards' proposal than the Dorgan measure, Lampson contended the proposal could represent a reasonable compromise.

The Democratic proposal also would slap the five largest oil companies with a new 25 percent profits tax.

Last week, Senate Republicans laid out their own very different strategy, calling on lawmakers to open the Arctic National Wildlife Refuge as well as more areas offshore to drilling.

Neither plan includes the proposal floated by Republican presidential hopeful John McCain and then adopted by Democratic candidate Hillary Rodham Clinton to have a gas tax holiday.

david.ivanovich@chron.com Tom Fowler in Houston contributed to this report.

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David Ivanovich

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