Exempt Energy Companies From New Derivatives Rules?


Alain Sherter warns that such an exemption (in negotiation in Congress) is fraught with risk. While energy companies can use derivatives to even out pricing or limit their risk they can also (like Enron) get into what is essentially gambling.

James Pilant

From the article

Concerns that energy companies want to dodge proposed restrictions on derivatives can be summarized in two words: Andrew Hall. He’s the star trader who stood to collect a $100 million bonus from Citigroup (C) until controversy over the windfall forced the banking giant to send Hall packing, along with his lucrative energy brokerage unit — straight into the arms of Occidental Petroleum (OXY).

The 2009 deal wasn’t merely the result of mounting political heat on Wall Street, however. It also underscored a trend in which financial firms and a range of companies use derivatives, leverage and other tools of modern finance to place bets on grain, gold, crude oil and other commodities. If energy companies once used derivatives strictly to hedge against price, currency or interest-rate changes, now they see these securities as a way to boost profits. But at what risk? As one equity analyst said of Occidental after it acquired the Citi subsidiary, called Phibro:

They never gambled before, and now they own the casino.

Sherter has a definite way of putting things.

jp