Volcker Rule could increase energy prices

Daniel Yergin

A report released on Wednesday by business information provider IHS, Inc. revealed that the Volcker Rule could affect banks’ ability to serve energy companies, resulting in rising gas, electricity and natural gas prices.

The study aims to measure the Volcker Rule’s impact on the energy market. Though the study was commissioned by Morgan Stanley, which stands to take a hit as a result of the mandate, IHS researchers said that the study remained unbiased and completely autonomous, according to Reuters.

According to the IHS researchers, large financial institutions are crucial in hedging risk and ensuring timely trades on behalf of energy companies. As the Volcker Rule seeks to limit proprietary trading and investment in private equity and hedge funds, banks will be less able to maintain this role, ultimately leading to higher energy prices.

“You are going to eliminate the flywheel that makes the system work,” IHS CERA Chairman Daniel Yergin said, according to Reuters.

Other results of the Volcker Rule’s impact on the energy market, as outlined in the study, include a cutback of 200,000 jobs in the energy sector, declining investment in natural gas extraction and a four cent increase in gas prices on the East Coast.

The rule, a provision of the 2010 Dodd-Frank Act, does extend exemptions to those trades being made for clients or those made to hedge portfolio risk. IHS researchers suggest that these exemptions should be expanded.

“The economic analysis demonstrates the possible unintended consequences that the proposed rule, in its current form, could have on broader segments of the U.S. economy,” Kurt Barrow, a report author, said, according to Reuters.

Several large financial institutions like Morgan Stanley have invited other industries to share in concern over the Volcker Rule with the hope that regulators will take notice. Some officials are skeptical of studies conducted or commissioned by the financial sector.

“I think we all need to be a little bit wary of the false precision that sometimes is associated with analytical advocacy,” Federal Reserve Governor Daniel Tarullo said in January, Reuters reports.

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