The proposed Volcker rule will limit the hedging services banks can offer to energy firms, causing a dramatic increase in natural gas, electricity and gasoline prices and forcing East Coast refineries to shut, according to a report released Wednesday by IHS.
The report, which was compiled by IHS, a business information services company, was commissioned by Morgan Stanley, a bank expected to be significantly affected by the Volcker rule. The analysis and opinions in the reports findings are "entirely those of IHS," according to note on the report.
The report said the rule will constrain banks' market-making activities, preventing them from offering commodities risk-management and intermediation services to much of the energy industry. As a result, the report said the rule could cause a 2.1 Bcf/d decline in US natural gas production, a 4-cent/gal increase in gasoline prices and a $5.3 billion annual increase in power costs. The report also estimated the rule could result in a $34 billion drop in US GDP each year through 2016.
The Volcker rule, named after former Federal Reserve Chairman Paul Volcker and contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, prohibits banks that are backed by federal deposit insurance and that have Fed discount window borrowing privileges from proprietary trading and limits their investments in hedge funds.
"In commodities markets, it is a fine -- and indeed uncertain -- line between market making and proprietary trading," the report said, arguing that that a narrow interpretation could limit banks' ability to provide hedging and intermediation services.
Independent natural gas producers will be particularly hurt by limited access to hedging services currently offered by banks, the report said, adding that if a proposed regulation to implement the rule is finalized, then then "upstream investment, particularly in gas-prone fields, could be reduced substantially, reducing gas production and associated employment," the report states.
IHS estimated that investment by producers would drop $7.5 billion a year, causing a 2.1 Bcf/d reduction in gas production. This would cause lead natural gas prices to rise by 64 cents/MMBtu and cost 182,000 jobs, the report said.
Further, the IHS said that without access to bank-provided hedging services, electric utilities would see higher earnings volatility and capital cost increases that could lead to a $5.3 billion per year increase in power costs.
Also, it said US refiners, "already under economic pressure from overcapacity and weak product demand," would be unable to get access to bank off-take agreements used for inventory financing and long-term margin hedges, used by many smaller companies. Without these services, "none of the currently announced refinery closures on the East Coast would be avoided," the report said.
The loss of these refineries, which would likely lead to more gasoline imports and shipments from the Gulf Coast, could lead to a 4-cent/gal increase in East Coast gasoline prices, raising consumer costs by $2 billion per year, the report added.
US Commodity Futures Trading Commission Chairman Gary Gensler, following an appearance at the US Chamber of Commerce on Wednesday, declined to comment directly on the IHS report, which he said he had not seen.
He said the Volcker rule "was [designed] to help lower the risk that taxpayers might have to stand behind a large financial firm," but added that there are challenges in implementing the rule.
"Congress said prohibit proprietary trading, that's clear, but then permit market making," Gensler said. "I think that we can achieve that, but it's a challenge."
Banking regulators and the Securities and Exchange Commission unveiled their version of the Volcker rule in October. The CFTC released its version of the proposed rule January 11.
A report released by the US Chamber's Center for Capital Markets Competitiveness on Tuesday said the Volcker rule "went overboard and is unnecessarily complex."
"Although it targets financial institutions, the rule may have far-reaching negative consequences for non-financial businesses, harming their ability to access capital," the Chamber report states.
At a panel discussion at the Chamber Wednesday, Paul Atkins, CEO of Patomak Global Partners and a former SEC commissioner, called the Volcker rule "a solution in search of a problem," given that proprietary trading did not cause the 2008 financial crisis.
