[Congressional Record Volume 158, Number 49 (Monday, March 26, 2012)]
[Senate]
[Pages S2018-S2020]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
OIL MARKET SPECULATION
Mr. LEVIN. Mr. President, once again, oil prices have spiked to high
levels threatening our economic recovery. Prices are now nearing $110 a
barrel, up nearly 30 percent since October 2011, only 5 months ago. For
years now the commodity markets have taken the American people on an
expensive and damaging roller coaster ride with rapidly changing prices
for crude oil.
In 2007, a barrel of crude oil started out costing $50 a barrel. By
the end of the year, the price had nearly doubled. In 2008, oil prices
shot up in July to nearly $150 a barrel, and then by the end of the
year crashed to $35. In the beginning of 2011, oil prices took off
again, climbing to over $110 per barrel in May. Then they began
falling. In October oil traded at $75 per barrel, a drop of more than
30 percent over 4 months.
Now 5 months later oil prices are back up to nearly $110 a barrel.
This unpredictable and incessant price volatility is burdening American
consumers and businesses with both uncertainty and expense.
Some in the media are blaming recent events in the Middle East for
the latest oil price spikes, but Middle East instability cannot explain
these large gyrations. We have seen uncertainty, unrest, and armed
conflict in that region for more than 50 years without seeing this same
pattern of extreme price volatility in oil prices. That volatility has
become a feature of U.S. oil markets over the last 7 years.
There is something else at work behind the spikes and sudden drops in
the price of oil and other commodities in recent years, and we have
strong evidence showing what it is. It is the increasing role of market
speculators betting on price swings.
For years now the Permanent Subcommittee on Investigations, which I
chair, has been digging into the problem of excessive speculation in
the commodity markets. Since 2002, the subcommittee has conducted a
series of investigations into commodities pricing, in particular
focusing on how speculators have changed the game. Our investigations
have used specific case histories involving oil, natural gas, and wheat
prices to show how excessive speculation in the futures and swaps
markets have distorted prices, overwhelmed normal supply-and-demand
factors, and pushed up prices at the expense of consumers and American
businesses.
For example, in 2006 the subcommittee released a report that found
that billions of dollars of commodity index trading by speculators in
the crude oil market had helped push up futures prices in 2006, causing
a corresponding increase in cash prices and was responsible for an
estimated $20 out of the then $70 cost for a barrel of oil. Since then
even more speculators have entered the commodities markets. Today we
have commodity index traders, exchange-traded products, even mutual
funds betting billions of dollars on crude oil prices on a daily basis.
Speculators have now come to dominate our futures and swaps markets,
overwhelming the commercial users and producers who use and need these
markets to set fair prices and hedge risks.
At a November hearing before my subcommittee, the Chairman of the
Commodity Futures Trading Commission, Gary Gensler, testified that over
80 percent of the outstanding futures
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contracts for crude oil are now held by speculators. That fact is new,
it is significant, and we cannot ignore it.
It used to be that prices were determined primarily by fundamental
market forces of supply and demand for physical commodities. When
commodities were tight and demand high, prices generally went up. In
contrast, when supplies were ample and demand low, prices generally
went down. Nowadays that relationship is largely absent.
Here are some startling facts from recent press and government
reports that show how U.S. crude oil prices today have become
disconnected to supply and demand. First is the fact that the United
States has ample oil supplies in the neighborhood of 350 million
barrels in storage, which is toward the higher range since 2008. World
supplies are also adequate with the Saudi Arabian oil minister recently
stating that world supplies are stronger today than they were 4 years
ago in 2008.
In addition, the United States is producing more domestic oil than it
has in years. In 2010, U.S. domestic crude oil production increased to
5.5 million barrels per day, up from 5.1 million barrels in 2007, and
is still climbing. In 2011, overall U.S. refining capacity also
increased. Perhaps most surprising of all in 2011, for the first time
since 1949, the United States exported more gasoline, diesel, and other
petroleum products than it imported. The United States is projected to
do the same in 2012 and 2013. At the same time U.S. oil supplies stayed
steady and production increased, U.S. demand went down. In 2011, U.S.
fuel consumption actually sank and oil demand in North America
contracted by 0.5 percent. Some of that drop was due to lower economic
activity, some to greater energy efficiencies, and some to higher
energy costs.
For example, U.S. demand for gasoline sank nearly 3 percent last
year. More broadly, in 2011, total U.S. demand for all types of oil
products fell to 18.8 million barrels a day, from 20.8 million barrels
a day in 2005. That is a drop of 10 percent. The end result is that
over the last year oil demand was down and supply was up in the United
States. Under normal economic conditions, both factors should have led
to lower oil prices. Instead, despite steady or improving oil supplies
and steady or dropping demand, U.S. crude oil prices became more like a
roller coaster than ever.
What explains the price volatility and escalation? The answer is
pretty clear to me after 10 years of investigations by our
subcommittee: It is the large amount of speculation in oil markets
which is a major contributing factor to high prices. Speculators who
now comprise more than 80 percent of the U.S. futures oil market are
bidding on contracts, speculating on price swings, and helping to drive
up price volatility and crude oil prices. Higher crude oil prices
translate directly into higher gasoline prices. According to a February
27, 2012 article in Forbes magazine citing a recent report by Goldman
Sachs, oil speculation ``translates out into a premium for gasoline at
the pump of 56 cents a gallon.'' In other words, speculation is adding
56 cents to the price of each gallon of gas bought at the pump.
Here is a Reuters chart that uses CFTC data. It focuses on the crude
oil holdings of speculators, the group of traders that the CFTC refers
to as ``managed money'' and which includes commodity index funds, hedge
funds, commodity pool operators, and commodity trading advisers. The
chart uses CFTC data to track the ratio of their long to short crude
oil futures holdings over time. Last month, there was a spike, way over
here to the right. Speculators held more longs than shorts by a 12-to-1
ratio, the largest recorded difference in 5 years. That same week, U.S.
crude prices hit a 9-month high of $110. And it is no surprise that
when more than 80 percent of the market suddenly bets 12 to 1 on prices
going up, oil prices do just this.
As we can see from this chart, these spikes occurred in the last year
or two. Before that, we did not have the spikes. Before this, there was
this huge amount of speculation in the oil futures market and we did
not have these large spikes which we have had in the last few years.
The reality is that oil prices again are not just affected by
physical supply and demand but by speculative pressures on prices. That
means if we are to get a handle on oil prices, excessive speculation
must be curbed. There is a lot we can do to combat excessive
speculation, and I will spell out some of these steps.
Congress has already taken the first steps. In July 2010, Congress
enacted the Dodd-Frank Act which, in Section 737, directed the CFTC to
establish speculative position limits on energy and other previously
exempted commodities, and broadened CFTC authority to apply those
limits to all types of commodity-related instruments, including
futures, options, and swaps. The Dodd-Frank Act also required all large
commodity traders to begin reporting their trades in real time to a
central repository, increasing transparency, producing new detailed
trading data, and strengthening regulatory oversight.
In November 2011, in compliance with the Dodd-Frank requirements, the
CFTC issued a new position limits rule. The rule sets limits that are
not as tough as they should be, but the real problem is that they are
not yet fully in force. That means this important new tool to clamp
down on excessive speculation lies dormant.
One big roadblock is that, within a month of the rule's issuance, the
financial industry filed a lawsuit to stop it from taking effect. The
lawsuit claims Dodd-Frank didn't require the CFTC to impose position
limits, although those of us in the Senate who fought for the law know
position limits were made mandatory by Dodd-Frank and were regarded as
vital to curbing excessive speculation. The court is considering the
case now and hopefully will not allow the lawsuit to delay or thwart
the legal protections needed to stop American families and businesses
from being whipsawed by excessive speculation in oil and other
commodities.
In the meantime, what should Congress do? First, we should stop
pretending that $110 per barrel of oil is caused solely by Mideast
unrest or physical supply and demand factors, and acknowledge a major
contributing role played by speculators in crude oil prices. Second, we
ought to urge the CFTC to find that current U.S. oil prices, which do
not reflect physical supply and demand factors, are evidence of a
severe market disturbance. That finding would allow the CFTC to
exercise its emergency authority, without waiting any longer, to clamp
down on excessive speculation in the oil markets. Among other options,
the CFTC could tighten position limits for oil traders, make those
limits immediately effective in the futures, options, and swap markets,
strengthen margin requirements, and take other actions needed to bring
oil prices back into alignment with supply and demand.
Third, on a longer term basis, we should revamp the rules that enable
commodity index traders, exchange traded products, and mutual funds to
flood U.S. commodity markets with speculative bets on commodities to
the detriment of American families and businesses. Legislation is
needed to require the SEC and CFTC to impose joint registration and
reporting obligations for traders that use securities to gain exposure
in commodities, joint regulation of hybrid products that combine
securities and commodities trading, and increased margin and capital
requirements for risky speculative bets. The Internal Revenue Service
needs to stop allowing mutual funds to use phony offshore corporations
to circumvent a longstanding 10 percent limit on their commodity
investments. Additional restrictions on commodity index trading should
also be considered, since it is the largest root cause of modern day
excessive speculation.
Finally, we should ask more of the President's task force on
commodity speculation. In March 2011, a year ago, Senator Jack Reed and
I sent a letter asking President Obama to convene a task force to
investigate and combat excessive speculation and manipulation of oil
prices. While the Attorney General did convene a task force, it has
concentrated principally on detecting a few cases of alleged criminal
activity, instead of tackling the broader issue of excessive
speculation cases in which no one is committing a crime, but aggregate
commodity trading tactics are driving up prices and price volatility to
the point where they damage the U.S.
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economy. The task force needs to urgently refocus and bring its
firepower to the battle to stop excessive speculation.
In closing, until we limit excessive speculation in commodity
markets, the American economy will continue to be vulnerable to violent
price swings and American consumers and businesses will continue to be
whipsawed by oil prices unconnected to actual supply and demand.
American families cannot afford the current price of oil and gas and
neither can our economy, which, after 4 years, is beginning to turn a
corner toward real growth. Today's prices--$110 for a barrel of oil and
$4 for a gallon of gasoline--are a clarion call to action that Congress
and the CFTC ignore at the Nation's peril.
Mr. President, I thank the Chair, and I yield the floor.
The ACTING PRESIDENT pro tempore. The Senator from Indiana.
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