[Congressional Record (Bound Edition), Volume 158 (2012), Part 3]
[Senate]
[Pages 4059-4061]
[From the U.S. 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

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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 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

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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. 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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