Gas Prices: Levin Statement at the Democratic Policy Committee Hearing on Oversight of Energy Trading: 05/08/06
As U.S. gasoline prices climb past $3 per gallon, American consumers are being told there is nothing that can be done. The oil industry says over and over again that oil prices are reflecting the laws of supply and demand, and there is not enough supply to meet demand. That explanation, however, is factually incorrect.
Right now crude oil inventories in the United States are at an 8-year high. We have right here in the United States 347 million barrels of crude oil in storage. As this chart shows, that’s more oil in storage than we have had since May of 1998, when crude oil cost $15 per barrel. Refineries shut down by Hurricane Katrina are back on-line, and so there is enough refinery capacity for this crude oil. Right now, the United States has more than enough oil to meet U.S. demand.
The same is true for the rest of the world. Energy Department statistics show that right now, global crude oil supplies exceed global demand by about 100,000 barrels per day, and there is spare production capacity of approximately 1 - 1.5 million barrels per day. As to the future, the Director of the Department of Energy’s Energy Information Administration recently testified before the House that as new global supplies come on line in the next few years, global surplus capacity would grow to between 3 and 5 million barrels per day, thereby “substantially thickening the surplus capacity cushion.”
So why are current and future prices of crude oil and gasoline prices going through the roof here in the United States? Why is the average price of regular unleaded U.S. gasoline nearing its post-Katrina record, when most of the refineries that were shut down in the wake of Katrina have re-opened? Why are crude oil prices hitting $75 per barrel, a world record?
Besides the supply and demand mantra, we’ve all heard a lot of explanations for today’s high prices. People are blaming everything from environmental regulations to Congress’s decision not to permit drilling in Alaska, the switchover from MTBE to ethanol, and instability in Iran, Venezuela, and Nigeria — but none of these seem to explain the huge and ongoing discrepancy between price and supply.
Without doubt, much of our oil comes from unstable parts of the world. But that is nothing new; it’s been that way for decades. And over the past two years none of these factors has prevented a steady buildup of supplies. The CEO of BP Petroleum recently said, “It is the case that the price of oil has gone up while nothing has changed physically.”
There is, however, one thing that has changed over the last few years, and changed dramatically, though with little notice. What has changed is the characteristics of the commodity markets, the place where the price of crude oil, gasoline, home heating oil, natural gas, diesel fuel, and other energy commodities is set.
Until recently, all energy futures trading in the U.S. took place on the New York Mercantile Exchange or NYMEX, which traditionally determined the market price of crude oil, natural gas, and other energy commodities bought and sold here in the United States. In the 1990s, Enron began to change all that by developing a way for companies to trade energy futures electronically, using computer software that operated outside of the regulated exchange markets – so-called “over-the-counter” trading.
Enron later collapsed, but the concept it pioneered of electronic over-the-counter trading, outside of the regulated markets, took off. In 2000, a group of oil companies and financial institutions, including BP Amoco, Shell Oil, Totalfina Elf oil company, Deutsche Bank, SG Investment Bank, Goldman Sachs, and Dean Witter, founded a company in Atlanta, Georgia called the Intercontinental Exchange, or “ICE.” ICE specialized in electronic over-the-counter trading of U.S. energy commodities. In 2001, ICE expanded its operations by purchasing the leading European exchange for trading European crude oil and heating oil futures, the London-based International Petroleum Exchange. ICE renamed it “ICE Futures” and, last year, converted it into an exchange that does all its trading electronically. Today, ICE is a publicly traded company.
So today, ICE operates two major electronic markets: ICE Futures in London, and an over-the-counter market here in the United States. ICE’s over-the-counter market for natural gas contracts in the United States has grown so large that it has become a major competitor to the NYMEX.
In addition to these new electronic commodity markets, a second development is that financial speculators have begun pouring tens of billions of dollars into trading oil and natural gas commodities. Oil industry analyst Philip Verleger estimates that, since 2004, oil traders alone have poured about $60 billion into the U.S. crude oil futures market. Financial institutions have beefed up their commodity trading departments, created a host of new ways to trade energy commodities, and devoted billions of dollars to this new way of making money. And their oil and gas traders are hauling in record profits.
Many analysts believe this souped-up trading activity has pushed up oil prices by $20 — $25 per barrel. It’s why we have $70 per barrel oil instead of $50. As Tim Evans, an industry analyst, put it: “What you have on the financial side is a bunch of money being thrown at the energy futures market. It’s just pulling in more and more cash. That’s the side of the market where we have runaway demand, not on the physical side.”
A trader in the natural gas market – where prices have also gone wild despite plenty of supply – put it this way: “[T]he basic facts are clear—this market is purely and simply being controlled by over-speculation.”
While American consumers and businesses pay more and more for gasoline, home heating oil, jet fuel, and other petroleum products, a few oil and gas traders are starting to match the oil companies for record profits. One oil trader alone, T. Boone Pickens, is reported to have made $1.5 billion in energy trading profits last year alone. Goldman Sachs and Morgan Stanley are each estimated to have matched that number, using energy commodity transactions last year to haul in a total of $3 billion. The problem is, at the same time energy markets have changed and oil and gas traders are pouring billions into energy commodities, the Administration and Congress have crippled the ability of U.S. regulators to track energy trades and understand what oil and gas traders are doing.
In 2000, at the urging of Enron and other large energy traders, a provision was slipped into an omnibus bill conference report that eliminated CFTC oversight of energy commodities traded by large companies outside of the regulated exchanges. This so-called Enron loophole has severely restricted CFTC oversight of energy trading.
On top of that, in the past three months, the CFTC has permitted ICE Futures in London to place terminals in the United States for U.S. traders to trade U.S. energy commodity futures through the ICE Futures exchange in London, with no U.S. government oversight or regulation. An oil trader can now sit at a computer terminal anywhere in the U.S. and avoid all U.S. regulation simply by routing his or her oil futures trades through London instead of New York. These trades can be made for U.S. crude oil, U.S. gasoline, U.S. heating oil, and a host of other U.S. petroleum products.
Already, in just three months of trading, ICE Futures in London has captured at least 30% of the U.S. crude oil futures market. Until ICE Futures was given permission to place its terminals in the U.S., all trading in futures contracts for crude oil, gasoline, and heating oil delivered in the U.S. were subject to U.S. oversight. But now, if U.S. oil or gasoline traders were to engage in fraud or market manipulation while trading U.S. crude oil or gasoline on the London exchange, Americans would have to rely on another government to detect the misconduct and do something about it. That’s unacceptable.
Until Enron punched a giant hole in the CFTC’s oversight of energy commodity trading, and ICE Futures began trading U.S. oil in London, all futures trades of U.S. energy commodities took place on the NYMEX, a fully regulated U.S. commodity futures market. That means NYMEX traders keep records of all of their trades and report large trades to the CFTC. These large trader reports are the CFTC’s primary tool for market oversight. These reports enable the CFTC to determine whether unusual price changes are due to changes in supply and demand, or to possible market manipulation.
In contrast, oil and gas traders on the ICE over-the-counter electronic trading market do not have to report to the CFTC. Although much of the over-the-counter trading on ICE is identical to the trading on NYMEX, oil and gas traders on ICE — unlike traders on NYMEX — are exempt from filing large trader reports. So are traders of U.S. crude oil on the ICE Futures in London.
As more and more U.S. oil and gas trading occurs on the ICE over-the-counter electronic trading facility, or is routed to the ICE Futures exchange in London, the CFTC is less and less able to oversee the U.S. energy market. As a result, the CFTC is less and less able to carry out its fundamental mandate to prevent manipulation of energy prices.
We’ve already learned a hard lesson about what can happen in the energy markets when no one is watching. Enron taught us how energy traders can manipulate prices and walk over the ratepayers and energy consumers if they think they can get away with it.
Congress needs to act and act now. As a first step, Congress should enact the Feinstein-Snowe-Levin-Cantwell Oil and Gas Traders Oversight Act, S. 2642. This bill would close the Enron loophole and require all large trades on over-the-counter electronic trading facilities to be reported to the CFTC. It would also require all traders in the United States who make large trades of U.S. energy commodities on foreign exchanges to report those trades to the CFTC. It would level the playing field between the NYMEX and ICE, and between the U.S. and London exchanges. It would enable the United States to oversee all U.S. oil and gas traders buying and selling U.S. energy commodities, and protect U.S. consumers and businesses from market fraud and price manipulation.
This legislation is necessary to give the CFTC the basic tools it needs to detect, prevent, and prosecute price manipulation by oil and gas traders. It also is necessary to help us to find out why oil and gas prices continue to defy the laws of supply and demand, continuing to skyrocket despite adequate supply.