Statement of Senator Carl Levin on Oil and Gasoline Prices: 05/12/08
Mr. President, day after day record-high oil and gasoline prices are hurting millions of American consumers and businesses. Unless something is done to make energy more affordable, the record-high prices will continue to reverberate throughout our economy, increasing the prices of transportation, food, manufacturing and everything in between. Skyrocketing energy prices are a threat to our economic and national security, and the time is long past for action.
My Senate Permanent Subcommittee on Investigations has conducted four separate investigations into how our energy markets can be made to work better. Most recently, last December, we had a joint hearing with the Senate Energy Subcommittee on the role of speculation in rising energy prices. As a result of these investigations and hearings, I have been advocating a variety of measures to address the rampant speculation and lack of regulation of energy markets which have contributed to sky high energy prices:
- Put a cop – a regulatory agency – back on the beat in the energy markets to ensure these markets are free from excessive speculation and manipulation;
- Stop filling the Strategic Petroleum Reserve until prices are lower;
- Develop alternatives to fossil fuels to lessen our dependence on oil;
- Impose a windfall profits tax on oil companies that have profited from the massive price increases.
One of the major causes of our energy crisis is the failed policies of the current Administration. The chickens have come home to roost on seven years of a business-as-usual energy policy, paired with fiscal and foreign policies that have pushed our growing energy problem close to a breaking point. Because the Administration has proved itself unable and unwilling to take the necessary steps to provide affordable energy supplies to the American people, it is up to the Congress to try to jumpstart a comprehensive solution to skyrocketing energy prices.
The price of crude oil recently reached a record high price of about $126 per barrel. Sky-high crude oil prices have led to record highs in the price of other fuels produced from crude oil, including gasoline, heating oil, diesel fuel, and jet fuel. The national average price of gasoline is at a record high of about $3.70 per gallon. Jet fuel costs nearly $3.40 per gallon. The price of diesel fuel, which is normally less expensive than gasoline, has soared to a record high of nearly $4.25 per gallon.
Rising energy prices increase the cost of getting to work and taking our children to school, traveling by car, truck, air and rail, and growing the food we eat and transporting it to market. Rising energy prices increase the cost of producing the medicines we need for our health, heating our homes and offices, generating electricity, and manufacturing countless industrial and consumer products. The relentless increase in jet fuel prices has contributed to airline bankruptcies, mergers, fare increases, and service cuts. “If fuel continues to go up, this industry cannot survive in current form,” the president of the Air Transport Association said recently. Rising diesel prices have placed a crushing burden upon our nation’s truckers, farmers, manufacturers, and other industries. To make matters worse, our energy costs are rising much more quickly than energy costs in other countries, directly threatening our global competitiveness.
In January 2001, when President Bush took office, the price of oil was about $30 per barrel. The average price for a gallon of gasoline was about $1.50. Since President Bush took office, crude oil prices have nearly quadrupled, natural gas prices to heat our homes have almost doubled, gasoline prices have more than doubled, and diesel fuel prices have nearly tripled.
It doesn’t have to be this way. Just seven years ago, at the end of the Clinton Administration, energy supplies were plentiful, and gasoline and other forms of energy were affordable. Once the Bush Administration took office, however, it didn’t take them long to eliminate the budget surplus by cutting taxes mainly for the wealthiest among us, creating a huge annual budget deficit, and driving up the national debt. This fiscal mismanagement has contributed significantly to a steep decline in the value of the dollar and soaring commodity prices. Because American currency is worth less, it takes more of them to buy the same barrel of oil. American consumers and businesses are forced to spend more and more of their hard-earned dollars to buy the same amount of energy. During the last years of the Clinton Administration, the U.S. ran a budget surplus, totaling nearly $560 billion. But over the past six years of the Bush Administration the annual deficits have totaled nearly $1.7 trillion, not counting the amount by which the Bush Administration has been draining the Social Security and Medicare trust funds. When this is counted, under this Administration the total outstanding debt has increased by a whopping $3.2 trillion.
When President Clinton left office, the dollar was worth more than the euro. In January 2001, it took only about 90 cents to buy one euro. Today, it takes about $1.60 to buy one euro — a record low for the dollar. The fall in the value of the dollar is a result of a weakened U.S. economy, a high trade deficit and a world-wide lack of confidence in the Bush Administration’s ability to manage our nation’s economy and foreign policy. As long as this Administration continues to insist on irresponsible fiscal practices – including tax cuts for people with the highest income and an open-ended conflict in Iraq that is costing $12 billion a month – the dollar will likely continue to decline in value. The marketplace has rendered a clear “no confidence” in this Administration’s fiscal competence.
Besides the weak dollar, there are other factors at work that account for soaring energy prices. Some are beyond our control; others we can do something about. In global markets, for example, the combination of increasing demand from developing countries, coupled with a variety of political problems in supplier countries, has contributed to price increases. Growing demand for oil and gas in China, India, and other developing countries is contributing to an overall increase in global demand for crude oil. On the supply side, many oil producing countries are politically unstable, and have not been fully reliable suppliers. For example, in Nigeria, which is a major oil producing country, for several years tribal gangs have been sabotaging production and pipelines.
While we can’t do much about some causes of sky high gas prices, a number of causes can be addressed. Another key factor in price spikes of energy is rampant speculation in the energy markets. Traders are trading contracts for future delivery of oil in record amounts, creating a paper demand that is driving up prices and increasing price volatility solely to take a profit. Overall, the amount of trading of futures and options in oil on the New York Mercantile Exchange has risen six-fold in recent years, from 500,000 outstanding contracts in 2001, to about 3 million contracts now.
Much of this increase in trading of futures has been due to speculation. Speculators in the oil market do not intend to use crude oil; instead they buy and sell contracts for crude oil just to make a profit from the changing prices. The number of futures and options contracts held by speculators has gone from around 100,000 contracts in 2001, which was 20% of the total number of outstanding contracts, to 1.2 million contracts currently held by speculators, which represents almost 40% of the outstanding futures and options contracts in oil on NYMEX .There is now 12 times as many speculative holdings as there was in 2001, while holdings of non-speculative futures and options is up but 3 times.
Not surprisingly, this massive speculation that the price of oil will increase has, in fact, helped increase the price of oil to a level far above the price that is justified by the traditional forces of supply and demand.
The President and CEO of Marathon Oil recently said, “$100 oil isn’t justified by the physical demand in the market. It has to be speculation on the futures market that is fueling this.” Mr. Fadel Gheit, oil analyst for Oppenheimer and Company describes the oil market as “a farce.” “The speculators have seized control and it’s basically a free-for-all, a global gambling hall, and it won’t shut down unless and until responsible governments step in.” In January of this year, as oil hit $100 barrel, Mr. Tim Evans, oil analyst for Citigroup, wrote “the larger supply and demand fundamentals do not support a further rise and are, in fact, more consistent with lower price levels.” At the joint hearing on the effects of speculation we held last December, Dr. Edward Krapels, a financial market analyst, testified, “Of course financial trading, speculation affects the price of oil because it affects the price of everything we trade. . . It would be amazing if oil somehow escaped this effect.” Dr. Krapels added that as a result of this speculation, “There is a bubble in oil prices.”
A fair price for a commodity is a price that accurately reflects the forces of supply and demand for the commodity, not the trading strategies of speculators who only are in the market to make a profit by the buying and selling of paper contracts with no intent to actually purchase, deliver, or transfer the commodity. As we have all too often seen in recent years, when speculation grows so large that it has a major impact on the market, prices get distorted and stop reflecting true supply and demand.
Last week, Senator Jack Reed and I wrote a letter asking President Bush to appoint a high-level task force to evaluate how speculators are driving up prices through manipulative or deceptive devices. The task force should also evaluate whether there are adequate regulatory tools to control market speculation and prevent manipulation. Hopefully the President will act quickly to convene this task force. I ask unanimous consent that a copy of this letter be included in the Record at the end of this statement.
Excessive market speculation is a factor that we can and should do a better job of controlling. There are other long overdue actions as well that, if taken as part of a comprehensive plan, can combat rising energy prices.
Putting a Cop on the Beat in Energy Markets
As to reining in speculation, the first step to take is to put a cop back on the beat in all our energy markets to prevent excessive speculation, price manipulation, and trading abuses. In 2001, my Senate Permanent Subcommittee on Investigations began investigating our energy markets. At the time, the price of a gallon of gasoline had spiked upwards by about 25 cents over the course of the Memorial Day holiday. We subpoenaed records from major oil companies and interviewed oil industry experts, gas station dealers, antitrust experts, gasoline wholesalers and distributors, and oil company executives. We examined thousands of prices at gas stations in Michigan, Ohio, California, and other states. In the spring of 2002, I released a 400-page report and held two days of hearings on the results of the investigation.
The investigation found that increasing concentration in the gasoline refining industry, due to a large number of recent mergers and acquisitions, was one of the causes of the increasing number of gasoline price spikes. Another factor causing price spikes was the increasing tendency of refiners to keep lower inventories of gasoline. We also found a number of instances in which the increasing concentration in the refining industry was also leading to higher prices in general. Limitations on the pipeline that brings gasoline into my home state of Michigan were another cause of price increases and spikes in Michigan. The report recommended that the Federal Trade Commission carefully investigate proposed mergers, particularly with respect to the effect of mergers on inventories of gasoline.
The investigation discovered one instance in which a major oil company was considering ways to prevent other refiners from supplying gasoline to the Midwest so that prices would increase.
In March 2003, my Subcommittee released a second report detailing how the operation of crude oil markets affects the price of not only gasoline, but also key commodities like home heating oil, jet fuel, and diesel fuel. The report warned that U.S. energy markets were vulnerable to price manipulation due to a lack of comprehensive regulation and market oversight.
Following this report, I worked with Senator Feinstein on legislation to put the cop back on the beat in the energy markets that had been exempted from regulation pursuant to an “Enron loophole” that was snuck into other commodities legislation in December 2000. For two years we attempted to close the Enron loophole, but efforts to put the cop back on the beat in these markets were unsuccessful, due to opposition from the Bush Administration, large energy companies, and large financial institutions that trade energy commodities.
In June 2006, I released another Subcommittee report, The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put a Cop on the Beat. This report found that the traditional forces of supply and demand no longer accounted for sustained price increases and price volatility in the oil and gasoline markets. The report determined that, in 2006, that a growing number of energy trades occurred without regulatory oversight and that market speculation had contributed to rising oil and gasoline prices, perhaps accounting for $20 out of a then-priced $70 barrel of oil.
The Subcommittee report I released in June 2006 again recommended new laws to increase market oversight and stop market manipulation and excessive speculation. I again co-authored legislation with Senator Feinstein to improve oversight of the unregulated energy markets. Once again, opposition from the Bush Administration, large energy traders, and the financial industry prevented the full Senate from considering this legislation.
In 2007, my Subcommittee addressed the sharp rise in natural gas prices over the previous year and released a fourth report, entitled Excessive Speculation in the Natural Gas Market. Our investigation showed that speculation by a single hedge fund named Amaranth had distorted natural gas prices during the summer of 2006, and drove up prices for average consumers. The report also demonstrated how Amaranth had traded in unregulated markets to avoid the restrictions and oversight in the regulated markets, and how the price increases caused by Amaranth could have been prevented if there had been the same type of oversight in the unregulated markets as in the regulated markets.
Following this investigation, I introduced a new bill, S. 2058, to close the Enron loophole and regulate the un-regulated electronic energy markets. Working again with Senators Feinstein and Snowe, and with the members of the Agriculture Committee in a bipartisan effort, we finally managed to include an amendment to close the Enron loophole in the farm bill that was then being considered by the Senate. The Senate unanimously passed this amendment to close the Enron loophole last December. Last week, the House and Senate conferees on the farm bill reached agreement to include our legislation in the final farm bill. I hope the Congress will finally pass this important legislation very soon.
Although the legislation to close the Enron loophole is vitally important for energy market oversight as a whole, and for our natural gas markets in particular, because energy traders have recently moved a significant amount of U.S. crude oil and gasoline trading to the United Kingdom, beyond the direct reach of U.S. regulators, we have to address that second loophole too.
One of the key energy commodity markets for U.S. crude oil and gasoline trading is now located in London, regulated by the British agency called the Financial Services Authority. However, the British regulators do not have any limits on speculation like we do here in the United States, and the British do not make public the same type of trading data that we do. This means that traders can avoid the limits on speculation in crude oil imposed on the New York exchanges by trading on the London exchange. It also makes the London exchange less transparent than the New York exchange. The original legislation to close the Enron loophole would have required U.S. traders on the London exchange to provide U.S. regulators with the same type of trading information that they are already required to provide when they trade on the New York Mercantile Exchange. Unfortunately, this provision was dropped from the close the Enron loophole legislation in the farm bill.
The Consumer-First Energy Act, which the Majority Leader and others introduced last week to address high prices and reduce speculation, includes a provision to stop rampant speculation and increase our access to timely and important trading information and ensure that there is adequate market oversight of the trading of U.S. energy commodities no matter where the trading occurs. This legislation would require the Commodity Futures Trading Commission (CFTC) to ensure that a foreign exchange imposes comparable speculative limits and comparable reporting requirements on speculators that the CFTC imposes on U.S. exchanges prior to allowing traders in the U.S. trading U.S. energy commodities direct access to that exchange through a terminal located in this country.
I believe this issue is so important that I have introduced this section of the package as a separate bill. Senator Feinstein is a cosponsor of this bill. I ask unanimous consent that a summary of the bill be included in the Record after my statement.
Postpone Filling the Strategic Petroleum Reserve
In addition to finding that the energy markets needed better regulation and oversight, the report issued by my Subcommittee in 2003 also found that the Bush Administration’s large deposits of oil into the Strategic Petroleum Reserve (SPR) were increasing prices but not overall U.S. energy security. We found that in 2002, the Bush Administration, over the repeated objections of its own experts in the Department of Energy, had changed its policy and decided to put oil into the SPR regardless of the price of oil or market conditions. By placing oil into the SPR while oil prices were high and oil supplies were tight, the Administration’s deposits into the SPR were reducing market supplies and boosting prices, with almost no benefit to national security, given the fact that the SPR is more than 95% filled. The DOE experts believed that in a tight market, we are better off with keeping the oil on the market rather than putting it into the ground where it cannot be used.
Following the issuance of this report, in early 2003, I asked the Department of Energy to suspend its filling of the SPR until prices had abated and supplies were more plentiful. DOE refused to change course, and continued the SPR fill without regard to market supplies or prices.
After DOE denied my request, I offered a bipartisan amendment with my colleague Senator Collins to the Interior Appropriations bill, which provides funding for the Strategic Petroleum Reserve program, to require DOE to minimize the costs to the taxpayers and market impacts when placing oil into the SPR. The Senate unanimously adopted our amendment, but it was dropped from the conference report due to the Bush Administration’s continued opposition.The next spring, I offered another amendment, also with Senator Collins, to the budget resolution, expressing the sense of the Senate that the Administration should postpone deliveries into the SPR and use the savings from the postponement to increase funding for national security programs. The amendment passed the Senate by a vote of 52-43. That fall, we attempted to attach a similar amendment to the homeland security appropriations bill that would have postponed the SPR fill and used the savings for homeland security programs, but the amendment was defeated by a procedural vote, even though the majority of Senators voted in favor of the amendment, 48-47.
The next year, the Senate passed the Levin-Collins amendment to the Energy Policy Act of 2005 to require the DOE to consider price impacts and minimize the costs to the taxpayers and market impacts when placing oil into the SPR. The Levin-Collins amendment was agreed to by the conferees and is now law.
Unfortunately, passage of this provision has had no effect upon DOE’s actions. DOE continues to fill the SPR regardless of the market effects of buying oil, thereby taking oil off the market and reducing supply by placing it into the SPR. In the past year, no matter what the price of oil or market conditions, DOE has consistently found that the market effects are negligible and no reason to delay filling the SPR.
Currently, at the same time the President has urged OPEC to put more oil on the market to reduce supplies, the Administration is continuing to take oil off the market and place it into the SPR. The DOE is currently depositing about 70,000 barrels of crude oil per day into the SPR, much of it high-quality crude oil that is ideal for refining into gasoline. It simply defies common sense for the U.S. government to be acquiring oil at $120 barrel, in a time of tight supply, just before the peak driving season, and put it into the SPR. That is why I have co-sponsored Senator Dorgan’s bill to suspend the SPR fill for one year, or until prices fall to more acceptable levels, whichever comes first. Passing this legislation will save the taxpayers money and relieve some of the pressure on the oil markets that is driving prices relentlessly higher. A similar provision is also included in the Democrats’ Consumer-First Energy Act.
The recent SPR fill has exacerbated yet another problem in our oil markets – the fact that the standard NYMEX futures contract that sets the benchmark price for U.S. crude oil requires a particular type of high quality crude oil known as West Texas Intermediate (WTI) to be delivered at a particular location, Cushing, Oklahoma. The standard NYMEX contract price, in turn, has a major influence on the price of fuels refined from crude oil such as gasoline, heating oil, and diesel.
Because the price of the standard contract depends upon the supply of WTI at Cushing, Oklahoma, the supply and demand conditions in Oklahoma have a disproportionate influence on the price of NYMEX futures contracts. That means when the WTI price is no longer representative of the price of U.S. crude oil in general, the prices of other energy commodities are also thrown out of whack. In other words, we have an oil futures market that reflects the supply and demand conditions in Cushing, Oklahoma, but not necessarily the overall supply and demand situation in the United States as a whole.
I have long called for reform of this outdated feature of the standard NYMEX crude oil contract. In 2003, the PSI report recommended the CFTC and NYMEX to work together to revise the standard NYMEX crude oil futures contract to reduce its susceptibility to local imbalances in the market for WTI crude oil. The Subcommittee report suggested that allowing for delivery at other locations could reduce the volatility of the contract. It is truly disappointing that since our report was issued no progress has been made for allowing for delivery at other places than Cushing, Oklahoma. As the price of oil has increased, the distortions and imbalances caused by the atypical nature of the standard contract have gotten worse. It is essential NYMEX repair its crude oil contract.
Developing Alternatives to Fossil Fuels
Putting the cop on the beat in our energy markets, strengthening access to key oil trading information, stopping the SPR fill, and fixing the NYMEX crude oil contract all focus on problems caused by rising energy prices. These consistently rising gas prices also underscore the need to develop advanced vehicle technologies and alternative energy sources that will significantly reduce our dependence on foreign oil.
I have long been advocated advanced automotive technologies such as hybrid electric, advanced batteries, hydrogen and fuel cells and promoted development of these technologies through federal research and development and through joint government-industry partnerships. We need a significant infusion of federal dollars into these efforts to make revolutionary breakthroughs in automotive technologies. Such an investment will make technologies such as plug-in hybrid vehicles affordable to the American public, and reduce our dependence on oil and reduce prices at the pump.
We need an equally strong investment in development of alternative fuels that can replace gasoline. I have strongly supported efforts to increase our production of renewable fuels and to do that in a way that will also reduce our greenhouse gas emissions. We need a strong push toward biofuels produced from cellulosic materials, which requires a significantly greater federal investment in biofuels technologies. Cellulosic ethanol has enormous potential for significant reductions in greenhouse gas emissions but additional federal support is required to make this technology financially viable. We need expanded federal research and development grants as well as increased tax incentives and federal loan guarantees to make cellulosic ethanol a viable replacement for gasoline. The federal government must do its part first to develop these technologies so that they will then in turn be within reach of the American public.
Windfall Profits Tax
One more point. The burden of higher energy prices is not being shared equally. To the contrary, it is falling hardest upon those who can least afford it. Large oil companies are reaping record profits at the expense of the average American who ultimately bears the full burden of these price increases. At the same time that average Americans are having to devote a greater and greater portion of their income to pay for basic necessities, such as gasoline, household utilities, and food, the major oil companies are reporting record profits, and their executives are taking home annual paychecks of hundreds of millions of dollars. Many of these profits have been generated without any additional investments into energy production. Rather, these companies have seen their profits rise with the flood of speculation. What is a high tide of profits for the oil companies, though, is a tsunami that is overwhelming millions of Americans.
And what are these oil companies doing with these record profits? Are they investing in new technologies? The answer is that the oil companies are not increasing their exploration and development investments by nearly as much as their profits are increasing. Instead, they are devoting large amounts of their profits to acquiring other companies and buying back their own shares. On May 1 of this year, the Wall Street Journal reported that in the first quarter of 2008 ExxonMobil spent $8 billion to buy back company shares, which “boosted per-share earnings to stratospheric levels,” whereas it spent less on exploration and actually reduced oil production.
For these reasons, we need to institute a windfall profits tax on the oil companies. We should incentivize big oil companies to invest their windfall profits into things that will increase our own domestic energy production by reducing the amount of the tax for such investments. If they don’t make these investments, a portion of that profit should be recouped by the public to help offset the outrageous prices they are facing at the pump.
I have supported a windfall profits tax numerous times when we have voted on it in the Senate. “The Consumer-First Energy Act,” imposes a 25% tax on windfall profits of the major oil companies. Windfall profits invested to boost domestic energy supplies would be exempt from the tax, which would encourage investments in renewable facilities and the production of renewable fuels such as ethanol and biodiesel. It would also encourage oil companies to increase their domestic refinery capacity. Proceeds from the tax would be put toward measures to reduce the burdens of rising energy costs and increase our energy independence and security.
Skyrocketing energy prices are tying up our already weak economy in knots, and causing financial pain to working families throughout this country. Congress can not just stand by; we should act now to stop the pain. Immediate steps include putting the cop on the beat in our energy markets, strengthening our access to key oil trading data in London, fixing the key NYMEX crude oil contract, stopping the senseless fill of the SPR with $125 oil, investing in advanced vehicle technologies and alternative energy sources, and imposing a windfall profits tax on the oil companies. Longer range steps include fixing the fiscal policies undermining the strength of the U.S. dollar, including by eliminating tax cuts for the wealthiest among us, reducing the $12 billion a month spending bill in Iraq, and closing the top loopholes like the use of tax havens to avoid payment of taxes to Uncle Sam in the range of $100 billion a year.
We can fight back against exorbitantly high energy prices. But it will take all our energy – and determination – to do it.