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Press Release of Senator Cantwell
Experts Tell Senate Committee How to Burst Energy Price Bubble
Cantwell Chairs Hearing Investigating Market Manipulation and the Causes of Outrageous Energy Prices
Tuesday, June 03,2008
WASHINGTON, DC - Today, U.S. Senator Maria Cantwell chaired a Senate Commerce Committee hearing investigating whether market manipulation is behind today’s skyrocketing oil and gas prices. The hearing examined what is behind today’s record high oil and petroleum distillate prices; what connections exist between financial markets – particularly the futures market – and the pump price consumers pay; whether there are opportunities for bad actors to manipulate these crucial markets; and the government’s role in protecting consumers from possible illegal activity. Additionally, witnesses testified on the key factors the Federal Trade Commission (FTC) should incorporate into its upcoming rulemaking needed to fulfill its Congressionally-mandated responsibility to prevent manipulation in wholesale oil and petroleum distillate markets. .
Witnesses included: Soros Fund Management Chairman George Soros, University of Maryland Law School Professor Michael Greenberger, Inland Oil Company President Gerry Ramm, Federal Energy Regulatory Commission official Lee Ann Watson, and Consumer Federation of America representative Mark Cooper.
“With gasoline prices well over four dollars a gallon in some regions, and diesel topping five dollars, consumers no longer have the confidence that the prices they are paying at the pump are fair or even linked to underlying supply and demand forces,” said Cantwell. “We have learned from painful experience that energy markets can be manipulated when federal regulators are asleep at the wheel or market rules aren’t strong enough to protect consumers.”
According to a number of oil industry executives and market analysts, around a third of today's crude oil price is pure speculation driven by large trader banks and hedge funds, and much of it on electronic futures exchanges free from U.S. oversight. To the extent that prices do not reflect market fundamentals, the federal government has an obligation to ensure that prices are not being manipulated.
“Recently, [oil market] spot prices have risen far above the marginal cost of production and far-out, forward contracts have risen much faster than spot prices. Price charts have taken on a parabolic shape which is characteristic of bubbles in the making,” said George Soros, Chairman, Soros Fund Management
Over the years, Cantwell has worked tirelessly to increase transparency and root out manipulation in the energy markets, including securing anti-manipulation provisions in the Energy Policy Act of 2005 to provide Federal Energy Regulatory Commission (FERC) expanded authority over manipulation in the electricity and natural gas markets. Cantwell has also cosponsored legislation to help prevent price manipulation and excessive speculation in energy commodity markets that are leading to high energy prices for U.S. consumers.
"Excessive speculation on energy trading facilities is the fuel that is driving this runaway train in crude oil prices," said Gerry Ramm, Senior Executive, Inland Oil Company of Ephrata, WA. "This rise in crude oil prices in recent weeks has dragged with it every single refined petroleum product, especially heating oil...Large purchases of crude oil futures contracts by speculators have created an additional demand for oil which drives up the prices of oil for future delivery...Reliable futures markets are crucial to the entire petroleum industry."
Last December, Cantwell’s legislation banning manipulation in the oil and petroleum markets became part of the 2007 Energy Bill. Her provision empowers the FTC to levy civil penalties of up to $1 million per day. On May 1, 2008, under Congressional pressure to act, the FTC issued an Advanced Notice of Proposed Rulemaking soliciting public comment on the appropriate way to interpret and enforce the Cantwell provisions related to preventing market manipulation in the petroleum industry. Earlier this year, Cantwell also called on the President to establish a new Oil and Gas Market Fraud Task Force under the leadership of the Department of Justice to examine possible fraud and manipulation in oil and gas markets. In addition, Cantwell wrote a bipartisan letter cosigned by 21 of her colleagues to the Commodity Future Trading Commission (CFTC) on May 23, 2008 demanding the Commission require greater scrutiny of foreign trading of U.S. delivered commodities.
[Cantwell’s opening statement below]
June 3, 2008
I would like to welcome everyone to today’s hearing on energy market manipulation and thank all of the distinguished witnesses for being here today. George Soros, Chairman of Soros Fund Management; Professor Michael Greenberger, University of Maryland School of Law; Gary Ramm, President of Inland Oil Company of the Petroleum Marketers Association of America; Lee Ann Watson, Deputy Director, Division of Investigation, Office of Enforcement, Federal Energy Regulatory Commission, and Mark Cooper, Director of Research, Consumer Federation of America.
We are here to examine whether today’s record high oil and petroleum prices can be explained or predicted by normal market dynamics, or supply and demand fundamentals; what connections exist between financial markets --particularly the futures market-- and the price at the pump consumers pay today; how the Federal Trade Commission’s (FTC) Advance Notice of Proposed Rulemaking can lead to meaningful consumer protections; practices the FTC should consider manipulative; and what lessons the FTC can learn from other federal agencies whose oversight of natural gas and electricity wholesale markets has uncovered manipulation in futures markets.
In short, we are here today to make sure that federal agencies do their job and police the oil markets.
Why is this such a concern?
One reason is we have seen the price of oil more than double from $60 to $135 is just over two years without major supply disruptions. We have also been plagued by manipulation in other energy markets.
Enron and others manipulated the Western electricity markets in 2000 and 2001 and cost consumers over $40 billion. In light of that, Congress gave the Federal Energy Regulatory Commission new authority in the Energy Policy Act of 2005.
Specifically, Congress made it “unlawful for any person … to use or employ … any manipulative or deceptive device or contrivance,” in connection with the wholesale electricity and natural gas markets. We’re going to hear today from FERC’s Deputy Director of Investigation and Enforcement on how FERC has used its new authority to root out manipulation in physical electricity and natural gas markets.
To date, FERC has used its new authority to conduct 64 investigations resulting in 14 settlements totaling over $48 million in civil penalties. We have seen the very same energy traders move from Enron to Amaranth, and American families and business alike have the same concerns about potential manipulation in our oil markets.
Last December 2007, Congress granted the FTC anti-manipulation authority in the Energy Bill. Specifically, Congress made it “unlawful for any person … to use or employ … any manipulative or deceptive device or contrivance,” in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale.
The FTC is now in the process of developing a rule under this new authority. These two laws were based on the Securities and Exchange Act of 1934. Congress did this to provide the FERC and FTC with the ability to provide a clear standard for manipulation by relying on the large body of securities case law.
In fact, the Supreme Court has compared this body of law to “a judicial oak, which has grown from little more than a legislative acorn.”
The FTC needs to take its new anti-manipulation responsibility seriously and write a strong rule like FERC, so that consumers will be protected from price manipulations. In both the natural gas and the oil markets, people have seen how the futures prices affect the physical prices.
Recent investigative reports by Congress and the Government Accountability Office, corroborated by substantial Congressional testimony from market users and experts, make clear the tight correlation between futures and spot prices; that is the prices consumers actually pay for energy.
This is why it is also critical for the Commodity Futures Trading Commission to be an aggressive cop on the beat to fulfill its Congressional mandate to protect American energy consumers from fraud, manipulation, and excessive speculation in all FUTURES markets that trade U.S. products.We saw Enron game the futures market to drive the futures price higher so electricity customers would be forced to sign higher priced long-term contracts in the physical market.
We saw the same thing with Amaranth in the natural gas markets. A large hedge fund drove up the futures price and natural gas customers were forced to pay higher prices for physical delivery.
It is abundantly clear to me that the CFTC is not doing everything it can to protect American families and businesses from possible oil price manipulations.
Americans may be surprised to learn that our oil futures markets were substantially deregulated by CFTC staff decisions that were made behind closed doors. This “London-Loophole” and now the “Dubai-Loophole” is keeping important U.S. energy trading in the dark. And without proper light manipulators have free reign.
I understand that the Dubai Exchange, which also received a staff no regulatory action decision that was given behind closed doors, recently began trading U.S. oil products on U.S. trading terminals. Now we have a “Dubai-Loophole” to keep track of.
This is no different than when U.S. businesses take out a post office box in the Cayman Islands to avoid U.S. business laws. Two weeks ago I sent a letter to the CFTC, along with 21 of my colleagues, insisting that the they reverse their “no-action” policy and start policing all U.S. oil markets.
I know several of my colleagues on this committee joined me in sending this letter, including Senators Snowe, Dorgan, Kerry, Boxer, Klobuchar, and McCaskill. The CFTC’s May 29 apparent response this request certainly does not go far enough. The CFTC is a toothless tiger.
There are four things wrong with the CFTC’s weak approach.
First, there is still no large speculation limits that are critical to preventing fraud, manipulation and excessive speculation.
Second, the CFTC will not collect the same kind of information that it would collect from other fully regulated exchanges. The information will be unaudited and unverifiable.
Third, unlike fully regulated U.S. exchanges like NYMEX, there are no enforcement mechanisms.
And fourth, the CFTC approach is partly just an agreement to agree – there are no firm commitments – so all of these measures may not even be put in place.
The CFTC’s announcement appears to be nothing more than a ruse to deflect criticism for its serious abdication of oversight responsibility. We look forward to hearing a formal response to our letter insisting on the CFTC to fully regulate all trading of U.S. energy commodities and close the “London-Dubai-Oil-Loophole.”
If the CFTC does not act, I am planning to introduce legislation that will force them to. For those of us who suffered Enron’s manipulations, we have plenty of perspective to share with the CFTC:
We want federal oversight agencies to do their job.
We expect federal oversight agencies to actively police the oil markets for fraud, manipulation, and excessive speculation.
I hope our witnesses can help illuminate these issues for consumers.
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