Cantwell Demands Investigation of Gas Price Spikes

Gas up 40 cents per gallon in WA state over last month, burdening families and economic recovery Cantwell wants to know why volatile gas prices not linked to supply-and-demand fundamentals, role of Wall Street speculation and possible price manipulation

SEATTLE, WA – Today, U.S. Senator Maria Cantwell (D-WA) demanded federal regulators use the authority she granted them in 2007 to ensure skyrocketing prices at the gas pump are not the result of market manipulation or other anticompetitive behavior. 

According to AAA figures, Washington state gas prices have gone up 40 cents-per-gallon in just the last month, hurting small business and burdening families and the economic recovery. Every $0.50 increase in gas prices costs Washington households one percent of their annual income, on average, or roughly $565 using 2010 average household income numbers. In the Seattle area, gas prices have risen nearly 60 cents per gallon over the past three months, and diesel prices are a dollar more per gallon over this time last year, hitting truckers, farmers, and transit services particularly hard.  

“While oil speculators on Wall Street may be profiting from Middle East turmoil, Washington families and businesses on Main Street are footing the bill at the gas pump,” Senator Cantwell said.“Unlike when gas prices spiked suspiciously in the summer of 2008, the Federal Trade Commission now has the necessary tools to be the cop on the beat protecting consumers from artificial gas price hikes. Today, I’m calling for the FTC to put those tools to use to protect families and businesses across the country.”

“Even a small gas price increase translates to significant costs for consumers in my home state of West Virginia and across America, including higher costs for food and other essentials,” said Senator Rockefeller (D-WV), Chairman of the Senate Committee on Commerce, Science, and Transportation, which has jurisdiction over the FTC. “When prices rise, many struggle to make ends meet, and must make difficult decisions about family budgets. Recently, the rapid spike in gas prices has caused more financial woe for already struggling Americans. To reduce the risk that fraud or deceit in the petroleum market could wreak havoc on working families who rely on competitive gas prices to get to work or the grocery store, it is critical that the FTC aggressively use all of its authority to make sure people are paying a fair price.” 

Cantwell announced today that she was sending a bipartisan letter to the Federal Trade Commission (FTC) calling for an investigation into any links between rising gas prices and a sharp increase in wholesale oil markets. In August 2009, the FTC finalized its Petroleum Market Manipulation Rule, which was promulgated in compliance with legislation Cantwell authored in 2005 and successfully shepherded into law in 2007, making it a crime to manipulate wholesale oil markets. Today she is calling on the consumer protection agency to use its new authority to meet their responsibility to protect consumers.

In the letter sent today to the FTC, Cantwell noted that the price per barrel of oil over the past four years has varied drastically despite comparatively little change to the world’s supply and demand. She asserts that the FTC must be more proactive and aggressive in enforcing its market manipulation rule, noting the success the Federal Energy Regulatory Commission (FERC) has had in ferreting out bad actors in the electricity and natural gas markets using identical authority, and she details several questions she wants answered to shed light on any illegal activity that is behind the pain at the pump. She continues: The high gas prices that are hurting American families and businesses today represent the first major test of FTC’s ability to protect consumers in this market. We urge you to use the authority of the Petroleum Market Manipulation Rule aggressively in order to protect consumers from unnecessarily high and volatile gas and diesel prices.” Senator Rockefeller (D-WV), Chairman of the Senate Committee on Commerce, Science, and Transportation which has jurisdiction over the FTC, also signed Cantwell’s letter. Senators Olympia Snowe (R-MA), Ron Wyden (D-OR) and Mark Pryor (D-AR), all long-time defenders of consumers, signed on as well.

Last week, Cantwell urged the U.S. Commodity Futures Trading Commission (CFTC) to crack down on oil speculation that is likely contributing to recent gas prices spikes. In a letter to CFTC Chairman Gary Gensler, Senator Cantwell and 11 other senators urged him to use the new authority granted in last year’s Wall Street reform law to combat excessive speculation. Commodities experts have said that oil speculators are driving up the cost of oil in the wake of news from the Middle East, with one market saying speculators are responsible for as much as $15 in the price of an oil barrel. (CNBC, 3/8/11)

Cantwell has long fought to prevent market manipulation and excessive speculation from artificially driving up the price of oil and prices faced by consumers at the pump. During last year’s financial market reform debate, Cantwell pushed for tough and effective rules and the elimination of loopholes to prevent speculators from manipulating the oil market. She fought to ensure that the bill required the CFTC to enact position limits to diminish, eliminate, or prevent excessive speculation that disrupts the market. Mandatory speculative position limits, which the CFTC are in the process of setting now, and strong anti-manipulation tools were main contributors to Cantwell’s eventual support of the Wall Street reform law.

Cantwell brought to the larger financial regulatory reform effort the knowledge she gained from a decade of fighting to protect Washington state ratepayers, including her historic battle to expose the ways Enron manipulated West Coast electricity markets to jack up prices. Using the lessons learned, Cantwell helped author provisions in the 2005 Energy Bill that made it a crime to manipulate electricity or natural gas markets. To date, the Federal Energy Regulatory Commission (FERC) has used the law to conduct 93 investigations resulting in 45 settlements and civil penalties of $122,230,000 and disgorgement of profits totaling $35,945,000. Cantwell also secured a provision in the Energy Policy Act of 2005 that prevented a bankruptcy court from forcing Snohomish Public Utility District (PUD) and its customers to pay millions of dollars in termination fees for electricity that was never delivered. This measure reaffirmed FERC’s authority to decide whether charges related to manipulated power contracts could be deemed invalid.

In 2005, Cantwell first introduced legislation that would create a federal ban on oil market manipulation to prevent Enron-style manipulation schemes from happening to the oil industry. Cantwell’s legislation banning manipulation in the oil and petroleum markets became law in the 2007 Energy Bill. Her provision empowers the FTC to levy civil penalties of up to $1 million per day. Over the course of the FTC’s nearly two-year rulemaking needed to fulfill its Congressionally-mandated responsibility to prevent manipulation in the oil and petroleum markets, Cantwell aggressively pushed the Commission to lay out the strongest rules possible. The final FTC rule went into effect on November 4, 2009 and essentially adopted all of Cantwell’s recommendations. 

The full text of the letter sent today to the FTC follows:

March 25, 2011

Federal Trade Commission

600 Pennsylvania Avenue, NW

Washington, DC  20580

Dear Chairman Leibowitz and Commissioners Kovacic, Rosch, Ramirez, and Brill:

We are writing to inquire whether the Federal Trade Commission (FTC) is fully utilizing the regulatory authority granted to it by Congress to ensure American consumers are paying a fair price for gasoline.  We urge you to use this authority aggressively to ensure that recent crude oil market price spikes and volatility are not the result of manipulative practices or anticompetitive behavior. 

As you know, volatile oil prices have recently driven gasoline and diesel pump prices above $4 per gallon in some regions.  High prices are leading our constituents to again question whether widely fluctuating prices can be explained by supply and demand fundamentals.  For example, December crude oil prices have varied from $85 per barrel in 2007, to $31 in 2008, to $73 in 2009, to $86 in 2010, with peaks at $147 in June 2008 and around $104 today.  Meanwhile, a 20 percent spike in oil prices since the unrest in Libya began in mid-February coincides with Commodity Futures Trading Commission (CFTC) data showing that as of March 1st there has been a 25 percent spike in the number of oil futures contracts created by traders without a commercial interest in oil delivery.  This finding is supported by data released by CFTC Commission Bart Chilton on March 15th which showed that hedge funds and other speculators have increased their energy market positions 64 percent since June 2008 to the highest level on record.  While many businesses are likely engaged in legitimate hedging decisions, the increased market participation must prompt rigorous FTC oversight to ensure that all activity is consistent with a competitive market. 

While some oil speculators may be taking advantage of Middle East turmoil, hardworking American families and businesses are footing the bill with more pain at the pump, higher food costs, and inflationary fears, all of which jeopardize our nation’s fragile economic recovery.  Federal Reserve Chairman Ben Bernanke reported to Congress recently that “sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored.”  And according to IHS economist Chris Christopher, every 24-cent increase in gasoline for longer than two years lowers U.S. employment by 410,000.

To protect the integrity of energy markets, family pocketbooks, and our economic recovery, it is critical that the FTC aggressively use all of the tools at its disposal to investigate and prosecute market manipulation.  Fortunately, unlike during the oil price spikes of 2008, the Commission has historic new tools to combat any manipulative or deceptive conduct that has a “sufficient nexus” to wholesale oil markets, including such conduct in oil futures markets. 

Congress vested the Commission with new oil market anti-manipulation authority in Section 811 of the Energy Independence and Security Act of 2007 (42 U.S.C. § 17301) to combat fraudulent and manipulative conduct in increasingly volatile oil markets.  The Commission stated in its final Petroleum Market Manipulation Rule that went into effect on November 4, 2009 that its authority reaches manipulative or deceptive conduct that occurs ‘‘in connection with’’ the purchase or sale of petroleum at wholesale, including such conduct in the futures market “provided that there is a sufficient nexus between the prohibited conduct and the markets for these products.”  Specifically, the Commission’s final rule states that:

“…the Commission declines to adopt a blanket safe harbor for futures markets activities.  Nonetheless, consistent with its longstanding practice of coordinating its law enforcement efforts with other federal or state law enforcement agencies where it has overlapping or complementary jurisdiction … the Commission intends to work cooperatively with the CFTC to execute the Commission’s objective to prevent fraud or deceit in wholesale oil markets.”

The Commission modeled its market manipulation rule after the Federal Energy Regulatory Commission’s (FERC) market manipulation rule.  Like the Commission, FERC was given nearly identical market manipulation authority in the 2005 energy bill, and to date it has conducted 93 investigations resulting in 45 settlements totaling over $150 million in penalties.  FERC’s final market manipulation rule empowered it to look at futures market activities that affect wholesale energy markets within FERC’s jurisdiction and its robust market monitoring division set up after Enron’s manipulations monitors futures markets on a real-time basis in close coordination with the CFTC.

It is critical that the Commission enforce its market manipulation rule with the same proactive aggressiveness that FERC employs, to deter manipulative behavior, prosecute bad actors, and draw a bright line to distinguish legal from prohibited behavior.  We request that you provide us a detailed description of the following:

·          The FTC’s efforts to enforce the Petroleum Market Manipulation Rule since it was finalized in 2009;

·          The steps the Commission is taking and plans to take in response to recent price volatility in the petroleum market; and

·          The FTC’s current and planned efforts to work with the CFTC and other relevant agencies to prevent fraud or deceit in the petroleum market.

As Chairman Leibowitz stated when the Petroleum Market Manipulation Rule was finalized, “This new Rule will allow us to crack down on fraud and manipulation that can drive up prices at the pump.  We will police the oil markets – and if we find companies that are manipulating the markets, we will go after them.”  The high gas prices that are hurting American families and businesses today represent the first major test of FTC’s ability to protect consumers in this market.  We urge you to use the authority of the Petroleum Market Manipulation Rule aggressively in order to protect consumers from unnecessarily high and volatile gas and diesel prices.