Cantwell: ‘Shenanigans’ in Oil Market Reminiscent of Enron ‘Nightmare’ in Pacific NW
In Floor Speech, Cantwell says $50 Million Oil Manipulation Case Shows Need for Immediate Action on Gas Prices ***VIDEO AVAILABLE***
WASHINGTON, D.C. – Today on the Senate floor, U.S. Sen. Maria Cantwell (D-WA) said the U.S. Commodity Futures Trading Commission (CFTC) should use its emergency authority to implement overdue rules today to rein in excessive speculation and help consumers save on high gas prices.
Cantwell praised the CFTC for filing charges Tuesday in a $50 million oil market manipulation case from 2008 – but said the case showed the need for immediate CFTC action to rein in excessive speculation that is shifting the oil futures market and artificially driving up gas prices. Referencing Enron’s blatant manipulation of Pacific Northwest electricity rates early last decade, Cantwell said similar tactics are now happening in the oil market, and they must be stopped.
“Energy is the lifeblood of any economy. We know in the Northwest, we saw this with Enron,” Cantwell said in a floor speech Tuesday. “We have been through this nightmare. We are so appalled it seems like it is happening again now in the oil markets. It’s the same shenanigans that happened in electricity, the same shenanigans in natural gas. Yes, the same shenanigans are happening in the oil market.”
Cantwell said that to really make a difference on Main Street, the CFTC needs to implement new rules on speculative position limits that Congress authorized in the Wall Street Reform Bill last year and actually prevent illegal activity from occurring in the first place.
“Many people are starting what is soon going to be the summer driving season, and they are outraged at the price of gasoline. It is hurting our economy. People who have to commute to work every day, people whose businesses depend on reasonable fuel costs are getting gouged over these prices,” Cantwell said. “We don't have to wait one more day. The Commodities [Futures Trading] Commission could be doing its job. … They can use their emergency authority. They can implement these rules today and help consumers save on high gas prices.”
Watch a video of Senator Cantwell’s remarks on the Senate floor today.
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. In recent months, she has called on the CFTC to not delay any further in implementing overdue rules on speculative position limits. The 2010 Wall Street Reform bill called for the CFTC to implement speculative position limits in energy markets within 180 days of enactment. The CFTC is more than four months late on its January 2011 deadline to take action, while consumers continue to pay high prices at the pump.
Also in recent months, Cantwell has demanded the Federal Trade Commission (FTC) investigate 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. Her provision empowers the FTC to levy civil penalties of up to $1 million per day. She is now calling on the consumer protection agency to use its new authority to meet their responsibility to protect consumers.
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 is 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.
Below are excerpts from Senator Cantwell’s floor remarks today, as well as a complete transcript.
“We have been through this nightmare. We've been through this nightmare, and that's why I have to say, Mr. President, first and foremost, we find it appalling that someone would propose H.R. 1 or the Ryan budget and now want to take away policing authority from the Commodities Future Trading Commission on the type of activity that would allow them to properly regulate these markets. Now we saw what's happened. We are so appalled about is it seems like it is happening again now in the oil markets.”
“It should be no surprise of what they actually see in this case [$50 million oil manipulation case], because it's the same shenanigans that happened in electricity, the same shenanigans in natural gas. Yes, the same shenanigans are happening in the oil market. That is that the commodity agency says in this case there was a close relationship between the physical oil price and the price of the financial futures which moved in peril. So basically what happened is that in the oil futures market, these individual companies took large positions. In fact, their positions were so big – and that's why Senator Wyden just described if this agency would come in and set position limits, people wouldn't be able to come in and move the market in such a significant way.”
“Many people are starting what is soon going to be the summer driving season, and they are outraged at the price of gasoline. It is hurting our economy. People who have to commute to work every day, people whose businesses depend on reasonable fuel costs are getting gouged over these prices. And we have federal regulators that need to be more aggressive at investigating these cases.”
“Our economy is too important to have this kind of activity continue to play the kind of havoc that it is on our system. And when you think about it, it's not as if we don't know what the scheme is. We have seen it time and time again with these other energy markets. So the question is whether we're going to be aggressive and make sure that the CFTC has the tools it needs -- that is not to cut funding like the Ryan budget or H.R. 1 wants to do – and that it actually takes this role and responsibility and starts setting position limits, starts the day-to-day activity.”
“But that market which was created after the dust bowl devastated so many farmers to give them a chance to legitimately hedge, now all of a sudden is captured by these large financial institution players. …Seventy percent of the market are these large players … who are people who are out there basically using their financial weight to move the market in a direction that then they can sell on the futures market to benefit from. It's outrageous. It is outrageous that our economy has to put up with this – that individuals have to put up with this.”
The complete transcript of Senator Cantwell’s floor remarks today follows:
Thank you Mr. President. I want to thank the Senator from Oregon for his stalwart attention to energy markets. And to the concern that many West Coast residents have over high energy costs. Senator Wyden has long been a vocal critic of what’s happened in some electricity market. And trying to figure out what’s happened with the oil markets and why the West Coast paid higher gas prices than any place in the country, we wanted to know why.
People said we were an isolated market and that’s why we were paying the highest gas prices. And then Hurricane Katrina hit and our prices still went up even though we were an isolated market. So Senator Wyden has long been a person coming to the United States Senate fighting for the consumer and saying that we shouldn’t be gouged by higher prices on energy.
Energy is the lifeblood of any economy. We know what manipulation looks like in the Northwest because we saw it with Enron. When the electricity markets were manipulated, everybody told us, “Oh, it was just a bunch of environmentalists not allowing us to do new facilities. Oh it’s this situation or that situation.” Well, when we finally exposed the audio tapes, we realized that no, it was just pure market manipulation.
In fact, what we had found out is that people were taking the futures market and basically making plays in the futures market while they also had the ability to affect the physical supply market of electricity. So by combining those schemes with different things like “Get Shorty” and “Fat Boy” and all these names they came up with. They were able to convince utilities and various customers that the supply was tight and that they were going to have to pay more for electricity in the future.
And consequently, they ought to keep paying these high prices. Well, thanks to a lot of hard work by a lot of individuals and ultimately, the Department of Justice, the Enron schemes were called for what they were -- just out-and-out market manipulation.
Now my colleague and I, Senator Wyden, screamed out loud about that situation and said we wished the FERC, the Federal Energy Regulatory Commission, would have acted a lot sooner on that issue. And that if they would have acted basically taking away the market-based authority that Enron had, you would have saved a lot of jobs in the Northwest.
You would have saved a lot of industries. A lot of people lost their jobs, their retirement, their home over those high energy prices for electricity. Thank god the result is we were able to pass new legislation in 2005, making it a federal crime for anybody to manipulate natural gas or oil markets. I should say that FERC has used that authority over the last several years to recoup millions of dollars of violations by industry officials who continue to perpetrate the same kind of scheme.
Of going in to the futures market and holding positions in the futures market and then going and taking physical supply and being able to affect the physical supply and demand. So this is something that is amazing to us from the West Coast.
And I know my colleagues, Senator Feinstein, Senator Boxer, Senator Murray, we’ve all been on the same page. Senator Merkley has been a loud voice on this. We have been through this nightmare. We’ve been through this nightmare, and that’s why I have to say, Mr. President, first and foremost, we find it appalling that someone would propose H.R. 1 or the Ryan Budget that would take away policing ability from the commodities future trading commission on the type of activity that would allow them to properly regulate these markets.
Now we saw what happened. And what we are so appalled about is it seems like it is happening again now in the oil markets. In fact, we see today on the front page of the New York Times, “U.S. Suit Sees Manipulation of Oil Trades.” So the commodities commission is finally saying now, yes, we’re looking at this case. It should be no surprise of what they actually see in this case. Because it’s the same shenanigans that happened in electricity and the same shenanigans in natural gas yes, the same shenanigans are happening in the oil market.
That is that the commodity agency says in this case there was a close relationship between the physical oil price and the price of the financial futures which moved in peril. So, basically what happened is that in the oil futures market, these individual companies and traders took large positions.
In fact, their positions were so big – and that’s why Senator Wyden just described if this agency would come in and set position limits, people wouldn’t be able to come in and move the market in such a significant way. But at the same time it’s alleged that these companies actually had millions of barrels of physical crude oil and that they had no commercial use for the oil.
So here you have people buying the physical supply, again, to manipulate it and help it tie in to the future market when they don’t have any commercial need for it. That is why it is so important to have the CFTC do its job on this and to interpret who our legitimate hedgers, like airlines, like farmers, people who actually need the physical supply juxtaposed to these large institutions that are just coming in and moving the market.
So what’s amazing is that at one point in time what they had as far as physical supply, for somebody who didn’t even have a commercial use, at least according to this New York Times article, was that they had two-thirds of the excess barrels available at Cushing. Here’s somebody that had the physical supply and was controlling two-thirds of marginal oil supply and then controlling the futures market.
Sothey were basically making money on the up side and they were making money on the down side. That is what the CFTCis alleging in its case, and I think it's one of the first cases in which a small group of traders are being charged in the potential role of manipulation of gas prices.
Well, I don't have to tell the presiding officer how critically important this is. I've been home recently and paid $4 a gallon for gasoline. Many people are starting what is soon going to be thesummer driving season, and they are outraged at the price of gasoline. It is hurting our economy. People who have to commute to work every day, people whose businesses depend on reasonable fuel costs are getting gouged over these prices.
And we have federal regulators that need to be more aggressive at investigating these cases. Now I’ll say I’m very happy that the Obama administration and the department of justice appointed a task force that is exactly what we need. We need every federal agency that has oversight of these markets, whether it's thephysical market with the FTC, or the CFTC and the commodities market, to work together with the department of justice to make sure that these schemes are not continued to be perpetrated on the American public.
Our economy is too important to have this kind of activity continue to play the kind of havoc that it is on our system. And when you think about it, it's not as if we don't know what the scheme is. We have seen it time and time again with these other energy markets. So the question is whether we're going to be aggressive and make sure that the CFTC has the tools it needs - that is not to cut its funding like the Ryan Budget or H.R. 1 wants to do -- and that it actually takes this role and responsibility and starts setting position limits, starts the day-to-day activity.
Because the value that Senator Wyden and I are down here talking about is instead of this case that now is going to be investigated, how many days, months, and years did we live with the potential of higher fuel costs, if this case is correct? How many days did we live with the higher cost of that? And how long will the investigation take?
Versus if the CFTC was actually implementing the law and the rules we gave them and enforcing position limits, it would be policing the market on a day-to-day basis and preventing consumers from paying one dime or one penny more than they need to pay on high fuel costs. The reason this is so important is that these oil markets were for legitimate hedgers.
My colleague and I represent a very robust agriculture community. We grow lots of different products in the Northwest, probably over 200 different agriculture products. We depend on the commodities markets to hedge for the future. But that market which was created after the dust bowl devastated so many farmers to give them a chance to legitimately hedge, now all of a sudden is captured by these large financial institution players. It used to be that those who really needed the hedge, like farmers and airlines, controlled 70 percent of the market.
Now they're only 30 percent of the market. 70 percent of the market are these large players just like this was described in this article, who are people who are out there basically using their financial weight to move the market in a direction that then they can sell on the futures market to benefit from. It's outrageous. It is outrageous that our economy has to put up with this that individuals have to put up with this.
And I know my colleague from Oregon and I are going to be out here and going to be loud and consistent on this until we have the rules and regulations in place to make sure that these markets are properly policed. We don't have to wait another day. We don't have to wait one more day. The commodities commission could be doing its job.
They don't need another legislative bill from us. They don't need another vote from anybody on the commission. They can use their emergency authority. They can implement these rules today and help consumers save on high fuel prices. I hope that my colleagues will help us in this effort to bring up the issues and make sure the American public understands what's going on so we can bring the pressure to bear on getting proper regulation in place.
Mr. Wyden: Would my colleague yield for a question?
Mr. Wyden:You've made a very eloquent case with respect to how this just hammers the people who need oil on a daily basis, those farmers and truckers and restaurants. You juxtaposed their situation compared to the speculators. For example, those people have a lot higher tax rate, for example, than do the speculators. So there is one advantage after another that the speculators have over the people that you and I are concerned about. Is it your understanding that the next best step to help those people who need oil, those small businesses on a daily basis, is to get the CFTC out of the regulatory swamp and to enact these position limits? Is that my colleague's understanding?
Ms. Cantwell:Well you're paying $4 a gallon for gasoline. You're affecting everybody who moves a product for business or anybody who commutes to work for any kind of distance. I know you've probably heard -- I’ve heard a lot from small businesses, small businesses who when fuel costs become the second-largest expense, it's hard for them to continue to do business. So the CFTC, you're right, could basically address this by just implementing the authority we gave them under the financial reg. reform legislation that we passed.
That's all they have to do. Now, I would say to them, they already have the emergency authority. They have so many tools at their disposal, I’m glad that they are investigating this case. I think this case is illuminating in the type of scheme that it might be, that the details are so familiar to you and I on how people work these schemes. But I would say investigations of these schemes are only going to go so far to helping the American consumer.
If they take another six to eight months to investigate these schemes, a lot of people are going to lose their jobs. Why not implement the rules they have right now, put them in place so we can protect consumers. And certainly don't pass legislation here in the Senate or in the House that is going to take away the ability to stop the kind of activities that drive up higher gas prices by manipulation. We want enforcement. We want it now. We want protection of consumers. And we're going to continue to be vocal about this issue.
And I thank my colleague from Oregon for joining me down here today to talk about this issue.
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