This morning at a Senate Energy and Natural Resources Committee hearing, U.S. Senator Maria Cantwell (D-WA) said Wall Street investors are artificially driving up the price of gas for Washington state drivers. Under questioning by Cantwell, the expert panelists testifying before the committee today agreed that the world price of oil -- the key factor behind record high prices at the pump -- is higher than what it should be based on supply and demand fundamentals, and that excessive speculation by non-commercial users in oil futures was one of those factors.
The average price of a regular gallon of gas in Washington state is among the highest in the nation, at $4.11, compared to $3.88 one month ago and $3.79 one year ago. The national average price of a regular gallon of gas is $3.92. A gallon of diesel, the backbone of the nation's shipping and farming industries, costs $4.48 today in Washington state, compared to the national average of $4.16 today and $3.96one year ago. According to an analysis by Credit Suisse bank, every one-penny rise in the cost of a gallon of gas takes $1 billion of consumer spending away from other goods in the course of a year. Therefore the 32-cent increase in gas prices over last year is diverting $32 billion away from consumer spending.
"I definitely believe that we should get these asset class investors out of this market," Cantwell said during today's hearing to Dr. Daniel Yergin, Chairman of IHS Cambridge Energy Research Associates. Click here to watch a video of Cantwell's remarks at today's hearing. "Saying that we are going to allow a bunch of investors to treat the commodities market like they want to treat the rest of Wall Street from a securities and investment perspective I think is the wrong idea for commodities, something particularly as vital as gasoline."
According to Commodity Futures Trading Commission (CFTC) data, assets allocated to commodity index funds have grown from $10 billion to more than $300 billion since 2003. At the same time, the prices for commodities that make up these indices have risen by an average of over 200 percent. In 2008, from January through May when oil prices increased $33 per barrel, commodity index funds grew by over $60 billion. From July through September 2008, investors pulled out $39 billion from commodity index funds, and oil dropped $29 per barrel.
As of last month, these funds held positions in NYMEX crude oil contracts equivalent to 233.9 million barrels of oil, about the same amount of real oil supply that Iran produces. Given that a Goldman Sachs analysis found that each million barrels of speculation in the oil futures market adds about 10 cents to the price of a barrel of oil, speculation by non-commercial users is estimated to be contributing around $23 a barrel to the current price of oil, which translates to a tax of about 56 cents a gallon at the pump.
During her questioning, Cantwell referred to a chart presented during today's hearing by Mr. Frank Verrastro, Senior Vice President and Director of the Energy and National Security Program Center for Strategic and International Studies. Click here and scroll down to page two to view the chart, titled, "Figure 2: Commodity Investment in Oil."The chart shows how institutional investors have discovered commodity index funds as a new investment opportunity and have flocked en masse to commodity futures markets since 2000. Today, with oil price volatility and increased prices as the "new-normal," non-commercial speculators dominate the oil futures market by as much as 85 percent to 15 percent, and commodity index funds account for as much as half of today's speculative volume
Cantwell also referenced a May 12, 2011 Senate Finance hearing where she questioned Exxon Mobil Chairman and Chief Executive Officer Rex Tillerson on the price of oil if it were based on supply and demand fundamentals. Tillerson responded that oil should cost between $60 and $70 per barrel if based solely on supply and demand, compared to that day's going rate of $98 per barrel.
Cantwell has long fought to protect consumers from artificially high gasoline and diesel prices. She has been an advocate for reining in excessive oil speculation, calling on federal regulators to implement overdue rules in the energy futures markets. She 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 the 2010 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, and she continues to push the CFTC to enact these new rules. Mandatory speculative position limits 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.