Today, when questioned by U.S. Senator Maria Cantwell (D-WA) at a Senate Finance Committee hearing, Exxon Mobil Chairman and Chief Executive Officer Rex Tillerson said that oil should cost between $60 and $70 per barrel, if the price of oil were based on supply and demand fundamentals. Oil was trading at $98 per barrel on Thursday morning, after inexplicably plunging 5.5 percent yesterday.
The last time crude prices were stable in the $60-$70 range was between June and August of 2009 and the national average price of regular gasoline was $2.50 to $2.70, according to the Energy Information Administration. Therefore, if today's oil markets were based on supply and demand fundamentals, drivers would be paying about a dollar-and-a-half less per gallon, or around $20 less each time they fill up their gas tanks.
Cantwell has been an advocate for reining in excessive oil speculation, calling on federal regulators to implement overdue rules in the energy futures markets. Numerous experts have concluded that excessive trading in oil futures is causing oil price volatility unrelated to supply-and-demand fundamentals, and contributing to rising gas prices.
Senator Cantwell asked Rex Tillerson, Chairman and Chief Executive Officer of Exxon Mobil Corporation, "What do you think the price would be today if it were based on the fundamentals of supply and demand?"
Tillerson responded: "If you were to use a pure economic approach, the economist would say it would be set at the price to develop the next marginal barrel. it's going to be somewhere in the $60 to $70 dollar range...."
Watch a video of Cantwell's remarks at today's hearing.
Yesterday, Cantwell led a bipartisan group of 16 other Senators in calling on federal regulators to expedite long-stalled rules to rein in excessive Wall Street speculation in West Texas Intermediate (WTI) crude oil futures and other energy commodities. The letter called on U.S. Commodity Futures Trading Commission to immediately implement overdue rules on speculative position limits in all energy futures markets, beginning with the crude oil futures market. The senators asked to see the CFTC's implementation plan no later than May 23.
In recent months, Cantwell has demanded that the CFTC implement overdue rules required under the Dodd-Frank financial regulatory reform bill to crack down on excessive speculation in the oil futures market that may be driving up gas prices for consumers. Over the last decade, commodity speculation has skyrocketed, leaving businesses that actually produce or consume commodities -- such as airlines and wheat farmers -- unable to use markets to accurately hedge their risk. In 2000, speculation accounted for 37 percent of the oil futures market; today it's about 70 percent with physical hedgers accounting for only around 30 percent.
Goldman Sachs has estimated that for every million barrels of oil held by speculators, the price of a barrel of oil goes up 8 to 10 cents. As of May 3rd, speculators held positions in U.S. crude oil contracts equivalent to 258 million barrels, which by Goldman's accounting could account for around $25 per barrel -- about a quarter of the cost of a barrel of oil today.
At today's hearing, Cantwell said the fact that speculators have taken over the market is a problem. "The commodity markets were established to basically prevent, or to lessen, the risk that individual users have to take. And now with 70 percent of the market being driven by speculators that are not the end-takers of any product, I think you're seeing this price driven up way in excess of what the fundamentals of a 60-70 dollar barrel that you say would be supply and demand." Cantwell added in a statement: "We don't have price discovery, we have price volatility."
Today the national average for a gallon of regular grade gasoline is almost $4 per gallon, which is only about a dime less from the all-time high set in July 2008. In Washington state, gas prices have gone up 74 cents-per-gallon over the last three months, and 93 cents-per-gallon over the last year, hurting small businesses and burdening families and the economic recovery. Diesel prices in the state are a dollar more per gallon over this time last year, hitting truckers, farmers and transit services particularly hard.
In January 2010, the CFTC proposed position limits for WTI crude oil, which could have curbed excessive speculation that may be driving up gas prices for consumers. However, the Commission has never adopted those limits, nor has it set aggregate position limits on energy commodities that were required under the Dodd-Frank Wall Street Reform bill.
"Congress gave the CFTC the power to rein in excessive oil speculation and the CFTC should use it," Cantwell said Wednesday."American consumers are getting gouged at the pump while speculation on Wall Street runs rampant. The CFTC must implement these long-overdue position limits to crack down on excessive speculation and provide relief to American consumers."
Implementing speculative position limits -- restrictions on the size of investors' commodity holdings -- would limit price volatility and unpredictability in commodities such as oil. The sheer volume of new capital coming from hedge funds, financial traders and other long-term passive investors --interests that mostly buy oil futures to turn a quick profit rather than meet a bone fide need to hedge risk -- is creating artificial demand and driving up the price for consumers in ways unrelated to actual supply-and-demand fundamentals. Position limits can also stop individual oil speculators from amassing excessively large numbers of oil futures in order to distort the futures market's normal pricing functions.
On April 20, Cantwell 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.
In March, Cantwell urged the CFTC to crack down on oil speculation that is likely contributing to recent gas prices spikes. In a letter to CFTC Chairman Gary Gensler, she urged him to use the new authority granted in last year's Wall Street reform law to combat excessive speculation by requiring higher margin requirements in order to protect the financial integrity of the futures trading markets.
CFTC Commissioner Bart Chilton -- one of five commissioners at the agency -- responded with a letter confirming that the latest data shows speculative positions in the energy sector are at an all-time high -- up 64 percent from June 2008. According to analysis compiled by Chilton, excessive oil speculation costs drivers between $8 to16 per tank, depending on the kind of car they drive.
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 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.