Washington, DC – As Rhode Islanders and middle class families across the country struggle to keep up with rising gas prices, President Obama has announced a series of new initiatives to crack down on the oil speculation that many believe is behind the price spike. U.S. Senator Sheldon Whitehouse (D-RI), who recently wrote to Attorney General Eric Holder to request an update on the Administration’s efforts to address oil speculation, applauded the President for his announcement.
“With middle class families struggling to get by, it is imperative that we take every step possible to bring gas prices back down to a reasonable level,” said Whitehouse. “We must crack down on oil speculators in order to ensure that families in Rhode Island aren’t getting gouged at the pump. President Obama’s plan to increase oversight of the oil markets and its major players is a step in the right direction.”
The President’s proposal aims to increase oversight of the oil and energy markets. His plan would, among other things, increase enforcement efforts of the CFTC over the oil futures markets, upgrade surveillance technology for enforcement staff, increase civil and criminal penalties for any manipulative activity in oil futures markets, raise margin requirements to prevent excessive speculation, and expand access to CFTC data in order to better analyze trading trends in oil and energy markets.
Senator Whitehouse, along with his colleagues Senator Klobuchar (D-MN), Senator Coons (D-MD), and Senator Blumenthal (D-CT), recently sent a letter to Attorney General Eric Holder to request an update on the efforts of the Administration’s Oil and Gas Price Fraud Working Group. If implemented, the initiatives outlined by the President would bolster the authority of the CFTC, which is a member of the Oil Working Group, to start putting an end to speculation in the oil markets. Senator Whitehouse encourages the CFTC to use its new authority to better inform the efforts of the Oil Working Group, and ensure that every necessary step is taken to crack down on unfair oil speculation.
Many believe that speculation is a significant driver of rising gas prices. As the Senators’ letter notes: “Last month, Forbes reported that Goldman Sachs calculated that each million barrels of speculation in the oil futures market adds about 10 cents to the price of a barrel of oil. Based on trade levels, that translates into an increase of $23.39 of the price of a barrel of oil.” The letter also notes that Exxon Mobil Chairman and CEO Rex Tillerson has estimated that speculation is responsible for a 50 percent increase in the price of oil.
The full text of Whitehouse’s letter is below.
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April 3, 2012
The Honorable Attorney General Eric Holder
United States Department of Justice
950 Pennsylvania Avenue, NW
Washington, DC 20530
Attorney General Holder:
As you know, Americans are facing near-record gasoline prices. Last year at this time, the national average price at the pump was an already-high $3.66 per gallon; today, it is $3.92. At a time when the economy is just starting to turn a corner, we can ill afford to slow down our progress by adding unnecessary transportation costs to family and small business budgets.
We, as members of the Senate Judiciary Committee, write to request a status report on your Oil and Gas Price Fraud Working Group, and to inquire whether the scope of the Working Group is adequate to address the full range of fraudulent or otherwise unlawful oil speculation practices that increase gasoline prices at the pump.
Price bumps can often be explained through a straightforward supply and demand calculus – either the supply shrinks, or demand grows, and oil is priced in the global market. U.S. consumption of gasoline and other petroleum products stands at 18.2 million barrels per day, which is 400,000 barrels less than this time last year. Meanwhile, over 2 billion barrels of American crude oil were produced in 2011, the highest level since 2003, and our gasoline supply inventory is slightly higher than last year. While the supply and demand fundamentals of our domestic market provide a stable picture, other market factors could be contributing to the rising price for consumers.
What, then, might account for the rise in prices? A number of experts have pointed to market speculation as a major driver of fuel costs. Last April, Goldman Sachs recommended that clients close a trade based on U.S. crude futures, saying speculators had pushed prices ahead of fundamentals. Last month, Forbes reported that Goldman Sachs calculated that each million barrels of speculation in the oil futures market adds about 10 cents to the price of a barrel of oil. Based on trade levels, that translates into an increase of $23.39 of the price of a barrel of oil. In January, the St. Louis Federal Reserve estimated that speculation added 15% to the price of oil over the period of 2004 to 2008, which is consistent with the Goldman Sachs estimate. In 2009, a policy brief from the Peterson Institute for International Economics concluded that speculation was the primary driver of the 2008 run-up in oil prices. Meanwhile, at a 2011 Senate Finance Committee hearing, Exxon Mobil Chairman and CEO Rex Tillerson testified that speculation is driving up gas prices by 50%.
While some market speculation is necessary to allow fuel end-users to protect against price fluctuations, some of the speculation affecting the market today may involve unlawful practices. In November 2009, President Obama established the Financial Fraud Enforcement Task Force, to identify those accountable for the financial crisis and to prevent fraudulent misinformation from manipulating our markets in the future. Last spring, recognizing the role that market manipulation, speculation, and downstream price gouging play in our rising gasoline prices, you established the Oil and Gas Price Fraud Working Group (“Oil Working Group”) as part of this Task Force. The Oil Working Group announced it would “monitor oil and gas markets for potential violations of criminal or civil laws to safeguard against unlawful consumer harm.” You are also in a position to identify conduct that may be a basis for regulatory action, with representation from the Commodity Futures Trading Commission, the Federal Trade Commission, the Department of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission, the Department of Energy, and from the National Association of Attorneys General.
We applaud your leadership in convening key federal assets into an interagency working group to tackle this important consumer issue. One year later, however, we are concerned about the lack of information available to the public about the activities of the working group or its findings. While we were heartened by your comments on March 9 that the Oil Working Group stood “ready to act if the FTC learns anything that implicates the laws they enforce” in their pending investigation requested by Congress, we believe the public deserves to know what the Oil Working Group is working on in the meantime to address unwarranted market collusion from oil market speculation to downstream price gouging.
As we are sure you agree, we need an “all hands on deck” approach to address the current unjustifiable oil and gasoline prices. If speculation is in fact driving prices to record heights, the federal government should use all means at its disposal to stabilize the markets and bring relief to American families. Your group is uniquely qualified to bring government forces to bear on this market failure problem. We write, therefore, to request a written progress report on the Oil Working Group’s efforts. We also ask that you report on what legal avenues the Working Group has available to it to investigate these concerns and take action in the event that evidence of civil or criminal misconduct is uncovered.
If current legal authorities are insufficient, we stand prepared to work with you to ensure that appropriate legislation is enacted to protect consumers adequately from speculators and manipulation of the oil and gas markets.
Sincerely,
Senators Whitehouse, Blumenthal, Coons, and Klobuchar
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