Senate Democrats

Experts Identify Excessive Speculation in the Oil Markets as Factor in Soaring Gas Prices

Questions about financial dealings in energy derivatives have increased since the collapse of Enron, the large hedge fund Amaranth, and the explosion of investments in the commodity markets (from $13 billion to $260 billion since 2003). Over the last several months, Democrats in Congress have raised concerns about whether the Bush Administration has a firm grasp on the role that energy derivative trading is having on the oil markets.

Senate Democrats have held multiple hearings on the issue and have enacted a provision in the Farm Bill that closed the “Enron Loophole,” which was important because it imposed new regulations or “exchange like regulation” on electronic trading facilities that had been previously exploited. The general focus of these hearings have been on excessive oil market speculation and its possible impact on the oil market, the existing loopholes used to skirt financial regulations, and the ability of the Commodity Futures Trading Commission (CFTC) to police these rapidly expanding markets. Senators Reid, Durbin, Schumer,Dorgan,and Murray developed S.3268,the Stop Excessive Speculation Act of 2008, to help address these problemsafter consultation with consumer advocates, oil market analysts, and experts from the financial and airline industries.

This Fact Sheet provides a compilation of quotes about the CFTC and excessive oil market speculation that helps define the scope of the problem and highlight the need to address the issue.

Commodities Future Trading Commission

“We could hire an extra 100 people and put them to work tomorrow given the inflow of trading volume.”

– Walter Lukken, Acting Chairman CFTC.(Washington Post, June 6, 2008)

“Trading volume has increased six-fold during the last decade, while at the

same time, Commission staffing levels have fallen to 447 full-time employees. That’s

50 fewer staff today than the agency had 30 years ago.”

– Walter Lukken, Acting Chairman CFTC (Appropriations Subcommittee on Financial Services and General Government May 7, 2008)

“Since the CFTC opened its doors 33 years ago, the volume of futures exchanges has grown 8,000 percent while CFTC’s staffing numbers have fallen 12 percent.”

– Walter Lukken, Acting Chairman CFTC (Senate Committee on Homeland Security and Governmental Affairs June 24, 2008)

Consumer Advocates

“Commodity futures markets have ceased to provide their proper function of helping to smooth the functioning of physical markets for vital commodities like energy and food. Instead they have become engines of speculation that feed volatility, amp up volume, and increase risk that increase prices and drive physical (commercial) traders or out of these markets.”

– Mark Cooper, Director of Research, Consumer Federation of America (Senate Committee on Commerce, Science and Transportation June 3, 2008)

“There is no question that speculators and unregulated energy traders have pushed prices far beyond the supply-demand fundamentals and into an era of a speculative bubble in oil markets. While some speculation plays a legitimate function for hedging and providing liquidity to the market, the exponential rise in market participants who have no physical delivery commitments has skyrocketed, from 37 percent of the open interest on the NYMEX West Texas Intermediate (WTI) contract in January 2000 to 71 percent in April 2008.”

– Tyson Slocum, ,Director, Public Citizen’s Energy Program. (House Agriculture Committee July 11, 2008)

Oil and Gasoline Industry Executives

“The [oil] fundamentals are no problem. They are the same as they were when oil was selling for $60 a barrel, which is in itself quite a unique phenomenon.”

– Jeroen van der Veer, Chief Executive Officer, Royal Dutch Shell (Washington Post Apr. 11, 2008)

“$100 oil isn’t justified by the physical demand in the market.  It has to be speculation on the futures market that is fueling this.”

– Clarence Cazalot Jr., Chief Executive Officer, Marathon Oil (October 2007).

“The price of oil should be about $50-$55 per barrel.”

– Stephen Simon, Exxon Mobil Senior Vice President (Senate Judiciary Committee April 1, 2008)

“The price has nothing to do with a shortage of oil. There’s a lot of oil on the market. It’s because of speculation and OPEC cannot control speculation.”

– Abdullah al-Badri, OPEC Secretary-General (Agence France-Presse June 11, 2008)

“Excessive speculation on energy trading facilities is the fuel that is driving this runaway train in crude oil prices.”

– Gerry Ramm, Inland Oil Company and Senior Executive on Behalf of the Petroleum Marketers Association of America,(Senate Commerce, Science, and Transportation Committee June 3, 2008)

Airline Industry Leaders

“Normal market forces are being dangerously amplified by poorly regulated market speculation… The nation needs to pull together to reform the oil markets and solve this growing problem.”

– Joint letter from AirTran, Alaska, American, Continental, Delta, Hawaiian, JetBlue, Midwest, Northwest, Southwest, United, and U.S. Airways (CNN, July 7, 2008)

“Clearly, addressing the financial speculation is the most immediate thing the Congress can do.”

– Doug Steenland, Chief Executive Officer, Northwest Airlines (House Committee on Energy and Commerce June 23, 2008)

“There is no question that rampant, unregulated speculation is driving market irregularities… The two largest oil price spikes of 2008 followed predictions by Wall Street banks that oil prices would rise significantly. The day after Morgan Stanley predicted $150 oil by July 4, oil spiked $11. On July 10, oil prices increased $5 a barrel in the last 20 minutes of trading.”

-Richard Anderson, Chief Executive Officer, Delta Airlines (Atlanta Journal-Constitution July 14, 2008)

“Experts agree that today’s surging oil prices are beyond those warranted by supply-demand fundamentals. In fact, just yesterday the International Energy Agency announced that annual demand is projected to increase at an annual rate of only 1.6% and that demand will be actually lower this year, growing only 1%, given declining economic conditions. Instead, surging oil prices are due, in some measure, to rampant investor speculation. In early June, speculators traded more than 1.9 billion barrels of crude oil – 22 times the size of the physical oil market, including $150 billion traded on the New York Mercantile Exchange alone.”

-Captain John Prater, President, Air Line Pilots Association International (House Agriculture Committee July 11, 2008)

Financial Analysts

“I believe the surge in crude oil price, which more than doubled in the last 12 months, was mainly due to excessive speculation and not due to an unexpected shift in market fundamentals. After all, demand growth in China, India and other developing countries was not a surprise and was reflected in crude oil futures a year ago.”

– Fadel Gheit, Managing Director and Senior Oil Analyst, Oppenheimer & Company. (House Energy and Commerce June 23, 2008)

“Wall Street is very good at inventing novel investment strategies because of the lucrative rewards which can follow. Unfortunately, Wall Street is not good at foreseeing the long-term consequences of the instruments that they create. We have to look no further than the recent subprime debacle, which has now grown into a worldwide financial crisis, to see where unbridled financial innovation can lead.

– Michael Masters, Masters Capital Management, LLC (House Energy and Commerce June 23, 2008)

Religious Leaders

The world’s poorest people have become more vulnerable “because of speculation and financial turbulence and their perverse impact on food and energy.”

-Pope Benedict XVI (Agence France-Presse July 7, 2008)

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