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Democratic senators point finger at oil speculators for high gas prices

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MahurinEcon_Thumb1_1045.jpg

Several Democratic senators are staging a media stakeout at the U.S. Capitol today to voice their concerns over the role of complicated finance speculation in high gas prices.

The eight senators expected to be in attendance are Sherrod Brown (D-Ohio), Maria Cantwell (D-Wash.), Mark Udall (D-Colo.), Amy Klobuchar (D-Minn.), Jeff Merkley (D-Ore.), Ron Wyden (D-Ore.) Bill Nelson (D-Fla.) and Bernie Sanders (I-Vt.), whose office will be used for the event.

The lawmakers will be addressing how, despite lower consumer demand and lower oil prices by the barrel compared to two years ago, Americans have needed to spend more at the pump. From the press release:

Last summer, the Dodd-Frank Act required the CFTC to impose strong speculation limits on oil and gas trading by January 22, 2011. The Dodd-Frank Act also gave the CFTC the authority to stop excessive speculation by increasing margin requirements, among other provisions.

Unfortunately, to date the CFTC has not met its statutory obligations on position limits and has not used its authority to ensure that gas prices at the pump accurately reflect the fundamentals of supply and demand.

As a result, Goldman Sachs estimated last March that excessive speculation was driving up oil prices by about 20 percent, and the CEO of Exxon Mobil recently testified that speculators were driving up oil prices between 30-40 percent.

There is mounting evidence that the rapid increase in gasoline prices has nothing to do with the fundamentals of supply and demand, and everything to do with Wall Street firms that are artificially driving up the price of oil in the energy futures markets.

The deadline for instituting those measures was over four months ago, set on January 22.

Sen. Sanders sent a letter (PDF) to the president in April echoing today’s statement while adding:

Other experts believe that excessive speculation is driving up crude oil prices by 50 percent. This means that Americans are paying Wall Street a premium of 70 cents to $1.63 a gallon every time they fill up their gas tanks.

On the Senate floor earlier today, Sen. Nelson of Florida dispensed with the notion market forces were to blame for the uptick in gas prices.

“That reason happens to be that there are speculators out there running around, running the price up of commodity exchanges for oil futures contracts,” he said, “and those prices run up until they’re ready to dump them and suddenly [the prices] go down.”

According to the U.S. Energy Information Agency, the average price of a gallon at the pump in conventional areas was $2.315 in 2009. The EIA now puts that figure at $3.849.

In a report this week from Dow Jones, CFTC Commissioner Bart Chilton tried to clarify the correct punitive language necessary in dealing with traders’ activity.

“Manipulation is something that is very specific in the law and has a really high hurdle for us to prove, so that’s why we’ve only had one successfully prosecuted manipulation case in the 36-year history of the CFTC,” he told Dow Jones. Speculation, on the other hand, is legal, according to Chilton.

On the Senate floor today, Nelson went on to say speculators account for two-thirds to 80 percent of the market. “They are the main player,” he said, “and this is what we need to end.”

Futures trading was established as a way of more accurately aligning the cost of oil output with consumer demand. Oil prices are set in futures markets, where contracts allow oil producers to lock in prices on their future output. That makes prices predictable and secure, especially for large consumers like airline companies, who rely on the locked in prices to hedge against inflation.

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