What is causing the high price of fuel?

The oil price bubble is unfairly restricting our nation’s economic potential through higher gasoline and heating oil prices. In recent months, the price of a barrel of crude oil increased from $57 in March of 2008 to more than $147 in July 2008. Last December, prices dropped to $32 and then returned to more than $80 in October. This volatility presents mounting evidence that the run-up in oil and gas prices was not as a result of the fundamental concept of supply and demand, but was largely driven by excessive speculation.

According to data from the Energy Information Administration, demand for petroleum products in the United States is lower today than it was 10 years ago, and supply is higher today than it was in 1982. In addition, the International Energy Agency recently predicted that global demand for oil will drop by about 2.5 million barrels a day this year compared to last year, including a drop of one million barrels a day in the United States alone.

Yet, despite an adequate supply of oil and decreasing demand, prices are going up, not down. This could not come at a worse time, as Americans are suffering through the worst economic crisis since the Great Depression. Every time you buy products such as food or gas, you are impacted by unregulated, dark and often foreign commodities futures markets. Speculators in these markets are increasingly buying and selling commodities such as oil to sell again, rather than to use. As largely unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands.

Clearly, we have a responsibility to do everything possible to achieve a balanced energy policy, including ensuring adequate supply, increasing conservation, investing in alternative fuels, as well as ensuring that unregulated markets are monitored to ensure that we stop excessive speculation now.

As speculators continue to dominate the market, the volume of oil traded “on paper” has been as high as 22 times greater than the volume of oil consumed. As prices rise, institutional investors have become active traders, turning commodities into just another asset class. This has caused severe market imbalance and upset the natural relationship between supply and demand. As a result, legitimate customers such as trucking companies, airlines, and consumers have been forced to purchase oil at unnecessarily higher prices. This has dramatically raised costs, resulting in needlessly high prices for American consumers and businesses.

How do they get away with that?

Over the last 20 years, commodities markets have become increasingly less regulated. Today, as many as 90 percent of all commodities trades occur outside of the traditional marketplace exchanges. In these so-called “Swaps trades,” parties secretly buy and sell commodities with absolutely no one watching. This means speculators can manipulate oil prices and corner the market without anyone knowing.

In addition, other loopholes exist allowing increasingly sophisticated speculators to take advantage of consumers. For example, in 2000, Enron lobbied policy makers to permit some U.S. commodities exchanges to operate without normal oversight. This has allowed some speculators to dodge public disclosure rules that would normally limit the number of trades an investor can make.

What is the solution?

To lower oil prices for all Americans, we need to increase domestic supply, exploration, alternative energy sources and conservation. We also must protect bona fide speculation and hedging. To address excessive speculation, Congress should promptly:

1. Reestablish strict position limits on energy commodities – Position limits have existed since 1936 and work well at curtailing excessive speculation. Any trader not hedging with the intention of taking physical delivery of a related commodity must be subject to strict position limits.
   
2. Close the London Loophole – Foreign Boards of Trade with U.S. terminals trading futures contracts that cash-settle against U.S. contracts should face the same regulations as U.S. exchanges. It is not fair for U.S. futures exchanges to face more regulation than their foreign counterparts trading in U.S. commodities.
   
3. Regulate “swaps trades” – All trades in the over-the-counter (OTC) swaps market must be subject to strict position limits. It is unfair to exempt swaps dealers from the same regulations that other market participants face. Experts have estimated the size of the OTC markets to be nine or 10 times larger than the futures markets.
   
4. Fully close the “Enron loophole” – Current law allows certain commodity markets to operate with almost no government oversight even though they trade contracts that are essentially identical to those traded on fully regulated exchanges like the New York Mercantile Exchange. These “look-alike” contracts significantly impact the value of a commodity like oil, and Congress needs to mandate that they all be traded on a transparent, regulated exchange.