Oil Speculators Cost Consumers $31 Billion this Summer

As oil prices continued to rise steadily on world markets during the early part of 2008, it became clear to many energy and economic experts around the world that supply and demand were not the only forces pushing prices higher. Market speculators who had no intent of accepting delivery of crude oil were buying and selling futures contracts to make quick profits as the price of oil continued to race upward. Market volatility exploded. During 1998, a barrel of oil traded within a $7 price range the entire year. A decade later, price swings of that magnitude were being seen in a single day. As long as another trader was willing to buy a contract at an even higher price than the original trader had purchased it, the bubble continued to inflate. While this phenomenon has occurred with different commodities and goods since nearly the beginning of markets, never before has a price bubble so deeply affected the pocket books of the American consumer.

On August 21, 2008, the Washington Post reported that the Commodity Futures Trading Commission (CFTC) has now learned that an astonishing 80 percent or more of oil contracts on the New York futures market are held by speculators. "Financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on the NYMEX, a far bigger share than had previously been reported by the agency." At one point in July, a single foreign energy firm held 11 percent of all regulated NYMEX oil futures contracts for the purpose of speculation.

At a hearing of the Select Committee on Energy Independence and Global Warming on May 22, 2008, the Bush Administration's top energy official, Energy Secretary Samuel Bodman, testified that he did not believe that speculation was playing any role in the run up in oil prices. When I asked whether rampant speculation was occurring in the oil futures market, Secretary Bodman responded, "No, I do not." Unfortunately for the American people, this misguided view led to the Bush Administration neglecting its responsibility to use the weapons that President Bush has at his disposal to affect the price of oil and oppose Democratic efforts to pop the speculative oil bubble.

Throughout the spring and summer, President Bush and Republicans in Congress thwarted attempt after attempt by Democrats to pop this speculative bubble and provide relief to consumers. Each time, Republicans sided with Big Oil over the American people. The resulting run up in oil prices is expected to drive Big Oil's profits to a record-breaking $160 billion in 2008.

On April 1, 2008, the price of oil was $100 per barrel. If the President had followed the call of Congressional Democrats and used the tools at his disposal back then--deploying the Strategic Petroleum Reserve and tightening oversight of oil markets--it is very likely much of this summer's pain at the pump could have been avoided. Instead, prices have since risen to as high as $147 per barrel and, according to my calculations, have resulted in additional costs for American consumers of $31 billion at the pump this summer.

Former Federal Reserve Chairman Alan Greenspan recently stated his view, that speculation was "importantly responsible" for the rapid increase in oil prices in late 2007 and early 2008. "Financial speculation did play a significant part in the rapid increase in oil prices," Greenspan said. The $31 billion Bush Big Oil bounce has contributed to the slowing of the American economy and put working families facing record prices at the pump in a desperate situation.

Democratic Legislative Action to Pop the Speculative Bubble

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Since the beginning of April, Democratic leaders have repeatedly called for President Bush to take action to pop the speculative bubble in oil prices and help consumers. On April 9, 2008, as the price of oil stood at $110.89, I joined with Democratic Caucus Chairman Rahm Emanuel and Rep. Peter Welch in writing to the President. We urged him to immediately stop filling our nation's Strategic Petroleum Reserve (SPR) and also release oil from this government stockpile, stating, "These two actions, in combination, would provide a powerful signal to speculators and world oil markets that will help alleviate the current upward pressure on prices and help American families." However the Administration refused to take these actions, and other immediate relief efforts including:

1) Price Gouging:

The Democratic Congress has taken up numerous bills over the summer months in order to address the rampant oil speculation that has driven up prices. However, each of these legislative efforts has been blocked by President Bush and the Republican leadership in Congress.

On June 24, 2008, the House considered H.R. 6346, the Federal Price Gouging Prevention Act, which would have helped protect consumers from unfair price increases at the pump. However, the Bush Administration threatened to veto this important legislation to protect American consumers from being gouged by Big Oil. The White House stated "if H.R. 6346 or any similar price control bill were presented to the President, his senior advisors would recommend that he veto the bill." House Minority Leader John Boehner along with the majority of House Republicans, voted with the Bush Administration and Big Oil to block this legislation.

2) Deploying our Government Oil Stockpile:

On July 24, 2008, the House considered H.R. 6578, the Consumer Energy Supply Act of 2008. This legislation would have required the Administration to begin immediately releasing oil from the SPR onto the market over a six month period and then refill the stockpile at a later date. The effect would have been to put an end to the speculative feeding frenzy that was driving up oil prices.

Deploying oil from the SPR has driven down prices when it has been used in the past. In 1991, when President Bush's father deployed oil from the reserve, oil prices fell 33.4 percent in two days. In 2000, President Clinton conducted a time exchange of oil from the SPR and prices again immediately dropped by 18.7 percent. And in 2005, when President Bush himself released oil following Hurricane Katrina, prices fell 9.1 percent. That's an average drop in the price of oil of 19.2 percent - a similar impact at the time would have resulted in a nearly $24 reduction in the price of oil.

The Bush Administration actively worked to oppose this legislation and despite the support of every Democrat, House Republicans stood together to block the passage of this legislation that could have immediately lowered oil and gas prices.

3) Cracking Down on Speculation in the Oil Markets:

On July 30, 2008, the House considered H.R. 6604, the Commodity Markets Transparency Act of 2008, which would have directed the Commodities Futures Trading Commission (CFTC) to use their authorities more aggressively to police the energy commodities market for manipulation, fraud and excessive speculation. This legislation would have been an important step in putting a federal cop back on the beat to crack down on the market speculation that was driving escalating oil prices.

The Bush Administration again chose to stand with the speculators and Big Oil rather than the American people by threatening to veto this important legislation, stating "the Administration is strongly opposed to H.R. 6604, which offers poorly targeted short-term measures that do nothing to address the fundamentals of supply and demand that bear the primary responsibility for current high energy prices" Republican Leader Boehner and the majority of House Republicans again followed suit by voting down this bill.

A New Direction

Since the Democrats took control of Congress we have pushed for a new direction on energy policy for America, successfully passing the first increase in fuel economy standards in over 30 years. But Big Oil and their Republican allies have dug in, using the same tactics of distraction and misinformation to keep consumers paying over $4 for a gallon of gas. Now that the CFTC report confirms Democrats suspicion that financial players such as hedge funds and foreign traders--and not oil consumers--were driving the price of oil higher and higher, Republicans should drop the blockade, and pass legislation to fight speculators.

Comments

[mezz1962a]

Yes of course blame it on the republican. Don't mention the fact that the Dems were in control of both house for the past 2 years.

Never mind you don't have to mention during the one of the greatest gas crisis in our era instead of passing reforms or even addressing the situation the Dems went on vacation.

Of course simply ignore the fact that Pelosi would not even let a vote come to the floor that involved off shore drilling

Most of all ignore the fact that Pelosi is pushing only an energy plan that heavily favors switching to natural gas why? maybe it's thet $200,000 she invested only a few months ago in Natural gas stocks

[bobncar]

The one interesting topic not being mentioned yet in todays hurrican aftermath, is that all the oil in the world does us no good if the refineries can't operate due to some sort of natural disaster. "Drill baby drill" sounds good for a campaign I suppose, but what good does the extra drilling do if the captured oil can't be refined as has been proven by the shutdown of the refinerys in Galveston after Ike. Someone explain to me if or when a natural disaster could prevent the sun from shining or the wind would stop blowing.

[arthur2008]

But John McCain would have us believe the election is about a pregnant teenager, rather than the profound failures of the Bush administration over the past eight years -- and Sen. McCain's inability to offer anything but more of the same.

[HarrisK]

This pandering and scapegoating just distracts from the real issues of supply (fixation on a fossil fuel infrastructure) and demand (yours, mine, the world's).

As an environmentalist and an economist and I seem to spend an awful lot of time having to elucidate the sophistry of politicians trying to make political capital out of real problems. More would have been done for the energy crisis by turning off the lights in the capitol building during the HR6604 sessions.

Quick lesson on speculation: the speculator buys "futures" of commodities, which is essentially a bet on which way the price will move relative to inflation. Because they never have control of any actual oil they cannot effect the supply, and their participation in the market has no effect on price. Or, as The Economist put it, "these bets do not affect the price of oil any more than bets on a football match affect the result."

However, just as a thought experiment, imagine that speculators actually did take physical control of this oil in expectation of future price rises. They would release their oil onto the market according to the same market forces to which OPEC responds. Therefore Goody Proctor and the other speculators would release their supply simultaneously and either at the same price or, more likely, a slightly lower price.

There, Rep. Markey, I hope I have saved you and your friends some time. Enjoy your vacation, and for god's sake, turn the lights out after you.

[iambusto]

anyone following the news about major oil companies exiting retail oil business. Exxon did it a few weeks back. Conoco Phillips just declared it today its exiting retail business. I believe BP has done the same (have to check the facts on that).

so next time you go and blame for 4$ gasolene, blame the gas station owners for the margins. The big oil is just sticking to "pumping oil out of the ground" business (along with some refinery too).

How about you have the govt. force the gas stations to only markup say 1% over the price of oil they receive from big oil. sounds good doesnt it :)

[JohnKdrew]

There are MANY tough decisions ahead relating to climate changes to come¦ why not let some people pay more to consume solar-based super vehicles¦ surely we can discuss this. Try thinking in triage terms- save, leave to manage or allow to die -www.climatechangetriage.net

[bugdog]

Oh screw all of it. Nationalize the US oil companies. Then use the military to strongarm the foreign ones. It'll finally be good for something.

[GetAbike]

Rule of Law,
First you chide KTM for not seeing the Grand Conspiracy saying you take exception to his "continued blindness to the human factor driving the current market... bla bla bla" then you refer to " peak oil conspiracy nut's" as if you are looking in a mirror.
Yes, there are HUGE human factors at play, but Peak oil makes no claim about any kind of conspiracy- that is well taken care of by people whose cognitive dissonance can't reconcile their belief that greed and hoarding can occur at the same time that oil is plentiful and in no danger of running out.
Google "Export Land Model" and you will find see that "peak Oil" and human factors are not mutually exclusive. There are many reasons that the price of oil will continue to go up. Diminishing exports happen for many reasons, and some of the scariest and most mundane are human factors.
And you know what? I don't dispute people have gamed the energy shortages that we will continue to have. Forget speculators and OPEC for a moment- just watch Russia flex their muscles in the next couple of years. Besides all that grimness, people in emerging economies want to be able to hop in the car and drive down to the mall to buy salad shooters too. That means less oil for us. That is a human factor we better get used to.

[Rule Of Law]

"...driving the current market... bla bla bla"

Bla bla bla...? Why, I'm offended! :)

I recognize that supply and demand as textbook forces play a role in pricing in a truly free market. Problem is--we ain't got one! As for the PO prophesiers, it is a theory, like many theories, that has not been proven. Whereas, the greed, power hunger and member measuring contests that pass for business and their psychological drivers are well known and documented. Should we be taking steps toward energy independence and a rational national energy platform? Of course. Should conservation be a part of that? You bet--the very first part, in mho. But should our decisions be based on a theory, like religion, a thing that you can't see and seemingly can't prove, or should we proceed based on what we do know for certain and can see at work every day? I favor correcting our behavior and giving more weight to the human factor.

[GetAbike]

ROL, thank you for your sincere reply.
i am afraid it is Good news/ bad news to me.
Good news- i agree with you, "I favor correcting our behavior and giving more weight to the human factor", though the correcting behavior aint gonna happen. If we are lucky, we will make it to the "Too little, too late" stage.

The bad news is that you didnt google "Export Land Model". (haha)
Nothing about theory or religion there, though it makes it much easier to dismiss PO (or anything) when you characterize something as religion or theory.
Here it is- the ELM:
Exports from numerous oil exporting nations countries are diminishing.
A few have already stopped exporting and are now importers.
The exporters are using more of their own oil.
These are not things "you can't see and seemingly can't prove", it is just statistics and history going on as we speak.
Oh, and I would add this if it was my model- Some day we may piss off or bomb any number of exporters and they will stop exports altogether.
These are all mostly human factors.
But what are the chances of us pissing off or bombing people in the middle east, or Mexico, or Venezuela? It is just a PO prophecy, right?
OK, I am guilty of a small prophecy ;) but it is based on history.
ROL, the ELM aint just blowin smoke.
And don't worry ROL we'll base our decisions on either pandering or pure panic.

[outnow]

Investigate the food prices, too. Monopolies form "trusts" and manipulate the market. This is the fundamental rule of markets. Greed is the motivation. Yes, there are good things about this human motivation and bad things. Demand is up, no doubt, but manipulation is constant. There can be several factors causing an effect, manipulation is one. Closing the loopholes and making markets transparent is the key to a well-run economy. Also, we need to stop burning oil; oil is a valuable lubricant and necessary for plastics, medicines and fertilizers. Hasn't our technology advanced beyond the stone age? Global warming may be happening and oil may be contributing. Pollution is out of control with the black crap called oil. Our oceans will be destroyed. Stop burning oil and the world will be better off.

[Rule Of Law]

Mr. Markey, I applaud your efforts to get to the bottom of what has become the largest transfer of wealth the world has ever seen!

While many here have long suspected that manipulation played a major role in this unwarranted price runup, we are not willing to accept that it was the result of some minor league players gaming the system, and wish that you would look a bit harder at who stood the most to gain and how the economic and political pressures at the highest levels brought about a system that could so easily be broken to the advantage of the few and at the cost of an entire nation.

This was the result of neither the peak oil conspiracy nut's oft repeated mantra of "the sky is falling" nor was it the result of "free market" (as though such a thing actually exists) economic forces. But rather the coming together of deregulation, a war that has impacted the free flow of fuel, and the you scratch my back and I'll scratch yours partnering of a piratical investment industry and our self serving administration.

Please elaborate on these connections in future blogs. Thank you.

[KillTheMessenger]

Who says the sky is falling?

PO only means we are through with roughly HALF the conventional oil. The other half can now be purchased at greatly increased prices.

That's usually what happens to the drug addicted. The first dose is for free. The real kicker comes when you want more!

So how about not wanting more? Sounds good to me.

[Rule Of Law]

Look, ktm, I'm all for energy independence and whatever it takes to get there. On that we agree--100%. Our current path is bad for the economy, our security and the environment.

What I take exception with is your continued blindness to the human factor driving the current market and the obvious collusion between the producers, the exchanges and the investment banks that fund the entire system and how they play governments and their people against one another for profit and profit only. You act as though these events happen in a vacuum, like some laboratory experiment--they don't.

[Photofarm]

Sorry, but politicians can't put the blame of high oil prices on speculators. It wasn't true in the past, and it isn't true now.

The real reason commodity prices have risen dramatically is world demand increases, especially India and China. It also doesn't help that some of these countries are subsidizing the price increase, thus not passing the rising costs onto consumers, which would curtail demand.

Your blowhard message shows once again why people are mad at all politicians of both parties.

[Paul Peete - Huffpost Blogger]

You are so far off. The CTFC was deregulated by Wendy Gramm and Cheney colluded with Enron and big oil in the early days of this admin. just so that the speculators could push prices skyward. Yes economics 101, demand increases, supply either keeps up or prices rise. But they have used every trick in the book with their Saudi buddies, Middle East turmoil, wrecking the Iraqi oil capability, and allowing the trades back and forth between dollars and oil futures to line their pockets. Be real, you are a Pugnicat aren't you?

[KillTheMessenger]

Mr. Markey. Let's all stop playing the blame game. It's not fun any longer.

Let's just tell people that peak oil is here and that the only way to stop the US from bleeding itself to death over oil imports is a heavy dose of a punitive oil consumption tax. Say on the order of 50% of import value? To be paid, ultimately, by the consumer? And to be offset with equal tax breaks for fuel efficient cars, of course.

How about that? Do you have the political stature to do what is necessary and to turn this country around? Or will we have to wait for $10/gallon gasoline before people come to their senses and you find it in you to do the one and only right thing, after it is too late...?

[Rule Of Law]

What's funny and almost too coincidental about the early 70's is that this is when the "peak oil" prophecies were first suggested to have been confirmed as American oil companies began capping wells here and accelerating their production in Arabia. At the time it was actually more profitable to drill, ship and sell Arabian oil here than it was to pump our own out of the ground. The notion that domestic production had "peaked" was the cover that Big Oil used to go overseas, and their decreased pumping here was used as a de facto sort of proof that the supply had indeed been depleted to an uneconomic level.

Drill here, drill now, pay us handsome supports to do it and sell us the leases that have been denied us for so long at bargain prices is the long term end game of the Oil Industry in their consolidation of power. And the market speculation as driven by Big Oil's proxies in finance--the huge international investment banks like Goldman and Morgan among others--is the lever they are relying upon to achieve those twin goals of more tax payer welfare for the wealthy and the biggest land transfer since the opening of the West.

[KillTheMessenger]

What's funny is that peak oil was projected for the decade after 2000 and, guess what, folks, oil production has not increased much since 2005, despite worldwide efforts to drill the hell out of this planet.

You should have listened to Jimmy Carter. The man knew what he was talking about and wanted you to conserve as much as possible of your own oil... and you burnt it all in your SUVs and kitchen clean loading area family semi-trucks.

:-)

[Rule Of Law]

No no no--according to you peak phanatics, and your self appointed god, the 1950's engineer who predicted the drying up of American oil in the early seventies and whom you all quote ad nauseum when it suits your needs, the peaking began Then! America was running out Then. Don't try to change your tune now.

What's funny is the self fullfilling aspect of his prophecy--being an oil insider after all--that the companies he worked for all began capping those wells right on schedule! And the move to Arabia was a done deal, costing us jobs, taxes, and our national security, and opening the door for know nothings like yourself to continue braying about so called peak oil when the facts are in!!! There was and is manipulation. It was run at the highest levels of the investment banking world and now that you cannot deny it, you fall back on your shopworn baaa baaa baaa, peeeeek oooooyle. Hey, aren't you the guy who said prices would come down after the summer driving season (such as it was) ended? But on another post you say that our gas usage has been dropping all year and that's why the price is down???

Gee, I'd like to see that graph. Because I remember the high point of pricing came just a few months back...that doesn't correspond to a year long decline in demand. Back to school, mr. engineer.

[darthdarcy]

The Republicans fetish for deregulation everything has caused this mess and this effort is strewn with self serving corruption..!

The Commodities and Futures Modernization Act caused this mess and is the root cause for the market manipulation allowing this trading of ghost barrels in dark markets..

This was also strewn with typical Republican corruption at the highest levels as it was written by Enron and submitted at midnight by Phil Gramm who wife was then the Commissioner of the CFTC who then went and get their pay off from Enron through a part time job paying her $900,000.00..!

Now the Republicans are doing all they can to keep these prices high, and manipulating it with there drill here drill now mantra..which all sources agree will do nothing to reduce prices in any real manner and if at all only by pennies and that 5-7 years away at best...!

This is one of the biggest swindles in world history...wake up America..!

[Rule Of Law]

It just occurred to me that the Repugs are always one step ahead in the scapegoat game. Though we now know with certainty that the markets were played by these manipulators, and it cost us billions, we should also be smart enough to know that when a villain needs to be thrown under the bus, the most logical choice will be these same high flying icons of over consumption that we have been taught to revile.

The real money men behind the throne at Goldman-Sachs, Morgan and Citi--never mind our own Oil-stocracy in DC, Bush and Cheney--will never be accused or see a court room. Some small fish at some brokerage will pay the same price Michael Milkin did just to balance the scales of "justice" while doing time in some resort prison waiting for parole to his off shore accounts, carefully protected by his employers. Watch for some poor schlump to take the fall.

[KillTheMessenger]

Darth, go buy yourself a Hummer. You will need it to burn through all the oil that will come online after the democrats remove speculation from the market. We will all be swimming in this stuff. It will sell for pennies per barrel.

Or it is just one enormous, never ending nightmare and we are really running slowly out of oil and what is left of it is really all under "their soil" where China can buy as much of it as it likes to become world power number one.

:-)

[Rule Of Law]

Can you say

buy

a

hummer?

[Photofarm]

darth,

Your message is totally wrong, if you knew anything about commodity markets and world demand, you would know what you said is wrong.

[Rule Of Law]

What neo con rovian ad hominen bull poo has come from the mouths of the "peak/free market" crowd today! The truth finally surfaces that the markets have been rigged, and the best they can do is kill the messengers!!!! They can no longer deny the fact that manipulation has played a major roll and it tears at their guts. So they play attack dog on those who had this thing pegged from the beginning. How grown up.

[GetAbike]

That's it?
Mr Markey, with all due respect, your policy efforts and those of the Congress have fallen waaay short of being meaningful to the point of being counter-productive. When pandering to voters is the focus of your efforts, meaningful change becomes the red-headed step child.
You acknowledge supply/ demand in your opening "....supply and demand were not the only forces pushing prices higher" then embark on describing the remedies that do nothing for that equation. Oh yes, you DID enact "stricter" CAFE standards. Big woop. Those cars in high demand, exceed those standards already. Your legislation DID eliminate subsidies for alternative energy. That is really pushing "for a new direction on energy policy for America".
What about public transportation? Rail infrastructure? Energy conservation- beginning with the military and Federal gov't.
You know - LONG TERM solutions.
Nobody expects a politician to tell the American people that their standard of living is going down- that it has to go down in the future to meet up with reality, but puhleeeze! dont brag about what you should be ashamed of when it comes to getting something done.