The Senate investigates higher oil prices

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Testimony of Michael Greenberger, Law School Professor, University of Maryland School of Law

To the U.S. Commerce committee:

http://commerce.senate.gov/public/_files/IMGJune3Testimony0.pdf
~~~
The Senate Permanent Investigating Subcommittee has now issued two reports, one in June 200632 and one in June 200733, that make a very strong (if not irrefutable case) that trading on ICE has been used to manipulate or excessively speculate in U.S. delivered crude oil and natural gas contracts.34 The June 2006 report cited economists who then concluded that when a barrel of crude was @ $77 in June 2006, $20 to $30 dollars of that cost was due to excessive speculation and/or manipulation on unregulated exchanges.35 If that assessment is correct, one quarter of the price of crude oil, and crude oil, derivatives, such as gasoline and heating oil, are the direct result of market malpractices by traders. Of course, we also know through U.S. enforcement actions and criminal prosecutions that Enron, using the Enron Loophole, for its Enron Online (an exchange that was deregulated in the way ICE is deregulated today), drove the price of electricity up almost 300% a year for California consumers in the 2000-2001 era.36

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The CFTC’s Newly Announced “Multiple Energy Market Initiatives”

For at least the last two years, two Acting Chairmen of the CFTC (Sharon Brown-Hruska and then Walter Lukken), and the CFTC Chief Economist, Jeffrey Harris, have repeatedly assured Congress, market participants, and anyone else who would listen, that the dramatic rise in crude oil, natural gas, gasoline, heating oil, and agricultural products is caused exclusively by supply/demand market fundamentals.66 These regulators have based their conclusions on the CFTC‘s ―exhaustive‖ research of all relevant market data.67

Indeed, as recently as May 20, 2008 before the full Senate Homeland Security and Government Affairs Committee, the CFTC‘s Mr. Harris, testified that ―‘all the data we have analyzed indicates that that little economic evidence exists that demonstrates that futures prices are being systematically driven by the speculators in the and energy markets.‘ . . . ur comprehensive analysis of the actual position data of these traders fails to support the contention‖ that there is excessive speculation or manipulation. Rather, he said prices are being driven ―by powerful economic fundamental forces and the laws of supply demand.‖68
I have already cited the abundance of informed academic and trader opinion that reaches conclusions quite the opposite of those of Ms. Brown-Hruska and Messrs. Lukken and Harris.69

Those who have blamed speculation as a material factor in the rise of energy prices have estimated, for example, that up to $90 of the present price of the barrel of crude oil has nothing to do with supply/demand, but, instead, is caused by unpoliced trader malpractices.70

In a rather dramatic about face, the CFTC suddenly announced on May 29, 2008 (or just nine days after Mr. Harris testimony) that that agency will now collect substantial amounts of new data to determine what is undergirding high energy prices.71 That release was divided into three parts: (1) an attempt to collect additional data not previously within the CFTC‘s possession about trading activities pertaining to ICE‘s WTI contracts; (2) the collection of new data pertaining to ―index trading‖ by swaps dealers, e.g., certain investment banks and hedge funds; and (3) the public announcement of an ongoing nationwide crude oil investigation commenced by the CFTC in December 2007 looking into possible unlawful trading malpractices.

Suffice to say for now that the credibility of well over two years of assurances by Ms. Brown-Hruska and Messrs. Lukken and Harris that all was fine in these markets based on the CFTC‘s analysis of ―comprehensive data has been wholly undermined by the May 29 release.

It is now clear that the data that was being analyzed by the CFTC as the basis of its assurances of regularity in these markets was, as many had repeatedly warned over the last two years, totally inadequate and unreliable.
~~~
Indeed, while the CFTC publicly announced its new initiative at 1 PM on May 29,87 at 1:05 PM that afternoon ICE felt obliged to issue a press release announcing that it had ―facilitated‖ the turning over of the data called for in the CFTC release. 88 It is self evident that ICE, in its capacity as the second largest trader of WTI and as an unregulated U.S. exchange, was almost certainly going to be an entity of interest to the CFTC in its market investigation. The seeming subservience of the CFTC to ICE in negotiating with the exchange over the information the agency deems necessary for its investigation is akin to asking a key witness to an investigation whether and to what extent it will agree to turn over material relevant to the investigation. That is simply not the way in which serious investigation is conducted, especially when dealing with suspicions that manipulative activity may be found in these markets.

~~~~
Finally, NYMEX President Newsome has further opined that ―he reports on the role of speculators on oil prices are grossly exaggerated. If you look at the data on who is actually trading, the level of commercial participants remains 70 to 72 percent.‖ Of course, as Michael Masters recently explained96, Dr. Newsome‘s calculation treats investment banks and hedge funds laying off the risk of their off exchange swaps transactions on NYMEX as the same as a heating oil dealer using the WTI contract on NYMEX to hedge his business risk. If those banks and hedge funds were properly classified as speculators, about 70 percent of the trading on NYMEX would be speculative – not commercial. And, if you were to add all of the WTI trading on NYMEX, ICE, and the Dubai exchange, speculation might very well approach 80-90 per cent of the WTI trades executed by U.S. owned exchanges. By any objective assessment, the crude oil market is now overwhelmingly dominated by speculation, most of which is not subject to the age old controls imposed upon speculators in these markets. One can easily see then how Goldman Sachs, a huge trader in these markets itself, could confidently predict that oil will soon reach $200 a barrel
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Wow, a scolding presentation.
Using a blunt knife sometimes works better.

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1. Continued: Dr. Cooper Testomony on oil price & CFTC

From: Energy Market Manipulation and Federal Enforcement Regimes
Tuesday, June 3, 2008
http://commerce.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=1c9f4e27-376a-49c8-a244-25730c4bbbe8&Witness_ID=ce982bca-8b3e-442c-9b63-1f8dd8aa13d1

1
SUMMARY
The speculative bubble in petroleum markets has cost the economy well over half a trillion dollars in the two years since the Senate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs first called attention to this problem. That speculative bubble in energy commodities has cost households, on average, about $1500 over the past two years in increased costs for gasoline and natural gas.
The Commodity Futures Trading Commission and the Federal Energy Regulatory Commission have failed to protect the public because they were slow to recognize the problem and are not looking for the real causes, examining a narrow set of abuses that ignore the much broader problem in the commodity futures markets. The Federal Trade Commission’s recent Advanced Notice of Proposed Rulemaking implementing the expanded powers it was given under the Energy Independence and Security Act of 2007 appears to be repeating the same mistake that the Federal Energy Regulatory Commission made in implementing the provision of the Energy Policy Act of 2005 that gave it expanded powers.

The overall pattern of prices supports the proposition that they have run up beyond anything that is justified by the problems in the physical market.

• We have a commodity that is vulnerable to abuse, in a new market that has been under-regulated from its birth.
  
• Public policy adopted in 2000 further reduced regulation and opened the door to counterproductive, if not outright manipulative, behaviors and pushed prices higher.
  
• We have a clear theory about how consumers could be hurt in this market.
  
• The problem is that both the structure of the market and the behaviors of market players are biased in favor of higher prices and against consumers.
  
• We have evidence at the micro levels of a pervasive pattern of past abuses and rumors about suspicious behavior in the current market.
  The economic analysis does not support the claim that these markets operate efficiently to establish prices.
  
• Risk premiums, which raise the price substantially (10 to 20 percent), are high and rising.
  
• Prices are well above the underlying costs of production.
  
• The operation of financial markets is no accident. Trading reflects the rules that are established – by law and through self-organization.
  
• The majority of transactions take place in markets that are largely unregulated.
  
• These over-the-counter markets, reported in unaudited, unregulated indices, are a major factor in setting the price of natural gas. And these unaudited, unregulated markets have behaved very poorly in recent years, with numerous instances of misreporting of prices.
  
• The abuses include a wide variety of practices including manipulation facilitated by large positions, lack of transparency, structural advantages enjoyed by large traders or the exercise of market power, insider trading and self-dealing, trading practices that accelerate market trends, perhaps causing them to overshoot.
  

It would be reassuring if we could blame the current speculative bubble on the blind ignorance and ineptitude of the regulatory agencies with oversight responsibilities. If that were the case, we could just fire the commissioners and secretaries and clean up the problem. Unfortunately, there is a more fundamental problem that must be addressed.

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.

Public policies have made these markets the playgrounds of the idle rich, while consumers suffer the burden of rising prices for the necessities of daily life. We have made it so easy to play in the financial markets that investment in productive long term assets are unattractive. We must turn down the volume by imposing more stringent conditions on these markets.

The most blatant mistake occurred when Congress allowed the Commodity Futures Trading Commission to forego regulation of over the counter trading in energy futures – creating what is known as the Enron-Loophole. Because there is no regulation of this huge swath of activity, regulators have little insight into what is going on in energy commodity markets. We must not only close the Enron-loophole, but ensure vigorous enforcement of registration and reporting requirements.

~~~~
CONCLUSION
Vigorously enforced registering and reporting requirements will chase the bad actors out of the commodity markets and the margin and tax policies will direct capital out of speculation and into productive long term uses. Creating a class of idle rich speculators, who are immune to the business cycle, was a huge mistake. Allowing this huge log of money to pump up the volume, volatility and risk has cost consumers dearly.

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2. Why Bush veto's the Farm Bill

Because it addresses the Enron Energy Loophole:

http://www.feinstein.senate.gov/public/index.cfm?FuseAction=NewsRoom.PressReleases&ContentRecord_id=ed7c8fe7-d420-e683-c889-bb53106f90f3&IsPrint=true
FOR IMMEDIATE RELEASE:
Thursday, May 15, 2008

Congress Approves Measure to Close “Enron Loophole”


- Measure included in Senate-approved Farm Bill conference report -

Today, the Senate sends the President a bill to close the Enron Loophole once and for all,” Senator Feinstein said. “This bill is really our best bet to deter unscrupulous traders from manipulating energy prices and engaging in excessive speculation. This has been a long, hard road – and this is a major legislative victory.”

~~~~~~~~~~~~~~~~
President Will Veto Farm Bill Again
Compiled By Staff
June 9, 2008
http://missouriruralist.com/index.aspx?ascxid=fpStory&fpsid=34216&fpstid=1

With the Senate passing the complete Farm Bill Thursday on a 77 to 15 vote, it is headed back to the White House where Deputy Ag Secretary Chuck Conner says President Bush will again veto the legislation.

"The President's position has not changed over the past couple of weeks," Conner says.

The first veto was easily overridden by Congress and Conner does expect the second veto to also be overridden. He says USDA has already formed the implementation team to get the programs on the ground as quickly as possible.

"We consider everything but the trade title to already be law as a result of the override," Conner says. "We're proceeding with implementation as if it is law, even though a lot of what the President will veto is in full effect."

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3. legislative proposals abound 6/10/08

From Business week: Oil Traders: Don't Fence Us In
http://www.businessweek.com/bwdaily/dnflash/content/jun2008/db20080610_657041.htm?chan=top+news_top+news+index_news+%2B+analysis

~~~~~
several proposals to rein in speculation on commodities markets are circulating in Washington. Representative Bart Stupak (D-Mich.) says he plans to introduce legislation to target speculation through swaps, foreign exchanges, and over-the-counter trades. Last month, Senate Majority Leader Harry Reid (D-Nev.), Senator Jeff Bingaman (D-N.M.), and others unveiled the Consumer-First Energy Act, which would mandate higher cash collateral for energy futures trading and ban traders of U.S. crude oil from routing their transactions through offshore markets. And Representative John Larson (D-Conn.) is expected to propose legislation that would go a step further, effectively banning over-the-counter energy futures trading by those who don't take physical delivery of the commodity.

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4. Consumer First Energy Act, Stalls in the Senate

http://afp.google.com/article/ALeqM5jaFWkwGWI9KaeJgGM4bx6FcAX2FA
US lawmakers block Democrat bill to cut energy prices

WASHINGTON (AFP) — Senate Democrats Tuesday failed to win passage of a bill they said would trim runaway energy prices by ending tax breaks for oil companies and forcing them to invest in "clean" technology.

A procedural vote on the Consumer First Energy Act failed by 51-43 to reach the 60 votes necessary to bring the bill to a final debate, amid Republican opposition to any attempt to raise taxes.

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5. CFTC, FSA Talk on Possible London Oil Positions Limits, FT Says

http://www.bloomberg.com/apps/news?pid=20601102&sid=aX4UEmcvwQxo&refer=

June 11 (Bloomberg) -- The U.S. Commodity Futures Trading Commission yesterday held talks with the U.K. Financial Services Authority about potentially introducing limits on the positions traders can take in London's oil markets, the Financial Times reported.

The discussions reflect the belief of some U.S. legislators that the London exchange, ICE Futures Europe, on which a form of the West Texas Intermediate crude contract is traded, is being manipulated by speculators to push up the price of oil, according to the newspaper.

Talks between the CFTC and FSA included the possibility that ICE Futures Europe could voluntarily limit the size of oil positions, the newspaper said. U.S. exchanges are required by the CFTC, the U.S. energy markets regulator, to cap positions taken by traders, while the FSA has no such rule, the FT said.

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6. Commodity Futures Trading Commission will meet on Thursday to discuss regulations

UPDATE 2-US regulators to meet on oil - EIA

http://www.reuters.com/article/governmentFilingsNews/idUSN1115112720080611
~~~~~
Some U.S. lawmakers have pressed the CFTC, the top U.S. futures market regulator, to claim jurisdiction over what they call "dark markets" -- oil trading on electronic exchanges like the IntercontinentalExchange (ICE.N: Quote, Profile, Research), or ICE, where the CFTC has little oversight.

"The CFTC is supposed to be a regulator," said Sen. Byron Dorgan, North Dakota Democrat. "But like a lot of regulators, it seems to be pretty much asleep at the switch."

Responding to such concerns, the CFTC this week formed an interagency task force to evaluate commodity markets, and has moved to seek more data on trading of WTI contracts in the United Kingdom. The CFTC has been investigating crude oil markets for more than six months.

The new task force -- which includes the Federal Reserve, the Department of the Treasury, and the Department of Agriculture -- will meet on Thursday to weigh possible U.S. regulatory schemes, EIA administrator Guy Caruso told a House committee hearing.

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7. Forced Commodity Liquidations Coming?

By Chris Laird
Jun 11 2008 9:56AM
http://www.kitco.com/ind/Laird/jun112008.html

The CFTC is looking at changing commodity rules to force big funds to disgorge multi thousand contracts positions.

The CFTC stated the commodity markets are not geared to have big funds sitting on long term positions of thousands of commodity contracts for long periods for foods and so on.

We could be looking at a forced liquidation – similar to the silver liquidation that happened in the big metal run up and silver corner by the Hunt brothers. That episode resulted in huge losses for the Hunts – who were forced out at huge losses after they tried to corner the silver market.

The entire world is up in arms about the energy and food shortages. It does not matter that the shortages are the real culprits. The fact is, pretty much all the nations are getting ready to force speculators out of these markets. The speculators are buying thousands of contracts in futures markets, even years ahead in grains, and sitting on them.

The fact is that, in a world food crisis, this is going to force poor people to pay – tribute – to big investors to eat. The world governments are not going to allow that to happen if they can stop it.

Already, India and others, and the US CFTC are looking at ways to force speculators to disgorge their tens of thousands of contracts in critical commodities.

I would bet that the fund universe is going to lose this battle. Many nations are getting behind this effort....

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8. S. 2995: Oil trading transparency act. .....introduced, step one

legislation:
S. 2995: A bill to amend the Commodity Exchange Act to enhance oil trading transparency
Sponsored by: Levin, Feinstein.


http://www.govtrack.us/congress/bill.xpd?bill=s110-2995

May 8, 2008: Referred to the Committee on Agriculture, Nutrition, and Forestry

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9. World Begins to Back OPEC’s Contention

Syed Rashid Husain
http://www.arabnews.com/?page=6§ion=0&article=110849&d=13&m=6&y=2008

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There is a growing acceptance now all around that speculation is playing havoc with the markets. Even the British Energy Minister Malcom Wicks reaching Riyadh later today, now concedes that at least partially — if not fully — the speculators are to be blamed

~~~
US Senator Jeff Bingaman, chairman of the US Senate Energy Committee, said Commodity Futures Trading Commission (CFTC) officials provided “glaringly incomplete” data to back up testimony that speculative trading is not the chief reason behind crude oil’s rise above $135 a barrel
~~~
Bingaman, a New Mexico Democrat, sent acting CFTC chairman Walter Lukken a letter asking why the agency classifies large investment banks and other swap dealers as commercial traders — the same category it uses for more traditional investors in the physical oil market such as oil companies and airlines
~~~
Senate Majority Leader Harry Reid this month proposed legislation that would prevent traders of US crude oil from routing transactions through off-shore markets to evade speculative limits. It also sets forth reporting requirements
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Toshinori Ito, senior analyst at UBS Securities Japan says, “Oil prices are surging not because of a supply shortage, but because of massive liquidity,” referring to the influx of financial funds into markets, helped by low interest rates

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The middle east new can do some good reporting!

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10. Legislation cracks down on rampant energy speculation

By R. A. Dillon
~~~~
Sens. Ted Stevens and Dianne Feinstein, D-Calif., introduced legislation Friday that would require the CFTC to impose limits on oil futures trades by non-commercial, institutional investors, such as banks and pension funds, on foreign exchanges.

The measure would essentially level the playing field, the senators said.

“It is becoming clear that rampant speculation in energy markets by institutional investors may be driving up the price of oil and gas,” Feinstein said in a written statement. “And yet, CFTC exempts these investors from the position limits that are imposed on all other speculators. This gives institutional investors an unfair advantage in the marketplace.”

Stevens said the bill would require market regulators to differentiate between institutional investors speculating on the price of oil, and commercial entities that use oil or other energy commodities and therefore buy futures as a hedge against future price increases.

“Our bill does not affect those who legitimately want to use futures to assure their own supply,” Stevens said. “It would require the CFTC to control the trading by people who are truly speculating and that oil futures are no way connected with their business.”

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11. Congress To Probe Oil Price Spike, Tuesday

http://www.consumeraffairs.com/news04/2008/06/gas_prices259.html
By Mark Huffman


Oil traders will come under increasing scrutiny in Washington this week as two Senate committees hold hearings on whether speculators are to blame for part, or all, of oil's spectacular price rise this year.
~~~~

Acting Chairman of the Commodity Futures Trading Commission Walter Lukken will try to explain the price surge when he appears Tuesday before a joint hearing of two Senate panels – the Committee on Agriculture, Nutrition and Forestry and an Appropriations Committee subcommittee on financial services

~~~~
OPEC oil ministers also appear to agree. The oil ministers for both Iran and Saudia Arabia, the world's two largest oil producers, say there is no oil shortage and prices are not being influenced by supply and demand.

Larson says all the money that has lately been pouring into the market cannot help but have a distorting effect. "The amount of money invested in energy futures has increased more than 1000 percent since 2000," Larson said. "Then, there were $9 billion in the energy futures market. Today, that number is up to $250 billion."

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12. US CFTC unveils new foreign market data pact

Nick Snow
http://www.pennenergy.com/index/articledisplay/us-cftc-unveils-new-foreign-market-data-pact/332086/s-articles/s-oil-gas-journal/s-general-interest/s-1.html

WASHINGTON, DC, June 18 -- The US Commodity Futures Trade Commission improved its access to data on US commodities traded on overseas exchanges as it amended terms under which ICE Futures Europe is permitted direct access to US customers, the CFTC's top official told a joint hearing of two US Senate committees.

The amended "no-action relief letter" will require ICE Futures Europe to adopt equivalent US position limits and accountability levels on its West Texas Intermediate crude oil contract, which is linked to the New York Mercantile Exchange crude oil contract, said Acting CFTC Chairman Walter L. Lukken.

It also will require ICE Futures Europe to follow similar US hedge exemption requirements and report any violations to the CFTC, he told a joint hearing of the Senate Agriculture, Nutrition and Forestry Committee and the Appropriations Committee's Financial Services and General Services Subcommittee.

"The CFTC will also require other foreign exchanges that seek such direct access to provide the CFTC with comparable large trader reports and to impose comparable position and accountability limits for any products linked with US regulated futures contracts," Lukken said.

"This combination of enhanced information data and additional market controls will help the CFTC in its surveillance of its regulated domestic exchanges while preserving the benefits of its mutual recognition that has enable proper global oversight over the last decade," he maintaine.
............

http://www.pennenergy.com/index/articledisplay/us-cftc-unveils-new-foreign-market-data-pact/332086/s-articles/s-oil-gas-journal/s-general-interest/s-3.html

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13. What data pact? FSA rejects 'American imperialism' in City oil market

Did someone cross the communication lines here? There seems to be a problem here.
The Brits are fuming....
Keep the dogs on them boys. Maybe will smoke those speculators out yet.
----------------------------------------------------------------


FSA rejects 'American imperialism' in City oil market
http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4167841.ece
~~~~~
However, a spokeswoman for the FSA said that it had the power to veto the CFTC's plan, which was presented as a fait accompli. “It's one of many options that we may consider,” she said. “We are keeping the matter under review.” She added that the FSA has a “very different approach” to market regulation to the CFTC but remained in talks with the Americans. The CFTC normally takes 120 days to implement its rulings.
............
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The Question here is: Who are the subjects and can we continue to operate the International commodities exchange(in oil futures with London) without full disclosure that the U.S. seeks, and under who's authority is the market ultimately controlled?

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14. The Brit's have "Balls Clause".

Finance regulator in London is waiting for CFTC to act, before he can react.


The Financial Times
http://www.ft.com/cms/s/0/a00c6a00-3e62-11dd-b16d-0000779fd2ac.html


~~~~~
The FSA must decide whether to put the change out for market consultation - or to consider whether it has grounds to veto the change, under the so-called "Balls Clause", which was introduced by parliament to ringfence the City from unwanted US regulation.
~~~~

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15. Etheridge bill in fast lane

Etheridge bill in fast lane
http://www.newsobserver.com/politics/story/1118161.html
And Here:

Etheridge Bill Targets Energy Market Manipulation http://www.ncnn.com/content/view/2898/26/

...is introducing a bill that would add 100 positions to the Commotsdity Futures Trading Commission, the federal agency responsible for protecting the public from fraudulent practices in commodity futures trading. The bill would also require more disclosure and transparency from investors like index funds and swap dealers. And it would give the CFTC more authority over trading of U.S. energy commodities on overseas markets which currently are not regulated by a U.S. entity. Etheridge says there is no one factor responsible for the current energy prices.

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16. Video archive of hearings on monday 6/23/08 7hr's

http://energycommerce.edgeboss.net/wmedia/energycommerce/062308.oi.hrg.energy-speculation.wvx

"When the Saud's say you have a problem with the oil markets, then you know you have a problem".: Rep. Inslee.

@ 2:51hr--position limits, and the tumor that needs to be operated on; And leveling the
playing field.

@ 3:00 hrs The difference between commodity and equity markets.

@ 3:23 hrs Recommendations for margin requirement,,, raise to 30% up to 50%,, like stocks.

@ 5:30 hrs Margin requirement's? May not be helpful. -Mr. Lukken

@ 6:40 hrs Mr Greenburger's opening statement!

@ 6:54 hrs Is ICE an U.S. or London entity? Unlimited trading! Ok, lets have limits.

@ 7:03 hrs Mr Barton... sums it up. and Global cooperation, or the British system of trading

@ 7:11.33 hrs Mr Greenberger's assessment. What a bunch of Pusey foots.
good from here to the end.

:popcorn: