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Congress To Probe Oil Price Spike

Money gushing into futures markets may be distorting oil prices

By Mark Huffman
ConsumerAffairs.com

June 16, 2008

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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.

Oil prices are up at least 40 percent since January, with prices almost setting daily records. The price of crude has hit $140 a barrel and a growing number of lawmakers have begun to view speculation as the main reason.

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.

The CFTC is currently conducting an investigation of market activity but has yet to report any results. Many in Congress are pushing for answers and have expressed frustration at what they see as a slow pace.

In addition to Lukken, the hearing will take testimony from officials from the Intercontinental Exchange and the New York Mercantile Exchange, where most U.S. commodities – including oil and gas contracts – are bought and sold.

In the House, at least one lawmaker isn't waiting to hear from market executives and regulators. Rep. John Larson (D-CT) has introduced legislation that would take speculators out of the unregulated energy futures markets. Larson is convinced that it is these speculators who are unfairly driving up the cost of gas and home heating oil.

His bill would require that anyone who invests in oil futures on the "dark" markets be able to actually take inventory of the product in which they are investing. That means no speculators who are out to make a profit by buying a contract and one price and selling it days later for a higher price, could participate.

"I know that this is a bold step. But, given the gravity of the current situation, bold action is exactly what's needed," Larson said.

Larson cites government officials and oil industry executives to make his case. He quotes Gay Caruso, Administrator of the Energy Information Administration, as saying in testimony before the Senate that speculation is adding as much as 10 percent to the price of oil.

He says Exxon Mobil CEO Lee Raymond even admitted back in 2005 that, "we are in the mode where the fundamentals of supply and demand don't really drive the price."

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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