SUPPLY AND DEMAND, MANIPULATION, CONSPIRACY, LACK OF OVERSIGHT?
Attempting to figure out who or what is responsible for the head scratching surge of the price of petroleum will surely lead reasonably sane people into fits of apoplexy. Those who should be in the best postion to know the real answer to this apparent mystery are testifying - as we speak - that the answer is the standard one of supply and demand. But the fact that yesterday the price went up another 7 dollars strikes me as a bit too much variance in a climate of continuing spiking.
It is difficult not to believe that there isn't some organized conspiracy afoot. Or at least that some people are making one hell of a killing while most of the rest are suffering. Remember the energy crisis referred to as ENRON? Supply and demand were the cliche answers to that fiasco as well until the truth finally emerged that it was a conspiracy.
So how to sort the wheat from the chaff?
My broker who shares my concern excitedly called me this morning eager to share a letter he received from a customer who is also interested in getting to the bottom of this serious problem. The letter - which I will quote in its entirety - is the most comprehensive explanation of this seemingly incomprehensible issue I have so far come across. The letter was written by Christopher Shays - an 11th term Represntative from Connecticut - sent to a contituent.
To make certain the letter is valid I called Congressman Shay's congressional office. His secretsary verfied that the letter is authentic and said all of it is free to be quoted.
Shays LetterMay 20, 2008
Mr. Robin Kach
60 Ivy Street
Greenwich, Connecticut 06830
Thank you for contacting me expressing support for H.R. 4066, the Close the Enron Loophole Act. I appreciate your taking the time to contact me, as well as your patience in awaiting my reply.
H.R. 4066 would close the so-called "Enron loophole" and require government oversight of the trading of energy commodities by large traders to prevent price manipulation and excessive speculation. I am a cosponsor of this bill because I believe Energy Trading Facilities (ETFs) should comply to the same standards as other futures exchanges regulated by the Commodity Futures Trading Commission (CFTC).
Since 2000, the electronic trading of energy commodities by large traders has been exempt from government oversight as regulated under the Commodity Exchange Act. H.R. 4066 defines energy commodities to include crude oil, gasoline, heating oil, diesel fuel, natural gas and electricity. The bill would subject any trading facility that functions as an energy exchange to oversight by the CFTC, just like regulated trades on the New York Mercantile Exchange (NYMEX), to prevent price manipulation and excessive spending.
Under this legislation, ETFs would function as self-regulatory organizations with CFTC oversight, and would be required to establish trading limits and accountability levels. Position limits set a ceiling on the number of contracts a trader can hold at one time on a trading facility, and accountability levels prevent price manipulation and excessive speculation by triggering CFTC oversight.
In 2006, a bipartisan report by the Investigations Subcommittee of the Senate Homeland Security and Governmental Affairs Committee found that speculators were buying up so many futures contracts that crude oil was becoming more expensive than it should have been. This report also found non-petroleum based financial institutions and investment funds invested as much as $60 billion over the past few years into commodities markets, driving up the prices of oil and motor fuels.
Large purchases of crude oil futures contracts by speculators have created an additional demand for oil, driving the price up sooner than the regular market forces of supply and demand would dictate. A key responsibility of the CFTC is to ensure prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation.
According to the Commodities Exchange Act, "Excessive speculation in any commodity under contracts of sale of such commodity for future delivery... causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity." It directs the CFTC to adopt regulations to prevent this from happening.
It seems to me energy commodities trading on the over-the-counter (OTC) electronic exchange should not be exempt from CFTC regulation. Market oversight would require traders to keep records and file Large Trader Reports with the CFTC, the information needed to gauge the extent of speculation. The absence of this information in the OTC electronic exchanges and in foreign exchanges makes it difficult to estimate exactly how much speculation has influenced the cost of oil, however, some analysts believe speculation may add between $20 and $25 to the price per barrel.
There are four components that affect the retail price of gasoline. The price per barrel of crude oil makes up nearly 70 percent of the price at the pump. Refinery and processing costs make up approximately 8 percent of the total cost, and about 10 percent reflects both the retailer's marketing strategy and the costs of operating the service station. Taxes account for approximately 13 percent of the total cost per gallon. Other factors, such as seasonality and local retail station competition, as well as problems with our aging refineries and pipelines and changes in crude oil supply, contribute to price fluctuation.
In addition, the falling value of the U.S. dollar makes global commodities, such as oil, more expensive. When the dollar weakens, commodities that are priced in dollars, such as oil, become cheaper for buyers using other currencies, increasing demand. At the same time, oil producers raise prices because they are being paid in less-valuable dollars. Moreover, the growth of China and India's economies and their demands for oil are putting tighter constraints on supply. This increase in global demand for oil can also lead to higher prices.
In the short term, we need to consider options like lifting tariffs on foreign-made ethanol and ensuring there is no price gouging. But the key will be a long-term energy policy to decrease U.S. dependence on foreign oil, protect the environment, build a market for renewable energy, and promote energy conservation.
For this reason, on April 19, 2007, I reintroduced H.R. 1945, the Energy For Our Future Act, which has three principal goals for our national energy policy: improving the fuel efficiency of passenger vehicles; incentivizing energy efficiency and promoting the growth of renewable energy; and repealing extraneous tax breaks for industries that are very profitable and already have plenty of incentive to develop additional supply.
Among other provisions, H.R. 1945 creates a renewable portfolio standard (RPS) which requires electric utilities to increase their use of wind, solar and other renewable energy sources to 20 percent of the total amount of power generated by 2020. In addition, the Energy For Our Future Act would increase corporate average fuel economy (CAFE) standards to 40 mpg by 2016. I believe raising CAFE standards is one of the most significant steps we can take as a nation to reduce our dependence on foreign oil, improve our national security, and protect our environment and economy. The CAFE reform measures in this bill would save four to five million barrels of oil per day by 2020.
The Energy For Our Future Act would increase funding for energy-efficiency housing, and offer tax incentives to retro-fit homes and commercial buildings. H.R. 1945 would double the funding in the Energy Policy Act for weatherization fuel assistance programs to $1.2 billion for FY 07, and $1.4 billion for FY 08.
H.R. 1945 bill would also extend tax incentives for energy efficiency through 2011 to encourage production and consumption of energy efficient appliances. These incentives would include the use of solar, photovoltaic and fuel-cell energy. Under the Energy Policy Act of 2005, those who build or use solar, photovoltaic and fuel-cell energy, receive a 30 percent tax credit until 2007. H.R. 1945 extends these incentives until 2012.
You may be interested to know, I voted for the Senate-amended version of H.R. 6, the Energy Independence and Security Act, which passed the House on December 18, 2007 and was signed into law by the President on December 19. In its final version, this bill increased the combined CAFE standard for cars and light trucks to 35 mpg by 2020, the first increase since 1975. The bill also creates a renewable fuel standard, which mandates at least 36 billion gallons of ethanol and other biofuels be incorporated into gasoline annually by 2022, and sets new energy efficiency standards for appliances and light bulbs.
Although I am pleased to see legislation that finally recognizes our need to conserve energy and invest in renewable sources, I am disappointed H.R. 6 did not do more. Previous versions of the bill, for which I voted on January 18, 2007, August 4, 2007, and December 6, 2007, would have established a national RPS, requiring energy companies to produce 15 percent of their electricity from renewable sources by 2020. These versions would have also repealed approximately $12 billion in energy subsidies to oil and gas companies and redirected this revenue to a renewable energy and efficient energy trust fund. Unfortunately, these provisions were not retained in the final version of the bill.
You may be interested to know, on May 16, 2007, I wrote to Energy Secretary Stephen Bodman inquiring about what initiatives the Administration and Department of Energy are taking to combat rising prices and reduce the country's demand for oil.
On May 18, 2007, I joined the Connecticut Delegation in sending a letter to Government Accountability Office (GAO) requesting an investigation into the possible role of refinery outages in Connecticut, both planned and unplanned, in determining gasoline prices and refinery company profits. The Comptroller General accepted our request and ordered an official GAO study which began in October.
The bottom line is we are not resolving our energy needs because we are not conserving. We'll just continue to consume more and waste more, consume more and waste more, and act like it doesn't matter. We are on a demand course that is simply unsustainable.
Please do not hesitate to contact my office again. If you would be interested in receiving my e-newsletter to update you about my work on your behalf in Washington, or for other information, please visit my website at www.house.gov/shays to sign up or to contact me.
Member of Congress
I googled this act a few moments ago and found the following pertinent information:
For years, speculators and profiteers have been using the so-called "Enron Loophole" to artificially inflate oil prices and reap record profits at the expense of American families and businesses.
On Wednesday, May 14, the U.S. House
The following day, the U.S. Senate also approved the bill, again by an overwhelming, and more importantly, veto-proof majority.
Although the president may still veto the bill, the results indicated that Congress has enough of a majority in place to override that action, should it occur.
As a result, the Enron Loophole is, or will be shortly, closed.
Thank you to all the individuals and institutions who supported our effort to close this loophole and put an end to the speculation and profiteering that has driven our economy to the brink of disaster.
Thank you also to all the individuals and institutions who supported our call to temporarily suspend deliveries to the nation's Strategic Petroleum Reserve, currently at 97 percent capacity, until the energy market can be brought under control.
As a result of these efforts, the White House said last week that it would suspend deliveries to the strategic reserve, thereby increasing the supply of oil available to consumers.
However, our work is not done. In fact, in many ways, it is only beginning.
The legislation closing the loophole is meaningless unless the federal Commodities and Futures Trading Commission, the agency charged with regulating energy trades, enforces the law. To do that, they need to the tools and the resources and, perhaps more importantly, the political will to put the cop back on the beat.
Moreover, speculators still have a free hand to continue gaming the market using the "Foreign Exchange" loophole. Similar to the Enron Loophole, this aspect of commodities law allows commodities markets that are owned by foreign entities to operate beyond the reach of federal oversight - despite the fact that their offices are open for business right here in the United States.
Closing the Enron Loophole and suspending shipments to the Strategic Petroleum Reserve stand as victories for American consumers, without question, but these actions also represent only the first step in what promises to be an arduous and ongoing battle against Wall Street greed.
Conclusion: At least some of leaders have to have known that lack of oversight would lead to the current debacle. Now who of our leaders would have a motive for doing this? Any of them associated with the oil business? The mysterious meeting with the Oil Executives that still remains curiously under reported looms suspiciously large at least in my mind. How about yours?