by Sen. Carl Levin
Once again, oil prices are spiking, threatening our economic recovery and causing real hardship for American families and businesses. The price of a barrel of oil is up nearly 30 percent since early October.
Unfortunately, that’s nothing new. For years now, the commodity markets have taken the American people on an expensive and damaging roller coaster ride with rapidly changing prices for crude oil. At the start of 2007, oil cost about $50 a barrel. By July of 2008, oil prices had shot to nearly $150 per barrel and then, by the end of the year, crashed to $35. In the beginning of 2011, oil prices took off again, climbing to over $110 a barrel in May. By October, the price fell to $75 a barrel, a drop of more than 30 percent over four months. Now, three and a half months later, oil prices are back up.
One of the major factors driving these high prices isn’t getting enough attention: excessive speculation in the commodity markets. Investigations by the Senate Permanent Subcommittee on Investigations, which I chair, have shown how the activities of speculators – those who don’t produce or use oil, but who bet on oil price changes – have overwhelmed normal supply and demand factors and pushed up prices at the expense of consumers and American business.
In 2006, the subcommittee released a report that found that billions of dollars in trading by speculators in the crude oil market was responsible for an estimated $20 out of the then $70 cost for a barrel of oil that year – and a corresponding rise in the price at the gas pump. Since then, even more speculators have entered the commodity markets. Today they bet billions of dollars on oil prices every day.
Oil markets exist to enable producers of oil and users of oil to do business. But at a November hearing before my subcommittee, the chairman of the Commodity Futures Trading Commission, Gary Gensler, testified that 80 percent or more of oil trades are now made by speculators. In February, Forbes magazine, citing a recent report by Goldman Sachs, reported that oil speculation adds 56 cents to the price of each gallon of gas bought at the pump.
Before speculators flooded the markets, oil prices were determined by fundamental market forces of supply and demand. When supplies were tight and demand high, prices went up. In contrast, when supplies were ample and demand low, prices went down. Nowadays, that relationship is largely absent. There is no shortage in the supply of oil globally, and the United States is producing more oil than it has in a decade. Last year, the United States actually exported more gasoline and other petroleum products than we imported. At the same time, U.S. demand for fuel actually sank.
Under normal economic conditions, rising production and lower demand should mean lower prices. Instead, prices are more volatile than ever. One key reason is that speculators are playing too large a role in the oil market. If we are to get a handle on oil prices, we have to curb excessive speculation.
Congress has already taken the first steps. In July 2010, we told federal regulators to establish rules to prevent speculators from dominating markets and distorting prices. Last year, the regulators rolled out the new rules. They are not as tough as they should be, but the real problem is that they are not yet fully in force. That means this important new tool lies dormant. One big roadblock is that the financial industry has filed a lawsuit to stop it from taking effect.
In the meantime, Congress should acknowledge that speculation is helping to drive up gas prices. We should urge federal regulators to exercise emergency authority, without waiting any longer, to clamp down on excessive speculation in the oil markets.
Congress should also ask more of the president’s task force on commodity speculation. A year ago, Sen. Jack Reed of Rhode Island and I sent a letter asking President Obama to convene a task force to investigate and combat excessive oil speculation. While the attorney general did convene a task force, it focused on criminal cases instead of the broader problem of commodity traders driving up gas prices. The task force should urgently refocus and bring its firepower to the battle against excessive speculation.
American families cannot afford the current price of oil and neither can our economy, which after four years is beginning to turn a corner toward real growth. Ignoring how speculators affect oil prices could put our recovery at risk.
Carl Levin is the senior U.S. senator from Michigan.