July 10, 2006
Consumers continue to pay on average over $3.00 a gallon for gasoline at the pump, and Congress has yet to enact legislation aimed at factors leading to rising gasoline prices. Consumers Union and the Consumer Federation of America strongly believe that S. 2642, The Oil and Gas Traders Oversight Act of 2006, is must pass legislation in the effort to address price volatility in today’s markets. We strongly urge you to cosponsor this important piece of legislation and to support its passage in the Senate.
The bill, sponsored by Senators Feinstein, Snowe, Levin and Cantwell, gives the Commodity Futures Trading Commission (CFTC) oversight authority over unregulated futures markets by requiring U.S. energy traders, who electronically trade futures contracts in the U.S. or trade U.S. energy futures on a foreign exchange, to keep records and report large trades to the CFTC. The CFTC currently has no authority to oversee the trading of energy futures on over-the-counter exchanges, a large and growing market. Legislation bringing transparency and surveillance to the trading of energy commodities is critical to the integrity of our price discovery markets.
On June 27, 2006, the release of a bi-partisan report by Senator Coleman and Levin, Chairman and Ranking Member of the Senate Permanent Subcommittee on Investigations, concluded that the billions of dollars pouring into energy commodities through electronic trading of energy futures, including gasoline, crude oil and natural gas, could have a significant impact on the rise in energy prices. The report, titled “The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat,” was comprehensive in its analysis of all the factors influencing gasoline prices today with the bottom line being that traditional forces of supply and demand cannot fully account for the increases consumers have seen at the pump. This report reaches conclusions similar to two reports commissioned by Attorneys General from Illinois, Iowa, Missouri and Wisconsin, which reviewed the natural gas and oil industries (“The Role of Supply, Demand and Financial Markets in the Natural Gas Price Spiral.”)
The reports make clear that while it is difficult to quantify the effect of speculation on prices, there is substantial evidence that the large and growing amount of speculation in the current market has had a significant impact on prices. Large quantities of speculative buying or selling of futures contracts can distort market signals that in theory are indicators of true supply and demand. Unfortunately, the CFTC’s authority to monitor the impact of this activity on the regulated exchanges is limited and they do not have authority to oversee trading of U.S. energy commodities on “unregulated” exchanges.
The same week, the Commodity Futures Trading Commission and the Department of Justice filed simultaneous suits in federal court against British Petroleum, the largest supplier of natural gas liquid in North America, for illegally cornering the natural gas market in the spring of 2004 and driving up propane prices by as much as 50%.
Propane is a natural gas used by millions of consumers for home heating. And, while the price spike was brief, the results were clear – the absence of government oversight and transparency in these markets allowed BP to corner 88% of the propane market forcing millions of consumers to pay higher heating prices.
S. 2642 is critical to the integrity and effectiveness of our nation’s price discovery markets. We urge that you act now and cosponsor S. 2642, the Oil and Gas Traders Oversight Act of 2006.
Senior Policy Analyst
Consumers Union, Washington Office
Consumer Federation of America