Mr. President, over the past half year, as the price of a barrel of oil has rocketed into the sky--all the way to $147 a barrel and in 1 day the price escalating $25--there have been a number of…
Mr. President, over the past half year, as the price of a barrel of oil has rocketed into the sky--all the way to $147 a barrel and in 1 day the price escalating $25--there have been a number of Senators on this floor and in committee meetings and in private discussions saying: Why won't people wake up and realize it is not the economic marketplace of supply and demand that is determining the price of oil? Who wants us to believe that? The oil companies, of course. In fact, the price of oil has escalated not because there is a tightness on the world marketplace of demand for oil. Indeed, at the very time of a 6-month period from the last quarter of last year until the first quarter of 2008--that 6-month period when the demand for oil was going down and the supply was going up, which would indicate the price should be going down if supply is greater than demand--exactly the reverse was true. The price kept rocketing to the Moon.
It defied the laws of supply and demand. Yet we had everybody running out saying, ``Oh, it is the tight world marketplace,'' and it was difficult to get people to listen to a group of Senators who said it was because the commodities futures exchanges had been deregulated and, therefore, unregulated oil futures contracts speculation was running wild.
Then, once it got up to $147 a barrel, what happened? The liquidity crisis hit, the economic crisis of confidence hit--not only in America but across the world. A lot of this was precipitated by the faulty mortgages, the subprime mortgages we are now not paying off in the revenue stream because people weren't paying their mortgages. Those mortgages had been bundled into securities and then bought and sold, and a lot of financial institutions, hedge funds, mutual funds and, indeed, big investments for pension funds started dumping those because they needed cash, and they started dumping their positions on oil futures commodities that they had purchased in this speculative frenzy that ran the price up to $147 a barrel. What happened? The exact reverse. The price of oil starts coming down. So what should we do about this? Well, we ought to do what a number of us have been saying: We ought to go back and reregulate what we have jurisdiction over, which is the Commodities Futures Trading Commission.
Now, why was it deregulated? It was deregulated in the dead of night before Christmas in the year 2000, and it was deregulated at the behest of the Enron Corporation. And once they deregulated that commodities futures trading market on energy, it allowed them to go out and speculate on energy contracts. What was the first result? In the early part of this decade we saw it happen in California. We saw the electricity contracts start a runup in speculative bidding, to which it went up--the cost of electricity--by as high as 300 percent in California. Once that started to unravel, then we know what happened: Enron started to unravel with all the shenanigans that had gone on there.
But here we are 7 and 8 years later, after the law was changed, and we haven't been able to get it changed back because people come out here and say: Oh, it is supply and demand in the world market for oil, and they come up with a simple slogan, as if that was going to handle the price of oil when it was hitting $147 and translated into about $4- gallon-gasoline. Their simple little slogan was ``drill baby, drill,'' as if that were going to solve the problem of the price of gasoline and the price of oil.
But now we hear--and people are starting to pay attention--we ought to reregulate this futures commodities trading. Now, what do we mean by regulate? I am talking about simple little things, such as you would have to use the oil that you are bidding on, such as an airline does. It locks in a future price for fuel by bidding on these future oil contracts. An airline, in fact, does use oil. By taking away the regulation, they have removed that ability. Or to give another example of regulation: A Commodities Futures Trading Commission could say you have to put a certain amount of money down if you are going to buy a future oil contract. Instead of getting it with nothing down, you have to put some skin in the game. But if you completely deregulate it, what you leave it to is the speculator to go in and bid that price up and up and up.
Now, this is what we have been saying on the floor of this Senate for the last 6 or 8 months, a number of us--Senator Dorgan, Senator Cantwell, this Senator, and several other Senators--but it has been hard to get an audience that would listen. Well, no less a respected institution than CBS News ``60 Minutes'' last Sunday night broke it open and put it about as clearly as I have ever heard in posing this question: Did speculation fuel oil price swings?
And what they concluded was that 6 months ago, when oil hit its alltime high of $147, and gas was up around $4 a gallon, it created a frenzy that fed into irrational and false claims that the problem was just supply and demand and that the solution was to drill for more oil.
Well, it looks a lot different now. That frenzy that got mixed up in Presidential politics as well, with those simplified mantras of ``drill baby, drill,'' fueled by a slick public relations campaign, that was funded by deep-pocket oil companies. Yet those same oil companies testified in the spring of 2008 that if supply and demand were the sole driver of oil prices, that oil should cost no more than $55 a barrel. We had executives of two of the big major oil companies say the normal laws of supply and demand would say that oil ought to be in the range of $55 to $65 a barrel, and they testified, this Senator thinks, correctly.
So ask yourself: Could supply and demand justify the wild swings in prices? And in that one instance where oil jumped $25 in 1 day for a barrel of oil, ask yourself: Could the new oil demands by China and India, that have needs for new oil products, could that have suddenly caused that price to jump so much in a single day? And the answer, clearly, is: No. It was speculation that caused that bubble to grow. Wall Street investors shifted billions of dollars out of the stock market and into the commodities futures market
and ultimately into oil, and that is what was the biggest driver of running up the price of oil and gasoline.
What is even more powerful in demonstrating the influence of speculators on oil prices is examining what happened to those prices after we in the Senate, and down at the other end of the Capitol in the House, started threatening regulation again. Well, guess what happened. The prices went down. When Wall Street experienced a financial meltdown with the collapse of Lehman Brothers and the near collapse of AIG, prices fell even more as the Wall Street speculators got out of the oil futures markets to the tune of $70 billion. The speculative bubble in commodities, which was not only energy but agricultural commodities, all of a sudden bubble popped.
Demand for oil in the United States is down by 5 percent, but the price of oil is down 75 percent. So we shouldn't be fooled by the drop in prices. Some financial analysts, fortunately, are not fooled by the drop in prices. They are advising investors that low oil prices are a temporary phenomenon and that oil prices will average above $75 a barrel over the next 5 years.
Well, a number of us, months ago, filed a bill to stop the trading of oil and other energy commodities on the unregulated exchanges, and what the bill does is it turns the clock back to a change in law that was pushed by the Enron Corporation, known as the Enron loophole, which opened the way for a flood of speculative money in these commodity markets. I am introducing that bill again today, and I seek our colleagues' support.
We must be vigilant to ensure that Wall Street investors do not take advantage of the lax regulation to reap profits by driving up the price of oil and making driving a lot more expensive for the rest of us. Let us remember that we saw what happened with another form of unregulated financial instruments. That was those insurance policies that had a fancy name, called credit default swaps. They were unregulated. Look what happened: The collapse of AIG that had to come in to the tune of upward of a $100 billion rescue from the Federal Government. I don't believe it is simple coincidence that the same legislation that let those credit default swaps escape regulation also allowed energy traders to conduct their business in the shadows. We need to bring that industry out of the darkness and into the full light of day.
Mr. President, I wish to quote a couple lines from this Sunday's interview on CBS News ``60 Minutes.'' A representative of the Petroleum Marketers Association is interviewed, a Mr. Gilligan, and he says:
Approximately 60 to 70 percent of the oil contracts in the
futures markets are now held by speculative entities, not by
the companies that need oil, not by the airlines, not by the
oil companies, but by investors that are looking to make
money from their speculative positions.
Now, that is a representative of the oil companies that said that. Furthermore, the investigative reporter, Steve Kroft, quotes a fellow named Michael Masters, and he states:
In a five-year period, Masters said the amount of money
institutional investors, hedge funds and the big Wall Street
banks had placed in the commodities markets went from $13
billion to $300 billion. Last year, 27 barrels of crude were
being traded every day on the New York Mercantile Exchange
for every 1 barrel of oil that was actually being consumed in
the United States.
That is Mr. Kroft's analysis on ``60 Minutes,'' and he was referring to a former Wall Street trader named Michael Masters.
I wish to end by further quoting Mr. Kroft from 60 Minutes:
A recent report out of MIT analyzing world oil production
and consumption also concluded that the basic fundamentals of
supply and demand could not have been responsible for last
year's runup in oil prices.
Another quote from an interviewee: ``From quarter four of '07 until the second quarter of '08''--that is a 6-month period--``the Energy Information Administration said that supply went up, worldwide supply went up, and worldwide demand went down . . . This was the period of the spike'' in oil prices ``so you had the largest price increase in history during a time when actual demand was going down and actual supply was going up during that same period. The only thing that makes sense that lifted the price was investor demand''--in other words, the speculators making an artificial demand.
I think it is clear. That is why I am introducing this legislation. I look forward with great optimism to the passage of this kind of legislation.
Mr. President, I ask unanimous consent that the text of the bill and a ``60 Minutes'' transcript be printed in the Record.