Long before the first official day of winter, the people of Maine have been coping with cold weather and feeling the strain of high prices for home heating oil, gasoline, diesel fuel, and other products refined from oil.
According to the Energy Information Administration, last month the benchmark price for a barrel of domestic crude oil averaged nearly $95. Compare that to $59 for November a year ago, and you see an astonishing 60 percent increase in a single year, an increase that cannot be explained by increased demand or tight supplies alone.
That troubling rise touches virtually every aspect of the economy. Oil prices significantly affect the costs of heating homes, driving family cars and commercial trucks, running fishing boats, operating farm and logging equipment, flying airplanes, making fertilizers, manufacturing plastics, and so on.
Many causes appear to have contributed to the sharp rise in oil prices: increased global demand for crude oil, instability in the Middle East and Venezuela, supply decisions of the OPEC cartel, insufficient U.S. refining capacity, the declining value of the dollar, the timing of government purchases for the Strategic Petroleum Reserve, and speculative trading on futures markets.
Recently, the Senate Permanent Subcommittee on Investigations, on which I serve, held a hearing to examine two factors over which we could have some control: the timing of purchases of oil by the federal government for the Strategic Petroleum Reserve and the impact of speculative trading on unregulated electronic futures markets.
In 2005, the Subcommittee’s Chairman Carl Levin of Michigan and I joined forces on a bipartisan amendment directing the Department of Energy to better manage the Strategic Petroleum Reserve by requiring the Department to avoid purchases when prices are high so as not to drive up prices further by taking oil off the market. The evidence at our hearing suggests, however, that the Administration has continued purchasing oil despite the current high prices. One economist told us that these purchases are the main factor in the current price spike and could affect prices for months to come.
The Subcommittee also heard testimony on whether speculators are creating additional demand for oil, driving up the price even though they seldom deliver or receive any oil themselves. I have heard from the Maine Oil Dealers Association and from commercial truckers in Maine who firmly believe that such speculation has been a factor in the current oil-price increases that are hurting their businesses and their customers.
Unfortunately, there is a lack of publicly available data to track the effect of speculation on market prices, and manipulation can go undetected on certain unregulated markets. That is why I support expanding the authority of the federal government to oversee energy futures markets and to provide greater transparency to guard against manipulation. Congress should pass carefully crafted legislation to help curb speculation on futures markets that can artificially drive up energy prices beyond what normal supply-and-demand considerations would produce.
Such legislation must be carefully crafted, however. The ability to make contracts keyed to future prices can provide significant benefits, such as allowing heating-oil dealers and other businesses to hedge their risk exposure to future price changes. Legislation is needed but should be carefully targeted so as not to damage legitimate risk-hedging functions.
Well-functioning markets benefit consumers by promoting price competition, by encouraging development of new products, and by attracting capital for new enterprises.
But when government and the public have little information about trades on unregulated or lightly regulated markets, real abuses can occur.
Unsupervised markets are open to deceptive practices and active or passive collusion. Government has a vital role to play in ensuring that markets are transparent and competitive. Regulators must have the information and authority to oversee trading.
This hearing is helping the Senate identify and quantify the role of excessive speculation in the level and volatility of oil prices and better understand the steps we must take to ensure that federal regulators have the right tools to guard against manipulation and other abuses.
Our long-term challenge, of course, is to reduce our reliance on imported oil. We need to pursue the goal of energy independence just as fervently as the nation embraced President Kennedy’s goal in 1961 of putting a man on the moon.