FAA Reauthorization Act of 2007 - Continued

Floor Speech

FAA REAUTHORIZATION ACT OF 2007--Continued -- (Senate - April 30, 2008)

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Ms. CANTWELL. Mr. President, I have been to the floor now a couple of times already to talk about the high price of gasoline and what is going on in the oil markets. I want to take a few minutes this evening and talk about this issue as it relates to the futures market and what is happening to the day-to-day price of gasoline.

I know my constituents are outraged over this price. I know they are frustrated. It is impacting our economy. They want to see results. They want to see us take action. I think it is very important for us to keep delving into the details of what is causing this problem; that is, the price of gas increasing over 100 percent in about a year's time.

The first thing that is important for us to remember is how dependent the United States is on foreign oil; that we are, at 20 million barrels per day, the highest user of a country dependent on oil. And when you look at other countries and where they are on this issue, you can see that 20, almost 21 million barrels a day of foreign oil really means the United States, given the high oil prices we are seeing in the world market, is more impacted than any other economy.

So that means the United States has to step up and deal with this issue. I am not saying other economies, such as China, Japan, and Germany, are not impacted, but we are five times more impacted, and that is why we need to be aggressive and act on this legislation.

Now, we know where oil has been. In fact, I made this chart a few days ago to show how oil prices have tripled since 2002. I said oil was at $118 a barrel. Well, that changed. It went to $120. Now I think it is back down maybe to $116 today. I have not seen where it has closed. But that means we have seen gas go from $3.50 to $3.60. We have seen diesel at $4.22.

The important point is that oil futures; that is, the future price of oil, people are already purchasing oil and oil contracts into the future, and they are paying $100 or more for the next several years. That means those contracts that people are purchasing in oil futures help set the price for the commodity we purchase today.

If people are saying: I will buy oil into many years from now, 7, 8 years from now, and pay over $100 a barrel, it makes it very hard to have oil purchased in the physical market for a cheaper price than that.

Now, I have spent many hours on the Senate floor talking about supply and demand. The reason I have done that is because when you have a normal market, you have supply and demand, it works pretty well. My concern is, when you look at the statistics and the numbers, and here is a particular example, that world supply basically since 1988 has increased 33 percent and world demand has increased in that same time period 33 percent.

I showed a chart the other day that basically showed these two lines in parallel. This is not about supply and demand. This is not about a major market disruption and thereby not having a lot of supply and thereby causing a shortage and an increase, a spike in price. Now, yes, we have had some anomalies in the marketplace. We have had situations like Katrina, but they have been small instances, nothing that would cause a 100-percent increase in a 1-year period of time in the price of oil.

So that leads you to say simply: What is going on in this marketplace if it is not supply and demand, if the market is not functioning?

Well, one thing I know about this futures price that I described to you is that we have had a lot of testimony before the Energy Committee, before the Commerce Committee. I am sure some of my colleagues with oversight of the CFTC have had hearings.

But one thing we heard from a professor from the University of Maryland was, with those selling or buying commodities in the spot markets, they rely on the future price to judge the amount they are going to pay for the delivery of those commodities.

So I am reinforcing what I said earlier; that is, if people are already buying future contracts, and those future contracts are saying: We are definitely going to pay more than $100 a barrel for oil, That is going to affect the spot market. And the spot market is the market in which people buy the commodity today and what price they will pay.

So if you are sitting there thinking: How much am I going to pay for oil, and people are going to pay over $100 a barrel for it over the next several years, it is certainly going to affect the day-to-day price of oil.

Now, why is this so important? Well, it is so important because the futures market, in my mind, is out of control as it relates to the price of oil. It is out of control in the sense that it is not regulated in the same way other futures commodities are regulated. It is not regulated the same way cattle futures are, for example. They have reporting requirements. They have trading requirements. They have oversight by the CFTC. They are not exchanged on an international exchange to which we do not have access. There is no loophole, but for oil there is. That is the futures market, and the futures market impacts the spot price market.

So let's look at what happened. In fact, one of the analyses that was done on these hedge funds and how they are impacting the futures market--because I know a lot of people think crude oil is produced and an oil company either has that supply and then delivers it to its regional retailers throughout the United States or maybe to other countries and that is how it works. But what is happening is major investors are buying that product.

In fact, hedge funds are taking an ever-larger bet in the futures market because it is smaller than the stock market or the bond market, which means you can have more influence. The funds are using borrowed money to maximize their bets, magnifying their impact on the energy markets and prices.

So this is a reporter reporting about what is happening in the futures market and how hedge funds are playing this large role of moving in and having an impact on what the futures price is. Now, the reason I mention this is because we know this is causing problems. We have a very big example of a hedge fund gone wrong; that is, a hedge fund that was involved in rogue trading and used its power in the futures markets to disrupt the market as it related to natural gas.

So many people probably read about Amaranth; they have seen it in the paper. But what happened is, Amaranth sold large volumes of the next month's gas delivery in the last 30 minutes of the market. So they took a huge amount of supply and basically did what was called ``crashing the close,'' basically to benefit their position.

Now what this did is it cost consumers $9 billion more in the cost of natural gas. That is what this hedge fund did in disrupting the natural gas markets. And, thank God, we had passed a law in 2005 saying this kind of activity was manipulative and it ought to be outlawed. The FERC is working on enforcement penalties of $291 million against Amaranth in this case.

But this is an example of how a hedge fund has come into the system and had a significant impact. Now, the Chairman of the FERC is saying these futures market prices impact the physical market price, and these manipulative schemes that were used like in Amaranth were designed to lower the prices in the futures market in order to benefit positions held in the physical market.

It is that kind of activity that we do not have enough insight into in the oil markets. You are saying: Well, how do we know about this? This was a natural gas market. And post-Enron we passed a law and said: We need to make this clear, a bright line that this kind of market manipulation is against the law.

We did that, and this is what the policeman on the beat, the FERC, has been doing to stop bad actors. And it is a very bright line. But what we need to do now is to do the same thing with the oil markets because after the Amaranth case, after it collapsed, lo and behold, what happened? What happened? Well, the futures price dropped to the lowest level for that contract in 2.5 years. So, basically, after Amaranth got out of the situation, and throughout this period thereafter, the market fundamentals of supply and demand basically have been unchanged.

This was an investigation that was done by our Permanent Committee on Investigations of the natural gas market. So once Amaranth was out of the market and their activities, guess what. We saw a stabilization in price. That is what we want. We want policing of the market. And that is why we want the FTC to do its job. We want the FTC to do the aggressive job that FERC is now doing in policing the electricity and natural gas market.

This body, this Congress, this President, signed into law language saying that the oil markets should also have a very bright line and should not tolerate market manipulation. That was signed into law last December. For the law to take effect, we need the Federal Trade Commission to actually implement the rule, to say how they are going to use this law, and to focus on catching the bad actors.

I want to reiterate the things that we need to do. We need to close the Enron loophole. The Enron loophole allows for online trading to be exempt from the regulations that other futures commodities comply with.

We need to require oversight of all oil futures markets. We cannot be held, in the United States with that 21 million barrels of oil, to having a blind spot on how the market is being impacted because the FTC does not have any insight into bad actors who might be manipulating it like Amaranth did.

We need the FTC to implement these new market rules. The FTC needs to be clear. They need to publish these rules and implement them as soon as possible.

I believe we need the Department of Justice to step in and help because we have seen, in the Enron case, when the Department of Justice and the CFTC and the FERC and various agencies worked together to piece this puzzle together with their authority, more enforcement mechanisms were used to catch bad actors.

I am sure we will have time again to talk about how 28 States have already implemented statutes to make price gouging illegal. I believe that is some authority that we should give the President.

So these are the things that we should be doing to protect consumers. I know it might seem to some of my colleagues that the oil futures market is complex and might not be the subject of something we should be dealing with on the floor of the Senate. But I will guarantee you, if we do not have a policeman on the beat for the oil markets, we are going to see a continuation of these incredible prices that are not based on market fundamentals.

I know whether you are an oil company or a hedge fund or whether you are someone in the supply chain, no one wants manipulation. Everybody wants markets to function based on supply and demand and basic fundamentals. Everybody should be for transparency of these markets, and they should be for strong Federal statutes implemented by the FTC, and they should be in support of having a very aggressive policeman on the beat to make sure we send a very strong message that these kind of practices will not be tolerated.

I yield the floor, and I suggest the absence of a quorum.

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