Councilmember Patterson urges Council support of federal efforts to reduce oil price speculation

September 19, 2011

Summary

Controlling speculation step toward preventing artificial manipulation of oil prices

Story

The Metropolitan King County Councilmember today unanimously adopted a motion introduced by Julia Patterson urging the County Council to support the efforts of U.S. Senator Maria Cantwell in reducing the cost of gas for King county drivers.

The motion calls on the Commodity Futures Trading Commission (CFTC), an independent Federal agency mandated to regulate futures and commodities markets, to implement its power to control and prosecute investors “speculating on oil prices.” This speculation drives up the price of gas and products dependent on gas prices, like public buses, in King County.

The investors manipulate oil prices by buying large amounts of future oil, called oil futures, “betting” that the price of oil will rise in the future. By purchasing this oil, the speculators shrink the overall oil supply. This causes oil prices to rise artificially even though there is not a true shortage of supply, creating huge profits for investors, but making the cost of oil to all of consumers much higher than the true price of oil.

While there are businesses which need to purchase oil futures, like airline companies and public transit systems so they can predict their future costs, speculators in the oil market have no true need for the product. Therefore, they are adding no true value to the economy, while hurting the American public who are dependent on oil.

Councilmember Patterson introduced this motion to help protect King County consumers -- including families, businesses, and governments -- from paying artificially high oil prices resulting from manipulated oil prices.

“Oil speculation is causing oil prices to rise artificially even though there is not a true shortage of supply,” said Patterson. “Today this market is based upon fear and manipulation, not on supply and demand.”

“In an economy that is struggling to recover, small shifts can have a major impact on everyone,” said Council Chair Larry Gossett. “The spike we have seen in gas prices has impacted everyone, but those with the least have borne the brunt of the increase. This effort to reign in oil speculation will put money back in people’s pockets.”

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, championed by Washington Senator Maria Cantwell, the CFTC was required to implement rules capping the size of speculator’s investments in oil futures markets within 6 months of the July 21, 2010 enactment. However, more than one-year after enactment, the CFTC has yet to enact rules to curb excessive speculation. Financial institutions continue to bet on oil futures and manipulate oil markets.

At a May 12, 2011 Senate Finance Committee meeting, the Chairman and Chief Executive Officer of Exxon Mobil, under questioning by Washington Senator Maria Cantwell, testified that the real cost of oil should be $60 to $70 per barrel.

A barrel of oil on that day was trading at $98, 33 percent higher than the price would be if oil were based on the actual value of $65 per barrel.

“Oil speculation on Wall Street continues to run rampant while American consumers foot the bill at the gas pump. King County and other communities around the country recognize that we need to crack down on the excessive speculation that is artificially driving up gas prices,” said Cantwell. “The CFTC has the power to do this right now by aggressively implementing long-overdue limits in oil market speculation. It is high time the CFTC get this job done and start providing price relief to families and small businesses in Washington state and across the country.”

“Right now, consumers are paying one-third more for gas than they should. The rising prices have hit pocketbooks hard for those in King County this summer,” said Patterson. “What people don’t realize is that the Federal government has the power to immediately lower the costs of gas for consumers at a time when every penny counts.”

Between Memorial Day and Labor Day, Washingtonians purchased an estimated 750 million gallons of gasoline at record prices. By Labor Day, the national average gas price was $3.63 per gallon, $1.00 per gallon higher than in 2010, despite no decrease in supply or increase in demand. Washington families and businesses are paying millions more without any apparent correlation to the economies of supply and demand.

Fuel prices are also a major cost for transit systems across the U.S. King County estimates it spent $90 million on fuel this summer, as well as facing deficits of $60 million per year over the next four years, compared to the cost of maintaining current levels of service. King County Metro estimates it will spend $160 million on fuel over that same time frame. If fuel prices were based upon actual demand, instead of prices that were speculated on, the Transit system would expect savings of approximately $53 million on their fuel costs. This would allow the county to avoid making cuts of 530,000 hours of service per year, 88 percent of the total projected cuts to bus service.

The CFTC is scheduled to vote on a final position limit rule this fall.