Durbin: It's Time To Put More Cops On The Futures Market Beat

June 9, 2008 -- WASHINGTON, D.C. – With gas prices reaching an all-time high today, United States Senator Dick Durbin (D-IL) called for a dramatic increase in the resources for the Commodity Futures Trading Commission (CFTC), the federal agency charged with overseeing America’s oil markets.

“What led to the record increase in the price of oil? The truth is that no one knows. Not the CFTC. Not the Energy Information Administration, the Federal Energy Regulatory Commission, or the Federal Trade Commission. This issue is much too important to the American people to allow this to continue. Enough is enough. Let’s get to the bottom of this," Durbin said.

By 2009 the CFTC will be asked to oversee around 980 million futures transactions of ever-increasing complexity. Yet during a huge rise in trading since 2000 the CFTC’s resources have actually shrunk from 546 employees to just 475. With so many trades and not enough resources, there are serious concerns about possible market manipulation.

In Friday’s Washington Post the Chairman of the CFTC, Walter Lukken, said “We could hire an extra 100 people and put them to work tomorrow given the inflow of trading volume. We are doing the best we can in difficult circumstances…. This is something that we are obviously concerned with -- the potential for manipulation."

The Senate today resumed consideration on the motion to proceed to the Consumer-First Energy Act of 2008. That bill would create a tax on "windfall profits" of the major oil companies; suspend filling of the Strategic Petroleum Reserve (SPR); punish price gouging; limit excessive speculation in the oil markets; and crack down on the Organization of the Petroleum Exporting Countries (OPEC).

Durbin’s full remarks, as prepared for delivery, appear below:

Senator Richard J. Durbin
June 9, 2008

Rapidly rising oil prices:
We need to get to the bottom of this

Last Friday, five startling things happened to our economy.

The futures price for a barrel of crude oil rose above $139, an all-time record. It increased over $10 in one day, and the increase in price on Thursday and Friday was the largest two-day increase in the 130-year history of the New York Mercantile Exchange.

That morning, a Morgan Stanley analyst had released a report predicting that the price for a barrel of oil could reach $150 by the Fourth of July.

Also that morning, the worst job report in 12 years was released. The national unemployment rate has now reached 5.5%.

By the end of the day, the Dow Jones Industrial Average was down 394 points.

The average price for a gallon of gas at the pump on Friday hovered around the all-time record of $3.99 per gallon.

Are these five events related? Of course they are. There are many other economic events that took place late last week that were also very important and related.

But here’s the tough question: did some of these events cause some of the others?

Most importantly: what led to that record increase in the price of oil, which will no doubt lead to crushing increases in the price of gas in the coming days?

The truth is that NO ONE KNOWS.

Not the Commodity Futures Trading Commission, the regulator that is supposed to be monitoring the futures markets. The CFTC commissioners recently argued before the appropriations subcommittee that I chair that all of the increase in the price of oil can be explained solely by the fundamentals of supply and demand.

Was there an explosion on Friday in an oil field that disrupted a huge portion of the world’s oil supply that I missed? I don’t see how a $10 increase in one day can be explained solely by increases in demand relative to supply.

Not the Energy Information Administration, the official U.S. government source for energy statistics. The EIA doesn’t receive detailed information on who is trading what and why.

Was there a massive run on gas on Friday by nervous motorists all across the country? Since the EIA doesn’t collect demand information from the gas pumps, I don’t see how they could judge whether supply and demand explains the current futures prices.

Not the Federal Energy Regulatory Commission, the regulator responsible for the transmission of energy between states. FERC focuses mostly on the physical delivery side of the energy markets, and doesn’t analyze the futures markets.

Not the Federal Trade Commission, the regulator responsible for looking out for the interests of consumers and for busting up monopolies. The FTC can investigate the effects of consolidation in the oil industry and can help prevent price gouging at the pump, but they don’t look at the nuances of futures market trading.

And I admit, not this United States Senator either. I don’t pretend to have all of the answers as to why gas prices keep going up, but I certainly see a problem that needs to be addressed.

This issue is much too important to the American people to allow this to continue. Enough is enough. Let’s get to the bottom of this.

There are far too many questions to which no one seems to have definitive answers:

Are speculators driving up the price of oil far beyond what could be justified purely by the dynamics of supply and demand?

Are investors simply fleeing the stock markets because of the slowing economy and flooding the futures markets with that excess cash?

Are new investment vehicles such as commodity index funds driving up futures prices?

Are investment bank analysts issuing reports predicting huge increases in oil prices in part because those same banks will profit from that event?

Are large institutional investors taking huge positions in over-the-counter trades that are helping to push market prices higher?

Are regulatory differences between the CFTC, which oversees American trading, and the Financial Services Authority, which oversees British trading, allowing traders to hide manipulative crude oil positions from the CFTC?

Are the big integrated oil companies using the rising price of oil futures to justify even larger increases in the price of gas at the pump?

If we had the answers to these and many other questions we would better understand how to bring the price of oil under control.

We would better understand what policy steps to take next.

And we would better understand how to ensure that a crisis such as this doesn’t occur in the future.

Therefore, it is time to give the CFTC the resources it needs to collect and analyze all of the relevant data, so that it can really understand what is causing these huge price spikes.

It is time to give the CFTC more analysts to investigate every last detail of what is happening here.

Look at this chart.

By 2009 the CFTC will be asked to oversee around 980 million futures transactions of ever-increasing complexity. Yet during this huge rise in trading since 2000 the CFTC’s resources have actually shrunk from 546 employees to just 475.

In Friday’s Washington Post the Chairman of the CFTC, Walter Lukken, said
“We could hire an extra 100 people and put them to work tomorrow given the inflow of trading volume. We are doing the best we can in difficult circumstances…. This is something that we are obviously concerned with -- the potential for manipulation."

Well, I think we should pay attention to the Chairman’s request.

More importantly, it is time to ensure that these extra resources are applied.

It is time to require that the CFTC receive data on all trades of all sizes by all participants in the oil futures markets that impact deliveries in the United States.

The CFTC then should be required to analyze that entire bed of data and report to Congress on the fundamental reasons behind the oil price spike.

The economy is clearly struggling. The cost of a tank of gas is becoming more burdensome to Americans every day. Yet the price of that gas continues to rise. Enough is enough. It is time to figure out what’s going on here, and do something about it.

Source: Senator Dick Durbin

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