May 22, 2008
Yesterday, the Senate Homeland Security and Governmental Affairs Committee held a hearing on institutional investor influence on commodity prices. In her opening statement, Ranking Member Susan Collins (R-ME) mentioned that she met last week with a PMAA member who is concerned about current futures market activities. PMAA members were in Washington DC last week and visited over 70 Senate offices and 300 House offices to express concern about excessive speculation in the futures market. Sen. Collins quoted: “He’s telling customers to expect home heating oil to rise to $4.50 a gallon next winter. He also said that an elderly customer was forced to hand over half of her Social Security check for her budget-payment plan.” The Ranking Member stated that something is deeply wrong with commodity markets and Congress should take necessary steps to address the price volatility seen over the last several months. Testifying before the committee were: Jeffrey Harris, Chief Economist, Commodity Futures Trading Commission; Michael Masters, Masters Capital Management, LLC; Thomas Erickson, Commodities Markets Council; Dr. Benn Steil, Council on Foreign Relations; and Tom Buis, National Farmers Union.
Committee members were intrigued by the testimony of Michael Masters who had a compelling argument that institutional investors are driving commodity prices to excessive levels. He argued that institutional investors park money in commodity markets (holding long positions meaning that they expect prices to go up) and are not leaving the market anytime soon. This in effect has led to dramatic price increases in all commodities especially crude oil. Masters stated that institutional speculators provide no benefit to the futures markets and recommended that Congress modify the Employee Retirement Income Security Act (ERISA) regulations to prohibit commodity index investing strategies. He also recommended that the CFTC reclassify all the positions of commercial traders to distinguish between positions held by physical hedgers and more passive institutional investors. Finally, he asked that Congress close the “swaps loophole” which allows institutional investors an exemption from speculative position limits when they hedge “over-the-counter” swaps transactions.
Following the hearing, Chairman Lieberman (D-CT) said he was convinced that institutional investors are driving energy costs to excessive levels and that Congress must step up its level of oversight on commodity speculation. In Sen. Lieberman’s opening statement, he stated that between 1998-2008, long positions in commodity markets grew from one-quarter to two-thirds while actual physical traders decreased from three-quarters to just one-third.
May 21, 2008
The House approved legislation (H.R. 6074) by a bipartisan vote of 324-84 that would outlaw price manipulation by the oil-producing cartel. The No Oil Producing and Exporting Cartels Act of 2008 (NOPEC), which was introduced by Representative Steve Kagen (D-WI) last Thursday, May 15, would also create a Department of Justice Petroleum Industry Antitrust Task Force which would develop and coordinate the implementation of investigative and enforcement policies of the Justice Department related to petroleum industry antitrust issues.
The Task Force would examine issues related to antitrust laws, including, gouging in sales of gasoline, collusive behavior in restricting petroleum refinery capacity and the existence of manipulation by refiners or “other wholesalers” of gasoline to retailers. Much of this language is similar to the anti-manipulation language that passed in the Energy Independence Security Act last December. The task force would also determine the existence and effects of any anticompetitive manipulation in the futures markets.
Though the bill passed by a wide margin, House Minority Whip Roy Blunt (R-MO) said that the NOPEC bill is “meaningless,” and Republicans voted for the bill because they didn’t want to return home and have to explain to their constituents why they voted against it. The Senate is expected to vote on the legislation after the Memorial Day recess, but it is expected that the bill will not receive the necessary 60 votes to defeat a Republican filibuster. The President has vowed to veto the NOPEC bill if it should ever pass Congress.
May 4, 2008
High gasoline and diesel prices have been the main topic of discussion for Congress this week. Presidential candidates have also been partaking in the debate with Senators John McCain (R-AZ) and Hillary Clinton (D-NY) advocating a tax holiday over the summer months. The Congressional Research Service (CRS) also issued an assessment on gas prices which outlines previous attempts by Congress to address the issues. PMAA is reviewing the CRS report in detail.
On the issue of futures market reform, numerous Members of Congress and separately Senate Republicans have discussed the issue this week and some may introduce new legislation. Senate Democrats are working on gas price legislation and Senator Dorgan (D-ND) has been advocating an increase in margin requirements for speculators. Sen. Dorgan is also working to include an amendment to the Federal Aviation Administration Reauthorization bill (H.R. 2881) that would halt all oil deliveries to the Strategic Petroleum Reserve (SPR) until the price of oil falls below $75 a barrel. Senator John Barrasso (R-WY) has also introduced his own bill, S.2927, to halt oil deliveries to the SPR. While Senator Dorgan’s (D-ND) proposal incorporates a price trigger on halting deliveries to the SPR, Republicans are proposing a six month freeze on deliveries to the SPR without a price trigger. It is not yet known if the Democrats will support the Republican proposal.
Senator James Inhofe (R-OK), ranking minority member of the Senate Environment and Public Works Committee, is voicing his concern that the Renewable Fuel Standard (RFS) has driven food prices to unprecedented levels. He has proposed that the Environmental Protection Agency (EPA) should use its authority to waive all or portions of the RFS mandates as part of its rulemaking process. Senator Kay Bailey Hutchison (R-TX) who chairs the Republican Policy Committee, announced plans to introduce legislation to stop national biofuel production at current levels for 2008.
Meanwhile, it looks like the Farm Bill will get another two week extension. Lawmakers are close to an agreement, but need time to make some adjustments to farm subsidy caps. House Agriculture Chairman Collin Peterson (D-MN) said that the House and Senate intend to make substantial cuts to farm subsidy caps and will have the votes necessary to override a veto. House Majority Leader Steny Hoyer (D-MD) said that he expects the House to take up the final version of the bill next week.