For the second year in a row, oil market speculation is unfairly taxing families and businesses and threatening to derail Washington’s economic recovery with higher gasoline and heating oil prices. If left unchecked, we risk losing a golden opportunity to rebuild our state’s fragile economy.
While oil prices are well below the record high of $147 a barrel in July 2008, recent market volatility combined with the upcoming fall and winter heating season has consumers and business owners worried that a new energy bubble is forming. This is happening at the same time that supply-and-demand fundamentals dictate a decline in prices.
According to data from the Energy Information Administration, demand for petroleum products in the U.S. is lower today than it was 10 years ago, and supply is higher today than it was in 1982. So why are the principles of supply and demand not working?
The only logical explanation is uncontrolled speculation. Every time you buy products such as food, gas or heating oil, you are impacted by an unregulated, secretive and often foreign commodities markets into which speculators are pouring billions of dollars. These speculators buy large amounts of oil and then sell it to each other again and again, with no intention of ever taking physical delivery of a barrel of oil.
As a result of weak regulations and loopholes, contracts for oil may trade more than 20 times with the price going up with each trade. And guess who picks up the final tab? Family-owned heating oil dealers, local gas station owners and the customers who buy from them.
Clearly, we all have a responsibility to do everything possible to achieve a balanced energy policy, including ensuring adequate supply, increasing conservation and investment in alternative fuels. In addition, we need to make sure that unregulated markets are monitored to stop excessive speculation now.
Last summer, the threat of congressional legislation brought on by public outrage helped deflate the oil bubble and return prices to reasonable levels. Despite the attention, however, Congress failed to enact new regulations on commodities trading. When Congress reconvenes in September, it can redeem last year’s inaction by:
• Re-establishing strict position limits on energy commodities.
In 1936, regulations were created to stop speculators from buying up huge amounts of commodities and artificially driving up prices. Over the past 20 years, speculators have convinced regulators to weaken and/or abolish some of these limits. These limits need to be re-instated. Any trader not hedging with the intention of taking physical delivery of a related commodity must be subject to strict position limits.
• Closing the “London Loophole.”
Large numbers of foreign markets are trading oil on American soil while claiming that our rules don’t apply. It is unfair that U.S. futures exchanges face more regulation than their foreign counterparts who are trading in U.S. commodities.
• Regulating “swap trades.”
As many as 90 percent of all commodity trades occur out of the traditional marketplace. In these so-called “swap trades,” traders buy and sell commodities over the counter with little, if any, federal oversight.
nFully closing the “Enron Loophole.”
In 2000, Enron lobbied policymakers to permit some commodity markets to operate with almost no government oversight, even though they trade contracts that are essentially identical to those traded on fully regulated exchanges like the New York Mercantile Exchange. This has allowed speculators to virtually trade commodities without adequate federal oversight, thus possibly leaving futures markets subject to excessive speculation and manipulation.
Last year’s energy bubble restricted consumer spending and helped provoke the worst economic crisis since the Great Depression. Higher oil prices raise the costs of everyday items and make it hard for families to make ends meet and for businesses to prosper. A recovery will not happen if energy prices continue to go unchecked.
It’s time for Congress to act, because the last thing anyone wants to see is speculators pocketing stimulus dollars intended to restart the economy.
Lea N. Wilson of Port Orchard is executive director of the Washington Oil Marketers Association, a nonprofit trade association whose members account for most petroleum products sold in Washington state.
