Sen. Bernie Sanders is taking aim at energy-market traders he blames for driving up gas prices by exploiting Iraqi instability, introducing legislation Thursday that would compel the federal Commodity Futures Trading Commission to intervene.
Sanders is part of a growing and diverse coalition of market watchers who believe speculators are partly responsible for rising oil and gas prices. The argument is a long-standing contention of populists, feeding a narrative of Wall Street insiders making life more difficult for Main Street consumers. But it is also gaining proponents higher up the socioeconomic food chain, including from oil-industry executives and nonpartisan analysts.
For all its political momentum, though, it's difficult to separate price increases driven by the crisis in Iraq from those fueled by Wall Street's maneuvering — and it's equally difficult to determine profit-driven exploitation from companies' efforts to manage the risk of higher prices.
Energy speculators bet on future prices for oil and purchase contracts, but Wall Street investors with enough capital to buy significant quantities at higher than market price can create an incentive for banks to hoard the commodity — and then wait to sell until those higher prices set in. In the meantime, consumers feel the pain of the high prices when they head to the pump.
The process can raise huge profits for oil companies and investment banks that can buy and sell hundreds of millions of barrels a day, leading to critics like Sanders claiming that Wall Street is unfairly taking advantage of the commodities market and cheating American consumers. But bankers and traders argue that speculation protects them from potential price shocks, and further regulations from the CFTC would burden legitimate hedging.
Sanders, a member of the Senate Energy and Natural Resources Committee, cites the 5 percent crude oil price rise since June 12 — when hostilities intensified in several Iraqi cities — as evidence for malpractice. In the longer term, Sanders notes that oil prices have increased by 53 percent over the past five years even though Energy Information Administration figures suggest that supply has risen by 4.3 percent while demand has dropped by 1 percent in that time.
"I am getting tired of big oil companies and Wall Street speculators using Iraq as an excuse to pump up oil and gas prices," Sanders said in a statement. "The fact is that high gasoline prices have less to do with supply and demand and more to do with Wall Street speculators driving prices up in the energy futures market."
Greg Priddy, the director of global energy and natural resources at Eurasia Group, said in a Thursday interview on PBS NewsHour that the market has indeed overestimated the impact of the Iraq crisis. Most of the country's oil production is focused in the southern region around Basra, where an overwhelmingly Shiite population has maintained relative stability.
"Even if the U.S. wasn't buying that much from Iraq — and it does buy a little bit — an outage in Iraq would still have a big impact if it happened."
But given that Iraq has become OPEC's second-largest oil producer, the country's influence on global oil prices is neither as trivial nor as irrelevant as Sanders would suggest. And unplanned supply disruptions have tightened world oil markets and pushed prices higher in the past.
"Even if the U.S. wasn't buying that much from Iraq — and it does buy a little bit — an outage in Iraq would still have a big impact if it happened," Priddy said.
Sanders has long been a vocal proponent of increased Wall Street regulation, particularly in the commodities market. The Vermont independent introduced an almost identical bill in March 2012, setting a 14-day deadline for the CFTC to take action against Wall Street speculators in response to a spike in gas prices that spring, and in June 2009 he first introduced the Energy Market Manipulation Prevention Act with similar goals. Both bills died in committee.
The issue has a partisan history, as Republicans tend to focus more on increasing domestic oil and gas production to slow price rises and oppose excessive regulation. All 19 cosponsors of Sanders's new bill are Democrats, many of whom signed onto the previous version in 2012, while Democratic Rep. Rosa DeLauro of Connecticut is introducing a companion bill in the House.
When spring fighting in Iraq in 2008 raised similar concerns over artificial gas-price increases, the Energy Markets Emergency Act overwhelmingly passed in the House with over 400 votes. But it fell short in the Senate after receiving only 50 of the 60 votes needed for passage. Senate Republicans vehemently opposed the bill because they thought it focused too much on speculation and should have included provisions to boost domestic oil production through offshore drilling and shale development.
Sanders's current bill is almost certain to stall in Congress much like his previous attempts, and the best hope for his cause lies in legislation that has already passed.
The Dodd-Frank Wall Street Reform Act of 2010 included a provision urging the CFTC to prevent excessive oil speculation. Thus far, however, differences over interpretation of the law have kept the commission from intervening. The distinction between driving prices up and betting prices will go up can be unclear and a point of contention in the futures market, and that uncertainty has made it difficult for the CFTC to legally impose specific position limits to curb improper speculation.
In 2012, Sanders directed his ire at CFTC Chairman Gary Gensler, who has since been replaced by Timothy Massad, a former top Treasury Department official. Even with the change in personnel, Sanders expressed little confidence when Massad received confirmation along with two other CFTC commissioners earlier this month.
"After reviewing [Sharon Bowen's] record and those of two other nominees, I am afraid that none of them will make sure that the price of gasoline and heating oil is based on supply and demand and not Wall Street greed," Sanders said in a statement following the votes.
"The proposed rule is so weak that one Wall Street oil speculator could control 25 percent of the market without exceeding the position limits."
Congress has passed legislation in the past directing the CFTC to impose limits on commodity speculation, but the process of converting that to an implementable rule has proven difficult for the federal agency. After the financial services industry successfully challenged an original rule in court, the CFTC proposed a revised 163-page rule last November — but Sanders remained unsatisfied.
"The good news is that the CFTC has finally proposed a new rule to limit the amount of oil that Wall Street speculators can trade on the energy futures market. The bad news is that it will take several more months, if not longer, before this rule takes effect," Sanders said at the time. "Adding insult to injury, the proposed rule is so weak that one Wall Street oil speculator could control 25 percent of the market without exceeding the position limits."
Banks and trading houses, meanwhile, remain opposed to new restrictions and characterize the rule rather differently than Sanders. Gregg Doud, president of the Commodity Markets Council, told Financial Times that the proposed rule would "tend to suggest that most of the bona-fide hedging that end users have done for decades could now be be kicked over into the category of speculation."
Such concerns are unlikely to placate Sanders, however, who has remained convinced for years that foul play is at work and the federal agency should step in for correction. In a 2009 testimony in front of then-Chairman Gensler, Sanders acknowledged that "there are some who still don't believe that speculation is responsible for driving up oil and gas prices." But he remained defiant.
"We now know that speculators artificially drove up electricity prices on the West Coast in 2000; propane prices in 2004; and natural gas prices in 2006," Sanders said. "Why would anyone believe that speculators at this very minute are not manipulating the price of oil when supply is high and demand is low?"