Iraqi Violence Has Restarted Bernie Sanders’s Gas-Price Fight With Wall Street

The senator blames speculators for exploiting the conflict for big profits in the energy market.

Sen. Bernie Sanders (I-VT)
National Journal
Jamie Lovegrove
July 2, 2014, 1 a.m.

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?”

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