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Sunday, April 20, 2008

Reply From Senator Levin Regarding Oil and Gasoline Prices

SEARCH BLOG: OIL and POLITICS

On March 30, I wrote to the two U.S. senators from Michigan regarding the present situation of oil and gasoline prices, as well as related energy policies. This site contains other posts regarding U.S. energy policies. If you haven't done so, you may want to read Friday's post and follow some of the links.

While the following email from Sen. Carl Levin's office may not represent the whole picture... especially the government's part in restricting supply... the issues raised in this response need to be evaluated, especially in the area of market speculation abuses [does that remind you of the recent sub-prime and hedge fund fiascoes?]. In evaluating what should or can be done, keep in mind that some of the aspects are global and some are purely national.

This is, most likely, a standard response to this issue, but it is worth reading to understand some of the politics involved:

Dear Mr. Hall:

Thank you for contacting me with your concerns about the price of gasoline. I appreciate hearing from you on this matter.

For most Americans driving is not a matter of choice. In many areas, people cannot drive less to get to work, school, medical care, or to buy groceries. Therefore, they are forced to pay whatever the oil companies charge for gasoline. During my time in the Senate, I have worked to protect consumers, farmers, and small businesses from potentially overwhelming price hikes in oil and gas prices. When prices spiked after Hurricane Katrina, I introduced a bill to give the President the authority to temporarily freeze gasoline and petroleum product prices until supplies were restored to pre-hurricane levels. I also have supported measures to impose temporary windfall profit taxes on oil and gas companies found to be guilty of price gouging.

Even when our refineries have been operating at full capacity, I have been concerned about the manipulation of the price of oil, gasoline, diesel and other refined products, such as home heating oil and jet fuel. Over the past several years, both as Chairman and Ranking Member of the Senate Permanent Subcommittee on Investigations, I have conducted investigations into the reasons for these rising prices. In 2002, I led an investigation which found that increasing concentration in the refining industry was contributing to price spikes. In 2003, I led an investigation which found that the Department of Energy’s (DOE) purchases of oil for the Strategic Petroleum Reserve (SPR) were pushing up oil prices. Under my leadership, the Subcommittee is currently conducting an investigation into energy trading and the manipulation of energy prices.

At the same time that gas prices have been rising, often seemingly contrary to the laws of supply and demand, there has been a dramatic increase in oil and gas trading by market speculators. Energy trading can be a very complicated matter, but the basics are straightforward: energy traders buy and sell contracts for the future delivery of oil and gas on futures exchanges such as the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE). Some of these traders are oil companies and refineries buying or selling oil and gas contracts, while others are speculators who bet on energy prices either increasing or decreasing before final delivery of these commodities.

The Commodity Futures Trading Commission (CFTC), the main federal regulator charged with policing U.S. energy commodity markets, is supposed to ensure that buyers and sellers in energy futures markets are not engaging in excessive speculation or illegally manipulating oil and gas prices. While the CFTC is able to regulate exchanges such as the NYMEX, it cannot police all U.S. energy commodities markets due to the “Enron loophole,” a provision in law that exempts electronic energy exchanges from government oversight. This provision has enabled companies like Enron to trade on electronic markets without any oversight from the CFTC. Traders on unregulated markets are able to buy massive stakes in energy commodities, possibly manipulating or distorting energy prices. In 2006, my investigation found that experts estimated market speculation could account for more than 25% of the cost of a barrel of oil. In 2007, my investigation found that large trades by a single hedge fund named Amaranth had pushed up natural gas prices during the winter of 2006-07. We need to put a “cop” back on the beat to protect American consumers from the price manipulation and excessive speculation that can occur on these unregulated electronic markets.

On September 17, 2007, I introduced the Close the Enron Loophole Act (S.2058). This legislation would help to prevent price manipulation by directing the CFTC and electronic exchanges to police energy commodity trading. This bill would help prevent excessive speculation and price manipulation by providing the CFTC with the authority needed to monitor and regulate electronic exchanges, something it already does with futures exchanges like the NYMEX. I worked to insert language from the Close the Enron Loophole Act into the Farm Bill that was passed by the Senate on December 14, 2007 (H.R.2419). Before it can be signed into law, the Farm Bill must be reconciled with similar legislation passed by the House of Representatives. If this measure were to be enacted by Congress and signed into law, it would significantly strengthen the federal government’s ability to police our energy markets.

We need to continue to develop a long-term, comprehensive plan that will conserve energy, increase our domestic energy supplies in a responsible manner, and increase the use of alternative fuels in order to enhance our nation’s energy independence. I believe we should invest in leap-ahead technologies like hybrid and hydrogen vehicles. By working with industry leaders to achieve new technological breakthroughs, we will help create jobs and spur our economy. With significant investments in research and development, public-private partnerships and incentives for manufacturers to invest in new technologies, we can make great strides in hybrid and alternative fuel vehicle technologies and dramatically reduce our dependence on gasoline. This type of comprehensive approach will reduce the cost of gas in the long run and enhance our national security by allowing for greater energy independence. As the Senate continues to debate our national energy policy, I will continue to work toward this goal.

Thank you again for writing.

Sincerely,
Carl Levin
ADDENDUM:
Further reading: United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS...THE ROLE OF MARKET SPECULATION IN RISING OIL AND GAS PRICES: A NEED TO PUT THE COP BACK ON THE BEAT

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CO2 Cap and Trade

There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates

FEDERAL RESERVE & HOUSING

SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006 Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)