An analyst known for his work with a Washington utility trying to prove that Enron manipulated power markets says market power, not speculation, may have been behind the spike in oil prices we saw beginning in early June.
In a report expected to be released by Senate Democrats today, Robert McCullough says the price spike that began June 4 doesn’t seem to fit well with the most commonly cited culprits:
• The decline of the U.S. dollar doesn’t fit well since it has only fallen about 10 percent vs. the currencies of our main oil suppliers (i.e. we don’t get a lot of oil from Europe).
• Fundamentals of supply and demand don’t fit since most of the news that occurred during that time (i.e. Saudia Arabia to increase output significantly) were more likely to increase supply.
• Speculators, i.e. participants in the market that don’t actually use oil, such as hedge funds and banks betting that futures prices will be higher, also don’t fit, McCullough argues, because again all the news that followed would normally drive prices down. Speculation also doesn’t account for the increase in spot oil prices.
“A better model for the July 3rd price spike would seem to be the Enron market manipulation of the Henry Hub forward market on July 19, 2001. In this case Enron purchased a large quantity of spot gas and took advantage of the price increase to sell at an artificial price in the forward markets. Enron’s positions dramatically exceeded the levels that would provide legitimate economic hedges.”
McCullough doesn’t identify what firm may have had such power.
*** UPDATE ***
Sen. Maria Cantwell (D-Wash.) put out a release on the report with this summary paragraph:
“Mr. McCullough’s research clearly shows that oil prices are no longer tied to supply and demand,” said Cantwell. “Statistically, this research shows that prices are spiking absent of a crisis like a natural disaster or supply disruption. However, prices then fell when Congress began serious debate on how to crack down on those who may be trying to manipulate the markets. Research shows that traders may well be in control of the market, not supply and demand, and consumers have been left paying the price.”
Cantwell said she to introduce legislation when Congress returns in September requiring the CFTC, EIA, FTC and FERC to implement new data collection tools.
Of course proving one party has taken a huge physical position (become a so-called “pivotal supplier”) in the markets is difficult to show because of the disjointed way oil trading data is gathered and the market is regulated, McCullough said.
Responsibility for oil is split haphazardly between the Federal Energy Regulatory Commission, which has authority over pipelines, the FTC which operates the Oil and Gas Industries Initiative, and the CFTC which views oil as one small part of a large portfolio of commodities. The responsibility for forecasting and understanding the oil markets lies with the Energy Information Administration. As noted above, no one agency has a clear mandate to accumulate data, oversee markets, and evaluate factors that affect consumers.
Among the solutions McCullough suggests:
1. The CFTC and FTC should should gather data on spot and forward markets that let them determine market share.
Some would argue the is highly sensitive competitive info, but McCullough says “Given the probability that market participants have a very good idea of the market shares and pricing, there is no logical public policy reason why this information should not be accumulated and provided to regulators and decision makers.”
2. CFTC market surveillance should be expanded to cover data on forward trades in over-the-counter markets. The current limits on surveillance “is worse than useless because it provides the illusion of market surveillance while allowing sufficient room for any offender to escape observation.”
3. The EIA should develop a way of reporting well-head prices for the largest suppliers in the U.S.