Bingaman on Market Transparency Hearing
March 25, 2009
04:14 PM
Today’s hearing focuses on draft legislation to strengthen the oversight and transparency of energy markets to curb excess speculation. Committee members will consider two proposals -- the Energy Market Transparency Act of 2009 and the Natural Gas and Electricity Review and Enforcement Act. Both drafts are available on the Energy Committee website.
Last year saw unprecedented price fluctuations in commodity markets, including oil markets. In February 2008, the price for a barrel of West Texas Intermediate crude oil, a commonly referenced U.S. “benchmark crude,” crossed the $100 per barrel threshold for the first time in history. Prices then continued their upward trend, peaking in July at almost $150 a barrel, only to collapse to the low $30s by the end of the year.
“The extreme price increase coincided with the growth of oil as an asset-class investment,” said Chairman Bingaman. “Between 2001 and 2006, the average daily contract volume for crude oil traded on the New York Mercantile Exchange increased by 90 percent. While the oil market has continued to evolve, the oversight and regulatory systems that seek to understand and monitor that market have struggled to keep pace.”
The Energy Market Transparency Act of 2009 calls for the Energy Information Administration (EIA) – the independent, policy neutral research arm of the Energy department – to develop a plan to collect information identifying the ownership of U.S. commercially held oil and natural gas inventories. This includes company-specific data involving product volumes and storage and transportation capacity.
Many of the investors that have begun to participate in the oil market in recent years operate only in the financial oil futures and derivatives market, not in the physical market. The draft legislation seeks to bridge the gap in understanding the connection between these financial, or “paper,” markets and the physical oil market. To that end, it establishes within EIA a Financial Market Analysis Office. EIA monthly oil market forecasts are based on calculations of physical supply and demand, and historically have not done enough to take financial factors into account. The agency was not well equipped to understand the market situation in 2008, and regularly underestimated the price increases that were forecast by non-governmental forecasters, such as investment banks, that were more connected to the financial market. This proposed bill, among other actions, would require EIA to dedicate resources to understanding the financial side of the oil market, and ensure that this analysis informed the agency’s oil market forecasts and other publications.
The Natural Gas and Electricity Review and Enforcement Act proposal seeks to give the Federal Energy Regulatory Commission (FERC) “cease and desist” authority to augment the anti-manipulation authority granted to FERC in the Energy Policy Act of 2005. The CFTC and SEC currently have cease and desist authority, on which the proposed FERC authority is modeled.
The proposal would allow FERC to go to Federal Court to get an injunction preventing a market participant from engaging in harmful behavior. FERC maintains that it needs additional authority based on a recent experience with an anti-manipulation case. While FERC was in the process of litigating the case, the company in question distributed its assets such that those assets were no longer jurisdictional to FERC. Cease and desist authority also would enable FERC to order a market participant to cease behavior that FERC believes is manipulative during the course of an investigation. This temporary order would suspend the participant’s market activity until the Commission reached a final judgment in its manipulation case.
On Tuesday, Sen. Cantwell introduced the Natural Gas and Electricity Review and Enforcement Act, S. 672. The language of Sen. Cantwell’s bill is very similar to what FERC has proposed.
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