If a Senate study concluded that legislation signed by President George W. Bush and supported by Halliburton was partially responsible for today's high oil and gas prices, do you think you would have heard about it?
Well, such a report was released by the Senate. However, the president that signed the law in question was William Jefferson Clinton, and the company that strongly lobbied for its passage was Enron.
Yet, mysteriously, this study was almost completely ignored.
On June 26, Senators Norm Coleman (R-Minnesota) and Carl Levin (D-Michigan) released a comprehensive report [1] detailing how speculation on various commodities exchanges around the world is impacting energy prices. Six weeks later, virtually no media coverage has been given to this bipartisan, 60-page study that should have been of great interest to Americans with gasoline over three dollars a gallon.
Even more curious than the lack of media attention to this report was its continued reference to Enron, a regular target of the press in the past five years. The Senate study strongly pointed an accusatory finger at "The Enron Loophole," a part of the Commodity Futures Modernization Act of 2000 [2], approved by Congress and signed into law by former President Clinton on December 21, 2000.
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The key here is that CFMA allowed for the creation of electronic futures exchanges that would not be governed by the CFTC, and determined that energy futures and derivatives could be traded on such exchanges. In the view of this Senate report, this precipitated a tremendous expansion in the demand for energy related contracts – and the potential for manipulation by large investors around the world – that has likely increased the price of oil by as much as $25 per barrel.
This is important, because despite conventional wisdom, existing supply-demand ratios in oil and oil-related products in no way justify current prices. As the Senate report accurately stated:
While global demand for oil has been increasing – led by the rapid industrialization of China, growth in India, and a continued increase in appetite for refined petroleum products, particularly gasoline, in the United States – global oil supplies have increased by an even greater amount. As a result, global inventories have increased as well. Today, U.S. oil inventories are at an eight-year high, and OECD oil inventories are at a 20-year high.
The report also gave an accurate historical reference to current oil supply levels:
As a result, over the past two years crude oil inventories have been steadily growing, resulting in U.S. crude oil inventories that are now higher than at any time in the previous eight years. The last time crude oil inventories were this high, in May 1998 – at about 347 million barrels – the price of crude oil was about $15 per barrel. By contrast, the price of crude oil is now about $70 per barrel. The large influx of speculative investment into oil futures has led to a situation where we have high crude oil prices despite high levels of oil in inventory.
Similarly contrary to the recent hysteria surrounding this issue, supply is expected to grow faster than demand for the foreseeable future:
In its monthly report for March 2006, the International Energy Agency(IEA), stated, "Additions to OPEC and non-OPEC capacity are forecast to keep global supply trends broadly in line with global demand in 2007 and 2008." The U.S. Department of Energy's Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby "substantially thickening the surplus capacity cushion."
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