U.S. Senate Permanent Subcommittee
on Investigations, Gas Prices: How Are They Really Set?

I. RECENT TRENDS IN ENERGY MARKETS
‘‘There has been no shortage and inventories of crude oil and
products have continued to rise. The increase in prices has not been
driven by supply and demand.’’
—Lord Browne, Group Chief Executive of BP

‘‘The oil prices have been moving steadily up for the last 2
years. And I think I have been very clear in saying that I don’t
think that the fundamentals of supply and demand—at least as we
have traditionally looked at it—have supported the price structure
that’s there.’’
—Lee Raymond, Chairman and CEO, ExxonMobil

II. FINDINGS AND RECOMMENDATIONS
Based upon its investigation into the role of market speculation
in rising oil and gas prices, the Subcommittee staff makes the following
findings and recommendations.
A. Findings
1. High crude oil prices are a major reason for the record or near record
highs of the prices of a variety of petroleum products, including
gasoline, heating oil, diesel fuel, and jet fuel.

2. The traditional forces of supply and demand cannot fully account
for these increases. While global demand for oil has been increasing, global oil supplies
have increased by an even greater amount. Global inventories
have increased as well. In 2006, U.S. oil inventories were at
an 10-year high, and OECD oil inventories were at a 20-year high. Accordingly,
factors other than basic supply and demand must be examined.

3. Rise in Speculation. Over the past few years speculators have expended tens of billions of dollars in U.S. energy commodity markets. Speculation has contributed
to rising U.S. energy prices, but gaps in available market data currently impede analysis of the specific amount of speculation, the commodity trades involved, the markets affected, and the extent of price impacts.

4. Price-Inventory Relationship Altered. With respect to
crude oil, the influx of speculative dollars appears to have altered
the historical relationship between price and inventory, leading the
current oil market to be characterized by both large inventories
and high prices.

5. Large Trader Reports Essential. CFTC access to daily reports
of large trades of energy commodities is essential to its ability
to detect and deter price manipulation. The CFTC’s ability to detect
and deter energy price manipulation is suffering from critical
information gaps, because traders on OTC electronic exchanges and
the London ICE Futures are currently exempt from CFTC reporting
requirements. Large trader reporting is also essential to analyze
the effect of speculation on energy prices.

6. ICE Impact on Energy Prices. ICE’s filings with the Securities
and Exchange Commission and other evidence indicate that its
over-the-counter electronic exchange performs a price discovery
function—and thereby affects U.S. energy prices—in the cash market
for the energy commodities traded on that exchange.

B. Recommendations
1. Eliminate Enron Loophole. Congress should eliminate the
Enron loophole that currently limits CFTC oversight of key U.S.
energy commodity markets and put the CFTC back on the beat policing
these markets.

2. Require Large Trader Reports. Congress should enact legislation
to provide that persons trading energy futures ‘‘look-alike’’
contracts on over-the-counter electronic exchanges are subject to
the CFTC’s large trader reporting requirements.

3. Monitor U.S. Energy Trades on Foreign Exchanges. Congress
should enact legislation to ensure that U.S. persons trading
U.S. energy commodities on foreign exchanges are subject to the
CFTC’s large trader reporting requirements.

4. Increase U.S.-U.K. Cooperation. The CFTC should work
with the United Kingdom Financial Services Authority to ensure it
has information about all large trades in U.S. energy commodities
on the ICE Futures exchange in London.

5. Make ICE Determination. The CFTC should immediately
conduct the hearing required by its regulations to examine the
price discovery function of the ICE OTC electronic exchange and
the need for ICE to publish daily trading data as required by the
Commodity Exchange Act.

6. Eliminate the incentives for speculators to drive up the price of oil by limiting the amount of return on their dollar.
Raise taxes on oil speculation to a reasonable percentage based on true growth rather than unrestricted greed.