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CRUDE OIL INVESTIGATION
Based on information received during the investigation by the Senate Permanent Subcommittee on Investigations on the causes of recent spikes in gasoline prices, in May 2002, Senator Levin directed the staff of the subcommittee to investigate whether the Department of Energy’s program to fill the Strategic Petroleum Reserve was increasing the price of crude oil and the operation of the crude oil markets.
In March 2003, Senator Levin issued a report entitled U.S. Strategic Petroleum Reserve: Recent Policy Has Increased Costs to Consumers But Not Overall U.S. Energy Security. The report concluded that in 2002 although the program to fill the SPR increased oil prices, it did not increase overall U.S. energy security.
The report also concluded that the lack of regulation in the over-the-counter crude oil markets made those markets vulnerable to manipulation. Based on this report, Senator Levin has urged the DOE to suspend shipments of oil to the SPR when crude oil supplies are tight and prices are high. Senator Levin has also co-sponsored legislation to prevent fraud and manipulation in the over-the-counter energy markets.
The March 2003 report, U.S. Strategic Petroleum Reserve: Recent Policy Has Increased Costs to Consumers But Not Overall U.S. Energy Security, contained the following findings regarding the SPR program and the crude oil markets:
- In 2002, DOE began to fill the SPR without regard to the price of oil. In early 2002, DOE reversed a longstanding policy of filling the SPR when crude oil prices were relatively low and deferring oil deliveries when prices were relatively high, and decided to fill the SPR without regard to crude oil prices and the overall availability of supplies.
- Filling the SPR in a tight market increased U.S. oil prices and hurt U.S. consumers. DOE ignored warnings by career staff that filling the SPR when oil prices were high and oil supplies were tight could drive oil prices higher and hurt consumers, did not conduct a cost-benefit analysis of the new policy, and did not attempt to estimate or track consumer or taxpayer costs. In a one-month period in mid-2002, crude oil price increases caused by SPR deposits spiked the U.S. spot price of home heating oil by 13%, jet fuel by 10%, and diesel fuel by 8%, imposing on U.S. consumers additional crude oil costs of between $500 million and $1 billion.
- Filling the SPR regardless of oil prices increased taxpayer costs. Prior to 2002, DOE routinely granted oil company requests to defer scheduled oil deliveries to the SPR when near-term oil prices were high, in return for deposits of extra oil at a later date. In 2000 and 2001, DOE used these deferrals to save taxpayers over $175 million and add 7 million barrels to the SPR. By denying deferral requests for most of 2002, DOE missed opportunities for comparable taxpayer savings and extra SPR oil. Also, by using federally owned oil acquired from offshore oil leases for the SPR instead of selling the oil on the market when prices were high, DOE reduced revenues supporting taxpayer-funded programs.
- Despite its high cost, filling the SPR did not increase overall U.S. oil supplies. In 2002, the SPR program put about 40 million barrels of crude oil into the SPR. At the same time, private sector inventories decreased by nearly the same amount. Although the SPR program has placed more oil under government control, lower private sector oil inventories mean there has been no net increase in overall national oil supplies.
- U.S. crude oil futures market needs to be improved. In 2002, after SPR deliveries removed oil from the marketplace, defects in the New York and London crude oil markets magnified local supply and demand imbalances into large increases in the price of crude oil. Although the underlying problems in the London market have been corrected, the New York Mercantile Exchange (NYMEX) has not made needed improvements to its basic crude oil futures contract.
- The unavailability of key information on over-the-counter trading activity makes detection and prevention of price manipulation difficult, if not impossible. The lack of information on prices and large positions in over-the-counter crude oil markets makes it difficult in many instances, if not impossible in practice, to determine whether traders have manipulated crude oil prices.
The report included the following recommendations:
- Restore market-based criteria for granting deferrals. DOE should restore its SPR business procedures allowing deferrals of oil deliveries to the SPR when crude oil prices are high or commercial crude oil supplies are tight, and the contractor agrees to deliver extra oil to the SPR at a later time.
- Increase OTC disclosure. Congress should authorize the CFTC, which oversees commodity markets, to require traders in OTC markets to provide the CFTC with routine information on large positions in crude oil and energy contracts and derivatives, as well as other information that would aid the CFTC in detecting, preventing, and halting commodity market manipulation.
Subsequent to the release of the 2003 report, Senator Levin took the following actions to improve the crude oil markets and lower oil prices:
- Urged DOE to suspend SPR shipments. Urged DOE, on several occasions, to suspend shipments to the SPR until crude oil supplies increase and prices decrease.
- Co-sponsored legislation to require responsible management of the SPR. Co-sponsored a bipartisan Levin-Collins amendment, which was included in the Energy Policy Act of 2005, to require DOE to establish procedures to fill the SPR in a cost-effective manner that minimizes the impact on oil prices and supplies consistent with national security requirements.
- Co-sponsored legislation to regulate over-the-counter energy markets. Co-sponsored bipartisan legislation to remove the so-called “Enron exemption” from current law to provide civil and criminal penalties for fraud and manipulation in over-the-counter energy markets. The legislation also would require record keeping and reporting for large trades in energy commodities, such as oil, natural gas, and electricity.
- As a result of rising oil prices in early 2006, Senator Levin directed the Senate Permanent Subcommittee on Investigations to look into the role that market speculation was playing in the rapid rise of energy prices. In June 2006, the Subcommittee released a report, The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put a Cop on the Beat, [PDF] that found that the traditional forces of supply and demand no longer fully account for sustained increases and price volatility in the oil and gasoline markets. The report determined that market speculation contributed to rising oil and gasoline prices, perhaps accounting for $20 out of a $70 barrel of oil, and that too many enegy trades occurred without regulatory oversight. The report recommended new laws to increase market oversight and stop market manipulation.
PSI Reports on Oil Prices:
Legislation supported by Senator Levin to address these problems:
- S. 2642, Oil and Gas Traders Oversight Act of 2006
- 2005 Levin-Collins amendment requiring market principles to be used in buying oil for the Strategic Petroleum Reserve, in Public Law 109-58, Energy Policy Act of 2005 [PDF]
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