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FTC Opens Investigation Into Oil Market Speculation

The Federal Trade Commission has opened a long-overdue investigation into whether speculators are manipulating the price of oil. The FTC is using powers granted to them by the Dodd-Frank law, which criminalizes manipulation of the oil markets. They have the ability to subpoena market players to determine whether they are in violation, and initiate fines of up to $1 million per day for market manipulators.

Democrats, led by Maria Cantwell, have been asking for months for some federal agency to use their power to investigate oil market speculation. The Commodity Futures Trading Commission could set position limits in the market to tamp down speculative buyers; so far they have blown past deadlines for doing so. The next step is the FTC, and they have started the process. Here’s how they described their actions in an announcement letter:

In light of these and other developments, the Commission has opened an investigation and has authorized the use of a compulsory process to determine whether certain oil producers, refiners, transporters, marketers, physical or financial traders, or others (1) have engaged or are engaging in practices that have lessened or may lessen competition — or have engaged in or are engaging in manipulation — in the production, refining, transport, distribution or wholesale supply of crude oil or petroleum products; or (2) have provided false or misleading information related to the wholesale price of crude oil or petroleum products to a federal department or agency.

Exxon Mobil CEO Rex Tillerson said in open Congressional testimony that, if the oil markets followed the normal rules of supply and demand, the price would only be about $60-$70 a barrel. Oil has hovered around $100 a barrel for months. And the speculators in the market are a larger force than even 2008, when they drove the price up to a record $147 a barrel. CFTC Chairman Gary Gensler estimates that 80% of the oil futures market is held by speculators, up from 37% ten years ago.

In a statement, Sen. Cantwell expressed satisfaction at the announcement. “Bad actors who are artificially driving up gas prices ought to be brought to justice and face stiff punishment. I am pleased the FTC is using this new authority to protect consumers. The American public deserves to have aggressive policing of these markets and for the FTC to enforce these new laws.”

This is a rare positive example of good implementation of the Dodd-Frank law, mainly because of Cantwell’s dogged determination to force the FTC into a serious rulemaking. The FTC now has enough power to crack down on speculation in the oil markets, and what’s more, they’re using that power.

More from The Hill. I’ll put the entire letter from FTC Chair Jon Leibowitz to Cantwell on the flip.

Dear Senator Cantwell:

Thank you for your recent correspondence to the Federal Trade Commission concerning the petroleum industry. As you know, crude oil and refined petroleum product prices and profit margins increased substantially this year. The Energy Information Administration reported that as of early May, U.S. refiners’ refining margins had increased more than 90 percent since the beginning of 2011, and U.S. refiners at that time were using only 81.7 percent of their capacity, representing a seven percent reduction from the same period in 2010. In light of these and other developments, the Commission has opened an investigation and has authorized the use of compulsory process to determine whether certain oil producers, refiners, transporters, marketers, physical or financial traders, or others (1) have engaged or are engaging in practices that have lessened or may lessen competition – or have engaged or are engaging in manipulation – in the production, refining, transportation, distribution, or wholesale supply of crude oil or petroleum products; or (2) have provided false or misleading information related to the wholesale price of crude oil or petroleum products to a federal department or agency. The Commission seeks to determine through this investigation whether there is a reason to believe that the foregoing practices are in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, as amended; the Commission’s Prohibition of Energy Market Manipulation Rule; 16 C.F.R. Part 317; or Section 811 or Section 812 of the Energy Independence and Security Act of 2007, 42 U.S.C. §§ 17301, 17302.

The information to be secured through this investigation may include, but is not limited to, utilization and maintenance decisions, inventory holding decisions, product supply decisions, product import and export strategies and volumes, product output decisions, capital planning decisions, product margins and profitability, and any other information which may be relevant to determining whether there is a reason to believe that there have been violations of any of the foregoing statutes or of the Rule. Let me assure you that the Commission will conduct this investigation as efficiently and effectively as possible.

We recognize that recent increases in crude oil and petroleum product prices place a tremendous strain on individual American consumers and harm the economy as a whole, and we remain committed to preventing and prosecuting any anticompetitive, fraudulent, or otherwise illegal activity which we identify through the foregoing investigation. The Commission will also continue to assist the Oil and Gas Price Fraud Working Group, established by the Attorney General and composed of state and federal law enforcement agencies, to help identify civil or criminal violations in the oil and gasoline markets, and to ensure that American consumers are not harmed by unlawful conduct. The Commission appreciates and shares your long-standing interest in finding ways to protect consumers in the petroleum sector. If you have additional questions, please do not hesitate to contact Jeanne Bumpus, the Director of our Office of Congressional Relations.

Sincerely,

Jon Leibowitz
Chairman

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David Dayen

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