Americans are struggling with high gas prices and Rep. Joe Courtney says the problem lies in deregulated commodities markets, where speculation has inflated oil prices. The three-term Democrat from Connecticut's Second Congressional District says that regulators need to implement the rules set out in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to alleviate this. He recently spoke with U.S. News about how speculators affect gasoline prices and why it hasn't been stopped. Excerpts:
What is driving up the gas prices?
I think most observers agree that the fear of what may develop in the Middle East is the primary factor, which ties into the way global oil prices are set.
How are they set?
They're set at these commodities markets where traders are watching world developments like a hawk and clearly there's a belief right now that buying long is a safe bet because events may develop over there that affect supply. It's not tied to actual supply and it's not tied to actual demand.
Is there a remedy for this?
If you look at Dodd-Frank, it was an issue which was explicitly dealt with by Congress and signed into law by the president, which empowered the U.S. Commodity Futures Trading Commission [CFTC] to limit the impact of what's called non-commercial traders.
And who are they?
Folks who don't produce, distribute, or take possession of petroleum products. That's been a bone of contention for a lot of people since the markets were deregulated back in the late '90s. There's just been an explosion of folks who are buying positions in these markets that really have no direct connection.
What is an example of legitimate hedging?
Southwest Airlines, a user of fuel, they like to hedge their bets by trying to lock in a price that they can plan on for the next six months. Or a petroleum dealer association.
Is there evidence that speculation is inflating prices?
We have a series of credible sources that have identified that the increase is as much as $23 to $30 a barrel. If it's $106 a barrel right now, that translates to a price that's much more inflated than what the actual marginal cost for producing a barrel of oil is. The head of ExxonMobil testified about a year ago in front of the Senate, and he was very blunt about the fact that it was speculative activity which drives that price above those traditional factors of supply and demand.
So what can the CFTC do?
Well, [Dodd-Frank] didn't just give them discretion, it actually mandates position limit rules, [which set limits on investor holdings].
Has the CFTC adopted them?
They did vote in October, it was a 3 to 2 vote. They did impose position limits.
But these haven't been implemented?
They conditioned it on an additional step, which is about a year of data collection, before they would actually go into effect.
What's behind the delay?
Within some quarters, there is a debate about whether or not this is a correct policy. And obviously there were two "no" votes in the commission.
Can expanding domestic production alleviate gas prices?
I'm sort of an all-of-the-above person. And there's been an increase in domestic production, I support that. But the bottom line is, this takes time to have any impact and it all feeds into a global market.
And that's where speculation surfaces again?
We've got to start looking at the rules that those markets operate under.