The way Republicans tell it, the minute we start drilling off the coasts of California, Florida and elsewhere, the price of gas will go down. In fact, it would take five years after the ban on offshore drilling was lifted for oil production to start, and, if it were lifted right now, in 22 years domestic oil production would have increased by only 7 percent, according to the Energy Information Administration. Even so, because oil prices are determined on the international market, any impact on average wellhead prices is expected to be insignificant. (Source: Center for American Progress.)
Republicans have shifted blame for high gas prices from Bush to the Democrats and their opposition to offshore drilling, and all it cost them was the credibility of Florida Gov. Charlie Crist
On the other hand, Congress and George Bush could take a step tomorrow that would create a drop in oil prices of between 25 and 50 percent overnight, simply by closing the Enron Loophole.
This is according to testimony before a Senate Committee two weeks ago by Michael Greenberger, the former director of Trading & Markets for the Commodities Future Trading Commission (CFTC), the government board that oversees commodities markets:
“Yes, overnight [closing the Enron Loophole] will bring down the price of crude oil to get at least a 25 percent drop in the cost of oil and a corresponding drop in the cost of gasoline. Some people estimate 50 percent.”
Greenberger’s testimony was brought to light by an investigation into the Enron Loophole by Keith Olbermann on MSNBC’s “Countdown” last week. (A transcript of Olbermann’s report follows.)
The Enron Loophole is the nickname for a provision written into the Commodity Futures Modernization Act (CFMA) of 2000 that was drafted by lobbyists for Enron and inserted in the bill by then Sen. Phil Gramm (R-Texas) that deregulated an aspect of the market Enron sought to exploit with its “Enron On-Line” trading program, the first Internet-based commodities transaction system. Phil Gramm is now a key economic adviser for the John McCain campaign.
While it was a technical success, Enron On-Line was based on a flawed business model that drained corporate revenues — even while the company was manipulating the rates consumers paid for electricity in California. Enron On-Line eventually drove the company into bankruptcy, and the cooking of the books to hide its losses led to charges of conspiracy and fraud against Enron executives.
The Republicans’ sudden rollout of the campaign to lift the ban on offshore drilling is really meant to shift the blame from Bush and the GOP to the Democrats and their opposition to offshore drilling. To their credit, they have done a masterful job — and it has only cost them the credibility of Florida Gov. Charlie Crist, who broke tradition in the state and came out in favor of lifting the ban. (It also sapped whatever meager credibility Crist’s predecessor, Jeb Bush, had left. Bush opposed lifting the ban when he was in office but came out wholeheartedly in favor of lifting it this weekend.)
[Barack] Obama campaign’s said today that he plans to ease the impact of rising gas prices by cracking down on excessive energy speculation through closing the so-called “Enron Loophole.”
… Aides [to Obama] argued the changes to the regulatory structures could have at least some medium-term impact on gas prices. The “Enron Loophole” — so named because it was added at Enron’s behest — has kept the Commodity Futures Trading Commission [CFTC] from fully overseeing the oil futures market and investigating cases where excessive speculation may be driving up oil prices, the campaign explained in a policy paper. Obama would close the loophole by requiring that US energy futures trade on regulated exchanges. His plan also calls for legislation that would direct the CFTC to investigate whether further regulation is needed to end excessive speculation in US commodities markets, including higher margin requirements and position limits for institutional investors.
Obama would aim to ensure that US energy futures cannot be traded on unregulated offshore exchanges and would seek to work with our other countries to establish regulations to avoid excessive speculation in commodities futures markets. He would also call on the Federal Trade Commission to investigate market manipulation, including in the oil futures markets and ask the Justice Department to investigate whether energy traders have been engaged in illegal activities that have helped drive up oil and food prices…
“I think everyone believes there’s too much speculation in the oil markets and a lot it flows directly from that particular loophole,” said [Obama adviser New Jersey Gov. Jon Corzine]. “It might as well be called the Phil Gramm loophole, because it was snuck in at the 11th hour, 59th minute to the 2000 energy policy bill, and it just is, it really needs to be addressed. And it would have a lot of impact I think certainly in the intermediate term, if not in the short term with greater oversight here.”
Corzine said the “Enron loophole” Gramm had added to the bill took exchanges and derivative oil contracts out of supervisory oversight and had been a problem in electricity markets in California a few years ago. He said it was unlikely Gramm would push back against his own amendment..
Here’s the transcript of the video of the report on the June 18 edition of “Countdown”:
OLBERMANN: John McCain is renowned for saying he does not know much about the economy and for parading around those advisers of his who he says do know something about the economy. our third story tonight, A COUNTDOWN special report on the price of gas, and how McCain’s chief economic adviser, among others, helped create and defend pivotal legislation that unleashed speculators to run up gas prices. It is, in essence, a legalized form of insider trading, deregulation that lets speculators overwhelm trading in oil futures, those complicated contracts that let commercial users of oil hedger their bets about future price and supply fluctuations by agreeing to prices and delivery dates ahead of time.
Since this legislation passed, gasoline prices have more than doubled and commodity traders have made tens of millions of dollars, devastating thousands of small companies that deal in oil, and creating the risk of a speculative bubble popping.
How does McCain fit in? The road connecting him to four dollar gas begins with Enron.
OLBERMANN (voice-over): Soon after Enron’s birth as a power supplier in the 1980s, CEO Ken Lay decided he could make more money betting on electricity futures, especially if government regulators didn’t stop him from cornering the market and gaming the system. Under the first President Bush, an obscure agency called the Commodities Future Trading Commission obliged Ken Lay. The CFTC chairwoman, Wendy Gramm, left Enron alone.
When Bill Clinton beat Bush, it took only one week before Enron asked Gramm to lock in her hands-off position as official CFTC policy. Gramm started the process. The CFTC approved it after she left on Clinton’s inauguration day. Five weeks later, she took a part-time post on Enron’s board of directors and wound up earning more than 900,000 dollars over the next decade. Clinton never undid Gramm’s changes.
Fast forward to the year 2000 and Bush v. Gore. In the chaos of constitutional crisis, Enron got a law passed containing what is now known as the Enron loophole. Where Gramm deregulated individual trades, the Enron loophole deregulated entire markets, online markets. Enron had just started its own online market, and set its sites on the state of California.
Over the next six months, California suffered 38 rolling blackouts, as Enron used artificial shortages, bogus deals and total knowledge of the market as sole owner of its own online market to triple California’s energy bills. In the dark, regulators had less power than California did, leaving Enron laughing about it.
UNIDENTIFIED MALE: The money you stole from those poor grandmothers in California.
UNIDENTIFIED MALE: Yes, Grandma Millie, man.
UNIDENTIFIED MALE: Yes, now she wants her (EXPLETIVE DELETED) money back for all the power you charged — jammed up her (EXPLETIVE DELETED) at 250 dollars a megawatt hour.
OLBERMANN: The Enron loophole applied to all energy commodities, oil, propane, natural gas. So, today, oil futures are driven by speculators, free from any regulatory oversight. Now, you can’t just blame OPEC any more. British Petroleum paid 303 million dollars to settle charges it cornered the propane market in 2004, inflating heating costs for seven million American homes.
Two years ago, a Republican Senate report recognized what speculators have done and blamed the Enron loophole. Two weeks ago, the Senate Commerce Committee heard testimony about the Enron loophole’s effect on the price of a barrel of oil.
MICHAEL GREENBERGER, FMR. CFTC DIR OF TRADING & MARKETS: The speculators are not just placing bets in these futures markets, they’re saying, gosh, if I can control the price of heating oil, I’ll go out and buy heating oil. So you have Morgan Stanley as the biggest heating oil owner in New England.
SEN AMY KLOBUCHAR (D), MINNESOTA: The idea is to put the words energy back in so that we can actually go back to where we were before this, what Dr. Cooper calls the foolish but affectionately called Enron loophole.
GREENBERGER: Yes, overnight that will bring down the price of crude oil to get at least a 25 percent drop in the cost of oil and a corresponding drop in the cost of gasoline. Some people estimate 50 percent.
MARK COOPER, CONSUMER FEDERATION OF AMERICA: The speculative bubble in petroleum markets has cost the average American household about 1,500 dollars in increased gasoline, natural gas and electricity expenditures in the two years since the Senate committee on investigations first called attention to the problem. The Senate knew about this problem two years ago.
OLBERMANN: John McCain seemed to understand this problem even earlier. In 2002 and 2003, he voted with the minorities to close the Enron loophole. “We’re all tainted by Enron’s money,” he said. “Enron made a sound investment in Washington. It did them a lot of good. Where they really do well is around the edges, the insertion of an amendment, the Enron loophole, into an appropriations bill.”
But for most of this campaign, McCain has offered explanations other than the influence of speculators and remedies other than regulation.
MCCAIN: We can develop alternate energy sources.
OLBERMANN: Will alternative energy fix things without closing the Enron loophole?
GREENBERGER: What”s going to happen when you get all this new, clean energy is the banks are going to go into those markets and rob those guys blind, like they”re robbing the gas station owners and heating oil dealers in this country right now.
OLBERMANN: What about McCain”s idea to stop filling America”s strategic reserve?
GEORGE SOROS, CHAIRMAN, SOROS FUND MANAGEMENT: The institutions acting as a herd are accumulating much larger…setting aside much larger reserves than the strategic reserve is. It’s a multiple.
OLBERMANN: John McCain doesn’t talk about the Enron loophole any more. One McCain adviser reportedly said he no longer even has a position on it. When the bipartisan Farm Bill shut the Enron loophole last month, John McCain opposed the Farm Bill, citing its spending levels.
What changed? Since 2006, John McCain’s top economic adviser has been former Texas Senator Phil Gramm, husband of the former CFTC head who then joined Enron. McCain chaired Gramm’s 1996 presidential race, with Ken Lay as regional chairman. It was Gramm who passed the Enron loophole, partially written by Enron itself, with no hearings, with no debate.
It was Gramm who stopped Democrats from closing the Enron loophole, and it was Gramm who became vice chairman at the Swiss financial firm UBS in 2002, less than a year after UBS bought the shattered remains of Enron’s energy trading arm.
Federal lobbying forms reviewed by COUNTDOWN show that Gramm lobbied Congress about commodity trading rules in 2006 and that his company, specifically, his former aide John Sabercool (ph), now a UBS lobbyist, lobbied the Senate as recently as last year against the close the Enron loophole act, without actually calling it that.
McCain’s finance co-chair, Wayne Berman, lobbied just last year for Chevron and for the American Petroleum Institute against the Price Gouging Prevention Act. And this year the lobbying firm for which Berman serves as managing director was hired by the New York Mercantile Exchange to lobby against the Close the Enron Loophole Act.
In fact, McCain’s top campaign adviser, controversial lobbyist Charlie Black, was paid 140,000 dollars by JP Morgan back in 2000 for the sole purpose of lobbying Congress to pass the Commodities Future Modernization Act, the same act that contained the Enron loophole.
McCain skipped this month’s hearing on gas prices, but this week after committee member Maria Cantwell pushed the Bush administration to investigate, McCain finally changed his tune in public.
MCCAIN: We must reform the laws and regulations governing the oil futures market.
OLBERMANN: Senator John McCain, however, still has not mentioned the Enron loophole, still has Gramm and Berman and Black heading his campaign, writing his economic policy. When Senator Cantwell sent a letter asking the CFTC cut off a new loophole that allows U.S. speculators to channel trades unregulated through London and Dubai, John McCain declined to sign it.
OLBERMANN: Senator Obama as well has an adviser who has lobbied for the American Petroleum Institute. Obama reportedly opposed the Enron loophole and voted for that farm bill that contained a closure of it. In an e-mail today, the McCain committee did not address our reporting on his advisers, but pointed instead to his 2003 vote against the Enron loophole and said, quote, “Senator McCain’s opposition to the Farm Bill had absolutely nothing to do with this issue, but rather the billions in pork barrel projects and subsidies in the bill that are sure to do more harm than good for most farmer, consumers and taxpayers.”