Thursday, June 23, 2011

A Presidential Announcement Regarding the Price of Oil

Good Afternoon,

For the past several weeks, various economic indicators have suggested the U.S. economy is struggling to grow at anticipated rates. During this season of spirited debates about the budget and the role of government, it’s important to remember that our primary concern must continue to be the rebuilding of our nation’s economy. While there are many factors, one of the more agreed upon causes of this setback is the skyrocketing cost of oil. You don’t have to be an economist to realize that gas prices in excess of $4 a gallon will slow down consumer spending. And it isn’t hard to realize how $100 or more for a barrel of oil can raise the cost of everything from food to children’s toys. While we continue our efforts to promote alternative energies, it’s an unavoidable fact that oil is the current lifeblood of our economy. That’s why earlier today I signed two different directives, with the goal of lowering the price of oil in both the short, and the long run.

I’ve ordered Energy Secretary Chu to release 30 million barrels of crude oil from the Strategic Petroleum Reserve over the course of sixty days. This crude oil will hit the market in two weeks, and should help alleviate the high prices the country has faced, while at the same time reducing the deficit anywhere from $2 to $3 billion. Supply in the market will rise, and the speculation bubble built on the uncertainty of that supply will be deflated. After Hurricane Katrina, a smaller release from our reserves resulted in over a 12% drop in prices, and a release of similar size during the first Gulf War cut oil prices by one third in a day. We believe our results will be somewhere between these two examples, and that this release will send the vital message to Wall Street that we cannot afford, and will not allow energy to become the next boom and bust market! And with that, let me make a promise: if the conditions we face today return in the future, I will not hesitate to issue this order again. This is about not letting this economy stumble, and on that there can be no negotiations.

Not all blame for the recent high prices should be shouldered by speculators. The conflict in Libya has certainly to some extent disrupted supply and raised uncertainty, and this has helped contribute to the extraordinary circumstances I base my decision on. However, it is the increased speculation in the commodities market that acts as an amplifier for swings in price that would otherwise be less severe, and take place over longer time frames. That’s partly how the disruption of Libyan oil- which accounts for just 2% of world production, and has in large part been replaced by Saudi Arabia and other countries- can cause 10% jumps in prices virtually overnight. This gambling builds on top of itself, and prices spiral out of control. And as profit margins move higher and higher, the temptation for businesses to bend and break the law increases. Earlier just this week, we saw the ICE fine Goldman Sachs for attempting to manipulate oil futures the same day the FTC announced an investigation into suspicious activity on the part of refiners and oil companies. These are the sorts of warning signs that went ignored in the last decade.

The Commodity Futures Trading Commission was set up to prevent just this sort of thing. Commodity markets were originally created to give the farmer and his buyers price guarantees to provide confidence when planting a years crop. The CFTC was put in charge of limiting commodity markets in this country mainly to buyers and sellers with legitimate interests in the price of their goods. Over time however, it granted dozens of letters allowing individual banks and institutions unlimited access to trading. By the time I was campaigning for President, they had either given up, or had been stripped by Congress of almost all of this regulatory power. It’s widely believed by economists everywhere from the IMF to OPEC that speculation was at the heart of the oil crisis in 2008. Since then, nothing has been done to reform the system. That’s why, after meeting with Secretary Chu, I wrote the CFTC, and directed them to use the existing emergency powers granted to them by the Commodities Exchange Act to restore order to this market, and ensure fair prices. It is my hope that they will tighten the position limits for those banks whose interests in the market go beyond a legitimate desire to hedge against risk. This is the first step that must be taken in order to ensure the long term stability of oil prices, and safety of our markets. It’s vital that this work begin today.

There will still be more that needs to be done. The commission has so far been slow to enact the new regulatory powers provided to it by the Wall Street Reform Act. I urge them today to announce their new rules, and begin enforcing them as soon as possible. Additionally, the sooner the Senate confirms the appointment of Mark Wetjen as one of the body’s commissioners, the sooner they can move forward with their long term decision making.

Let me be clear. These measures will merely reign in prices, allowing a more natural balance between suppliers and consumers of oil. This is not a magic bullet to our long term energy needs, it simply allows time for the market to reset and adjust. The world’s supply of oil is finite, and there will come a day when no amount of drilling will be able to meet our current rate of consumption. The laws of supply and demand insist that the price for oil will go up until the last drops are gone. But we are not at that moment, and that future is no reason for this nation to allow its current progress to be slowed by bets made on Wall Street. These actions I have taken today come at no cost to taxpayers- rather, they will reduce the deficit, and lighten the burdens felt by families across the country. They are about reaffirming our priorities, and putting the well-being of our nation above the profit margins of a wealthy, privileged few. And it is about my renewed pledge to the American people to do all that is in my power to fight for them and their country.

Thank you.

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