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Oil roars back to $100, but does anybody care?

November 29, 2011: 1:52 PM ET

Oil price volatility is back, and so are calls for investigations into what's driving it. Taxpayers have paid for countless similar probes for decades, without a single conclusive result.

By Leah McGrath Goodman, contributor

oilFORTUNE -- Before this decade, it was unheard of for crude oil prices to jump a few dollars a day unless the U.S. was under a trade embargo or about to go to war. And even then, the outright price of oil was hardly prohibitive (recall that for the entire month leading up to the Iraq war in March 2003, oil did not cross $38 a barrel, let alone $100).

Yet today, without a major media event in sight, we witness price swings that would put the wartime spikes of yesteryear to shame. Despite the American Petroleum Institute's pronouncement in June that oil supplies in the U.S. hit a high not seen in more than three decades, the two-buck oil price pop – including today'sis now seen as commonplace.

Why? It has become a nettlesome question for no fewer than a dozen government departments and agencies, among them the U.S. Department of Justice, the National Association of Attorneys General, the Commodity Futures Trading Commission, the Federal Bureau of Investigation, the Federal Energy Regulatory Commission, the Department of Homeland Security, the Federal Trade Commission, the Department of the Treasury, the Federal Reserve Board, the Securities and Exchange Commission, the Department of Agriculture and, of course, the Department of Energy.

While intelligent minds may differ as to why oil prices have risen as much as 630% over the past decade – speculation or fundamentals? – one fact is no longer up for debate: a shift seems to have taken place in oil-patch tectonics that's keeping prices propped up. And the cost of ignoring it does not bode well for consumers or our national security.

The rhetoric offered by Washington has been as impressive as it has been ineffectual, with a flurry of investigations, working groups and general inquiries coming up empty, even as they stretch for years into the future, racking up taxpayer dollars. Taking note, a handful of senators and even President Obama have recently ramped up the pressure.

Maria Cantwell, Democratic senator from Washington state, advanced questions during a Senate hearing two weeks ago meant to ascertain the progress of the Department of Justice's much-touted Oil and Gas Price Fraud Working Group, which involves many of the agencies listed above, in addition to state authorities. Pledging to "monitor oil and gas markets for potential violations of criminal or civil laws to safeguard against unlawful consumer harm," the DOJ has sought to uncover unlawful activity in the energy market, though it has shied away from explaining exactly how. Cantwell is known for her strong positions on energy market issues after tangling with Enron while still a junior senator. The scandal, she has noted, proved "that fierce market manipulation does happen."

Since it formed in April at the behest of President Obama, very little has been heard from the DOJ working group. This is disappointing, as the DOJ is one of the only arms of the federal government with the statutory power to bring suspects to justice and imprison them, as opposed to civil offenders, who are simply fined (and usually pay much less than they profited in breaking the law.) "We are encouraging an increase in communication, both formal and informal, and information-sharing among the government agencies," a DOJ spokeswoman says. "So far, there have been no particular cases of finding fraud, civil or criminal."

Information-sharing? With tactics like that, offenders better watch out.

Washington's quandary

For its part, the Federal Energy Regulatory Commission revealed last week in its annual enforcement report that its top priority in 2011 – and for the foreseeable future – is "fraud and market manipulation." How many cases were settled this year by its Office of Enforcement? Nine. That represents approximately $5.7 million in civil penalties. Just to put that into perspective, the tab at the pump for Americans over the Thanksgiving week came to more than $200 million.

At the urging of Senator John D. Rockefeller IV, the Democrat from West Virginia who, incidentally, is the great-grandson of oil tycoon John D. Rockefeller, the Federal Trade Commission came forth with its own investigation into the oil and gas market, which seeks to determine whether "oil producers, refiners, transporters, marketers, physical financial traders or others" are violating the commission's rules – particularly, its Prohibition of Energy Market Manipulation Rule. Cantwell's questions during the recent Senate hearing paid special attention to the FTC's efforts to aggressively enforce that rule. The questions, exclusively reviewed by Fortune, have yet to be made public.

According to the FTC, no apprehensions have been announced and probably won't be until the matter is concluded. As with the DOJ, there is no timetable for that. Further, the commission emphasizes that it usually does not disclose the existence of investigations, but in this case Rockefeller chose to make it public.

Meanwhile, the Commodity Futures Trading Commission is often so gung-ho about investigating an issue, it will probe it for years before Congress gets restless and begins clamoring for results. (A case in point: the grand investigation into oil speculation launched in 2007 that dragged on for years before being mysteriously discontinued. A high-ranking official inside the agency says the probe was never finalized "due to a lack of political appetite.")

The Dodd-Frank Act led to a similar turn of events. Congress mandated that the CFTC approve new rules to limit overzealous trading in oil and other commodities by January of this year. Even with years of market data to draw from, the CFTC urged senators to give it more time to conduct additional studies.

Protecting consumers is part of the CFTC's job, but it was more worried about hurting Wall Street. Commissioners openly fretted about appearing to be "control freaks" or "stifling" market competition. (This seems unlikely: In the year to date, the U.S. traded several trillion dollars of crude oil contracts alone, a number that dwarfs the amount of physical oil actually available on a global basis, which is about 89 million barrels a day.) Stifling is just about the last thing this market needs to be worried about.

After overshooting its deadline by nearly 10 months, the CFTC in late October finally imposed limits on the size of the positions Wall Street firms are allowed to take in oil and other highly strategic commodities markets. Two of the five CFTC commissioners voting on the measure opposed it, stating that it overstepped the CFTC's statutory authority.

Several senators felt the measure did not go far enough. Bernard Sanders of Vermont, the longest-running Independent in the history of the U.S. Senate, aims to expand on the rule through legislation he dubs the "End Excessive Oil Speculation Now Act." The bill, co-sponsored by eight Democratic senators, including Rockefeller, proposes to rein in what Sanders believes is too much oil speculation, even in light of the new CFTC rules. In August, Sanders drew criticism for leaking CFTC data showing that at the time of oil's record high near $150 a barrel in July 2008, the market was dominated by big speculative players such as Goldman Sachs (GS), Morgan Stanley (MS), J.P. Morgan (JPM) and the secretive Swiss oil-trading firm Vitol.

"One of the great questions of our time," Sanders recently wrote, "Is whether the American people, through Congress, will control the greed, recklessness and illegal behavior on Wall Street, or whether Wall Street will continue to wreak havoc on our economy and the lives of working families."


Leah McGrath Goodman is the author of The Asylum: The Renegades Who Hijacked The World's Oil Market.

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