For immediate release - Tuesday, March 7, 2006.
Contact Bob Brammer - 515-281-6699
Attorney Generals' Report:
Market Fundamentals Can't Account for Huge Increase in Natural Gas
Supply and demand alone don't support and explain huge price increases.
WASHINGTON, D.C. -- A six-month study into skyrocketing natural gas prices and erratic natural gas markets concludes that traditional factors of supply
and demand alone cannot account for the surge in prices, and that a huge influx of money into speculative financial markets has reinforced the upward spiral of
report released today was commissioned by four Midwestern Attorneys
General: Lisa Madigan of Illinois, Tom Miller of Iowa, Jay Nixon of Missouri
and Peg Lautenschlager of Wisconsin. Miller, Nixon, Lautenschlager and
a representative of Madigan's office discussed the findings of the report
today at a news conference in Washington. [Click here
for photo.] The report examined several causes of high natural gas
prices and volatility, and addressed potential remedies.
Natural gas prices climbed to all-time highs last fall and early winter, with spot prices exceeding $15 per million Btu and wellhead prices exceeding $10 per
million Btu for the first time ever. By contrast, gas prices had hovered around $2 to $4 per million Btu for much of the last two decades. Future prices today are
far above the costs of production and, if realized, could cost consumers hundreds of billions of dollars more, the Attorneys General said. Consumers are already
feeling the effects of those increases, with this season's average winter heating bills projected to be the highest in history.
"This report and our
early analysis indicate that the 'physical market' and purported tight
balance of supply and demand are not sufficient to explain the behavior
of natural gas prices," Miller said.
"Demand has not been
surging or soaring, as often has been reported, and supplies are not so
tight as to support enormous price increases. The study reports that even
with the recent hurricanes, supply and demand are now about where they
were last year or two years ago," he said. [See figure 12, from
the Report, at the end of this release.]
"We are realizing
that the financial markets and trading of natural gas are just as important
as the physical market," Miller said. "We are finding that natural gas
markets may be vulnerable to abuse and volatility, and yet the markets
in which wholesale natural gas prices are set are very lightly regulated,
and they lack transparency."
Miller said the four Upper Midwest attorneys general established a "Natural Gas Working Group" last fall to focus on the issue. They directed their staffs to
begin looking into natural gas prices following dire predictions about skyrocketing costs to consumers. Staff met with invited representatives of utility
companies from each state, as well as with natural gas producers, to gather information and obtain frank perspectives about the causes of the projected dramatic
The Attorneys General also enlisted the assistance of an expert and commissioned the study which was released today. The study for the Attorneys General
was prepared by Dr. Mark Cooper, a long-time Washington, D.C., analyst of energy and consumer issues and the author of hundreds of reports over more than
25 years on a wide variety of energy and consumer issues.
In their discussions of market dynamics, the Attorneys General said they found greatly divergent opinions and contradictory explanations for the recent roller-coaster of prices. But they emphasized that a closer look at the physical market for natural gas points to the conclusion that supply and demand fundamentals do
not explain the price increases.
The study and the Attorneys General say a significant contributing factor has been a huge influx of money into largely unregulated financial markets,
reinforcing the upward spiral of prices by increasing volatility and risk, and creating uncertainty. The lack of transparency in those speculative markets hinders
effective review as well, they said.
"Under the current system, regulators have little way of knowing the true dynamics of the natural gas financial markets," Miller said. "A huge share of
transactions take place in markets that are largely unregulated, especially the over-the-counter markets."
The four Attorneys General urged the federal government to take action to assert basic jurisdiction over unregulated financial trading that could be contributing
to the enormous increases. Common-sense changes in federal oversight policies are needed, they said, to make the markets more transparent and efficient.
Policy steps outlined in the study released today included:
- Oversight of the over-the-counter markets, including requirements for registration of traders and reporting of trades.
- Stricter limits on positions held by any one entity and expanded settlement periods for short- and long-term contracts; and restrictions on how much the price
of natural gas can move on the markets before trading is temporarily halted for a "cooling off" period.
- A joint federal-state task force to examine critical questions about the supply-side of the physical market and the role of major oil companies, which straddle
the physical and financial markets.
"As the report notes, when we look for answers, we mainly end up in Washington, D.C., where jurisdiction resides over the interstate natural gas system,"
Illinois Attorney General Lisa Madigan said: "Instead of the current method of setting prices based on the actions of just a few traders, we need oversight of all
natural gas transactions to make sure that the prices consumers pay accurately reflect the actual supply of and demand for natural gas."
The report is available
online on at www.IowaAttorneyGeneral.org.
Upper Midwest Attorneys General announce natural gas price study – March
7, Washington, D.C.
Left to right: Wisconsin Attorney General Peg Lautenschlager,
Illinois Depy. Attorney General Ben Weinberg, Iowa Attorney General Tom
Miller, Missouri Attorney General Jay Nixon.
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