[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                  IMPLICATIONS OF A WEAKER DOLLAR FOR 
                    OIL PRICES AND THE U.S. ECONOMY 

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 24, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-131
                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

44-904 PDF                       WASHINGTON : 2008 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 






























                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York         MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois          PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York         EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York           RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois                KENNY MARCHANT, Texas
ANDRE CARSON, Indiana                THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California            KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana              DEAN HELLER, Nevada
TRAVIS CHILDERS, Mississippi

        Jeanne M. Roslanowick, Staff Director and Chief Counsel

































                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 24, 2008................................................     1
Appendix:
    July 24, 2008................................................    35

                               WITNESSES
                        Thursday, July 24, 2008

Bergsten, C. Fred, Director, Peterson Institute for International 
  Economics......................................................     6
Kasputys, Joseph E., Chairman and CEO, Global Insight, on behalf 
  of the Committee for Economic Development......................     9
Murphy, Robert P., Economist, Institute for Energy Research......    13
Williams, Walter J., Economist, ShadowStats.com..................    12

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    36
    Bergsten, C. Fred............................................    38
    Kasputys, Joseph E...........................................    51
    Murphy, Robert P.............................................    60
    Williams, Walter J...........................................    69

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Letter from Republican members of the committee requesting 
      this hearing...............................................    74
Barrett, Hon. J. Gresham:
    Written responses to questions submitted to Joseph Kasputys..    77
    Written responses to questions submitted to Robert Murphy....    81
McCarthy, Hon. Kevin:
    Letter to Hon. Jack Kingston from Guy F. Caruso, 
      Administrator, Energy Information Administration, dated 
      July 2, 2008...............................................    86


                  IMPLICATIONS OF A WEAKER DOLLAR FOR
                    OIL PRICES AND THE U.S. ECONOMY

                              ----------                              


                        Thursday, July 24, 2008

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 2:03 p.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Maloney, Velazquez, 
Sherman, Scott, Green, Cleaver, Perlmutter, Donnelly, Speier; 
Bachus, Paul, Jones, Shays, Capito, Barrett, McCarthy of 
California, and Heller.
    The Chairman. The hearing will come to order.
    It is a busy time. On June 24th, just before we broke for 
the July 4th recess, I received a letter from many of my 
Republican colleagues headed by the ranking member of the 
Monetary Policy Subcommittee, Mr. Paul, and the ranking member 
of the full committee, Mr. Bachus, asking for a hearing 
because, ``Neither the Federal Reserve Bank nor the Treasury 
Department have been willing to take responsibility for the 
dollar's slide over the past several years, while American 
consumers have been forced to pay continuing higher prices for 
gasoline, etc. With this in mind, we once again urge you to 
consider our request to hold a Financial Services Committee 
hearing to examine the dollar's weakness and its effect on the 
price of oil.''
    I am not familiar with any prior requests, so I don't know 
how they could once again do it, but as soon as I received 
this, I did agree to hold a hearing. We then had a fairly short 
window. So it has been a busy time for us, as people know, with 
the bill for us yesterday. This was the best time to do it. 
Thursday afternoon isn't always the ideal, and I apologize for 
that, but given when I got this and what the schedule was, this 
is the best we could do, and I was glad to respond. I will put 
the letter, without objection, into the record.
    We will now have our opening statements. In the interest of 
time, I am going to waive mine.
    I have made it clear that this is a hearing which the 
Republican colleagues asked us to call, and I was glad to 
accommodate that. They are right; this is a very important 
subject. The price of energy and the interaction of the value 
of the dollar with the price of energy is probably as important 
a subject as we have. Even people who may not be fully familiar 
citizens with the interactivity they have would think it is 
very important once they focus on it.
    So with that, I am going to recognize the gentleman from 
Texas for his opening statement.
    Dr. Paul. Thank you, Mr. Chairman. I appreciate that very 
much, and I appreciate you holding these hearings at our 
request. I think these are very important hearings and a very 
important subject as well.
    First, I would ask unanimous consent to submit a written 
statement into the record. Thank you.
    I think what these hearings are dealing with is the essence 
of inflation. Everybody knows there is inflation out there, and 
nobody likes it. Everybody wants to take care of it, but they 
don't talk a whole lot about where it comes from. But if you do 
a survey of economists, whether they are conservatives or 
liberals or monetarists or Keynesians or whatever, almost all 
economists recognize that inflation is related to a monetary 
phenomenon. And they seem to agree with that, but then they 
don't dwell on the monetary phenomenon; they dwell on the 
prices.
    And today, of course, people aren't very happy with the 
price of oil and energy, and they talk about obscene profits 
and not enough drilling and too much demand in China. And these 
factors may well play an important role, but supply and demand 
of the oil is one thing, but nobody really talks about the 
supply and demand of the dollar. And if the dollar goes down in 
value, that is going to push prices up. And we don't talk about 
that a whole lot.
    A lot of times people, when they think about this issue, 
they talk about an economy when it gets heated, that they have 
to turn it off. A heated economy is bad, so they tighten the 
money and raise the interest rates to turn off the heated 
economy. But in reality, if you have a sound, healthy economic 
system, and it is vibrant and heated, actually that is very 
good. There is a lot of growth. And what happens when you have 
a lot of growth is that prices go down.
    So it always seems so foolish to me when people talk about 
a heated economy, and they look at the prices and say, well, to 
get the prices down, we have to penalize the economy and turn 
it off and turn off the spigot. And that, of course, isn't the 
way it works if you have a sound dollar.
    That is something that I have been talking about for a long 
time, and I am so glad that we are able to pursue that a little 
bit and relate higher prices to the monetary phenomenon. And if 
this is the case, if everybody agrees that it has something to 
do with monetary policy, and we don't like the consequences 
which are higher prices, in many ways it is semantical, because 
99 percent of the people, you talk about inflation, they think 
the CPI is going up. But those of us who concentrate on the 
monetary system say, well, inflation comes from the increase of 
the supply of money, artificially low interest rates, now 
investment and artificial financial bubbles that need to be 
corrected, bringing up a recession. And I think we have a 
chance today to talk about that issue and see the relationship 
between money and prices, and that just drilling isn't going to 
be the answer to a problem which is basically monetary.
    So once again, I want to thank the chairman for holding 
this hearing. And I welcome the panel.
    The Chairman. The gentleman from California.
    Mr. Sherman. Thank you, Mr. Chairman.
    World oil is priced in dollars. But the fact is that if the 
dollar was at 80 cents to the euro instead of $1.55, we would 
be paying a lot less at the pump. The fall of the value of the 
dollar has made imports more expensive, but it has also begun 
to revitalize our manufacturing sector and led to more 
manufacturing exports.
    The fact is we can't really control the value of the 
dollar. We do some jawboning. Every other country does 
everything possible to lower the value of its currency; we push 
in the other direction, which means either they are all idiots, 
or we are idiots. I will bet on the latter.
    The one thing we could do to influence the value of the 
dollar is to raise interest rates. Other than causing a 
recession, I don't know why we wouldn't do that.
    The fact is that trying to affect the value of the dollar 
cannot be done easily or effectively. The value of the dollar 
stems from our trade policy. The theory of free trade has the 
vast majority of economics professors backing it. It is an 
elegant theory. There are facts that contradict that theory. 
Those facts, therefore, must be ignored.
    For example, we were told that the trade deficit was the 
fault of the U.S. budget deficit. We had a budget surplus under 
Clinton; the trade deficit grew. The fact must be ignored. 
Tourists come into this country from Japan to my City of Los 
Angeles to buy Japanese goods and fly back. Under the theory of 
open trade, that can't exist. It must be ignored. Now Europeans 
are doing the same thing on the east coast. All these facts 
must be ignored.
    The trade deficit piles up. Even if it is only a $700 
billion trade deficit versus an $800 billion deficit, there is 
a trade debt as our dollars accumulate overseas. What we 
learned in the housing crisis is that things that can't go on 
forever don't; and the willingness of the rest of the world to 
buy U.S. dollars forever will end, perhaps in a disruptive way.
    What we need is a completely different trade policy, a 
policy that is based on facts, a policy that reflects--I mean, 
we sign these wonderful agreements with--arbitration provisions 
with China. One of their arbitrators voted for the American 
company. He is now in jail, a fact that must be ignored as we 
continue to subscribe to, let alone enter, new trade 
agreements. But the trade agreements are so beautiful on paper 
that facts like the imprisonment of a Chinese arbitrator must 
be ignored.
    The reality is that America is a society with a rule of 
law. And so, if you change the laws, change the regulations, 
you open our market. Other societies are not, but that fact 
must be ignored.
    The Chairman. The gentleman from Nevada.
    Mr. Heller. Thank you, Mr. Chairman.
    In deference to times and votes coming up here pretty soon, 
I will postpone. I am more interested in the testimony. Thank 
you.
    The Chairman. I thank the gentleman.
    The gentlewoman from West Virginia.
    Mrs. Capito. There is pressure now.
    The Chairman. There always is.
    Mrs. Capito. I want to thank the chairman for holding this 
hearing. It highlights an issue, I think, of interest all 
across this country. I would like to say that I have a 
constituent who writes me quite frequently on this exact issue, 
and I am pleased to see that we are going to be fleshing out 
his concerns and getting good information. So I appreciate the 
chairman for moving forward with this hearing.
    Thank you. I would like to submit my full statement.
    The Chairman. Without objection.
    The gentleman from Georgia.
    Mr. Scott. Thank you very much, Mr. Chairman.
    This is indeed a timely hearing, and I want to thank the 
chairman and ranking member for holding it, and I am certainly 
looking forward to the information that this panel will give.
    First, I believe we learned the hard way that our lack of 
being proactive as far as investing in renewable and 
alternative forms of energy as well as increased conservation 
programs, and it is finally, finally catching up with us. We 
are behind the ball.
    I have talked often about the example of Brazil in moving 
forward and having the foresight to see, and I share with the 
panel my own visit in Brazil and being able to get down there 
and seeing firsthand and spending a week or so of what they 
have been doing over the last few years. There is much that we 
can learn.
    Our country has for far too long conducted itself on the 
notion that oil is a finite resource. You know, nowhere is this 
impact on oil affecting us, not only consumers at the pump, but 
you just look at the airline industry itself and what they are 
going through, and they don't have the luxury right now of 
moving to a basically renewable fuel as we do with our 
automobiles that, if we move quickly, can take some of that 
downward pressure off some of these industries that don't have 
that choice at this moment. But I believe that this current 
energy crisis is one where we will have to finally learn our 
lesson and change our ways. The price of oil continues to 
increase, and experts expect the trend is set to continue for 
the next coming year or two.
    Second, oil prices have jumped nearly sevenfold since 2002, 
in part by a broader commodities rallies sparked by the demand 
from emerging economies such as India and China. If we keep 
going at our rate, our energy needs in the next 10 years will 
increase pretty close to 22 percent. China's would increase 
pretty close to 180 percent. And then you have India and some 
of the other developing nations. This is a very urgent, very 
critical issue.
    And, third, and what we are addressing today in this panel 
discussion, the falling dollar, the weakening dollar and the 
high price of oil. It is true the American dollar's fall is a 
detriment to access to foreign oil. The dollar is worth less, 
and so oil-producing countries are requiring more money to 
purchase the same barrel of oil. And we know the exchange that 
is used is our money, it is all on the dollar.
    A couple of examples: It takes close to $1.60 to purchase a 
euro, and the Canadian dollar is now worth more than the U.S. 
dollar, whereas, for more than 3 decades, the Canadian loonie 
was worth quite a bit less than our own dollar.
    So is the immediate cause of rising oil prices the weak 
dollar? That is the fundamental question we have to answer, and 
I look forward to that. I am interested in hearing to what 
extent our distinguished witnesses believe that our dollar is 
contributing to our oil price and supply woes.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman, for calling today's 
hearing, which was requested by the gentleman from Texas, Mr. 
Paul, and 16 other Republican members of the committee.
    Mr. Chairman, at a time when the cost of gasoline is the 
biggest pocketbook issue for most Americans, it is important 
that we look at all the factors behind oil prices. Let me stop 
right there and say that I represent Bibb County, Alabama, 
where the average take-home pay is $285 a week. I have 
constituents who are paying $90 a week to put gas in their 
tanks, and they can't continue to do that. It is the biggest 
source of financial stress in my district. It is having a 
really devastating impact. I have constituents who tell me they 
are having to change their eating habits; they are having to 
substitute beans for meat. So this is absolutely a tremendous 
stress.
    One of the factors is the impact of the weaker dollar and 
what effect it has had on the price of oil and indeed all 
commodities. Here they are hit with the gas prices, and then 
food is going up. So that is hitting them.
    One recent study by the IMF suggested that if the value of 
the dollar had remained steady against other currencies from 
2002 through the end of last year, the price of a barrel of oil 
would be about 25 percent less than it is today.
    But make no mistake about it, our fundamental problem is 
with supply and demand. We are not producing enough American-
made energy to meet our needs, so foreign oil producers are 
holding us over a barrel. And when I talk about energy, I am 
not talking about just oil, fossil fuels; I am talking about 
any kind of energy production. We need it all. We need solar, 
we need wind, we need nuclear. We need everything.
    Federal Reserve Chairman Ben Bernanke made a statement 
before our committee last week that deserved more attention 
than it got. He said that a 1 percent increase in oil 
production could lower prices by 10 percent. I thought that 
would be headline news the next day, but I didn't see any paper 
report that.
    In a survey I just did in my district, there was a strong 
opinion that with gas now at $4 a gallon, the United States 
must do more to develop the abundant energy resources we have 
here at home. As I said, that includes our oil and natural gas 
reserves offshore and in Alaska. It involves nuclear, coal, 
wind, solar, as well as renewable fuel. And energy production 
is just one leg of the stool. Conservation ought to be another. 
We should talk about both of them and new technologies for the 
future. Hydrogen may be 20 years away or something, but we need 
that. By diversifying now through responsible exploration or 
licensing new nuclear power plants, just to name two examples, 
we ensure that Americans have renewable, affordable energy over 
the long run.
    Mr. Chairman, in closing, high gas and energy costs are a 
burden for all of us, for our families, and for our schools. It 
is impacting local governments, businesses, and manufacturers. 
And they slow our economy. Congress should be devoting its full 
attention to the issue, and to the extent today's hearing draws 
attention to that fact, it will have served a very useful 
purpose.
    Thank you again, Mr. Chairman, for holding this hearing. I 
look forward to the testimonies of our distinguished gentlemen.
    The Chairman. Let me make a procedural explanation in 
fairness to the witnesses and to the members who have asked me 
to call this hearing. We are about to have a vote on one 
amendment to the pending bill. That will last 15 minutes. And 
there will then be debate on the motion to recommit, which 
takes 12 to 13 minutes, and then a 15-minute motion to 
recommit.
    I am prepared to stay here through the last amendment vote, 
so I will keep the committee in session. I would urge members, 
in consideration of witnesses, to go and vote right away on 
that first vote. If you then come back, we will have a half 
hour before you have to go back again. Otherwise, we lose about 
40 minutes. If that is acceptable, we will begin with the 
statements.
    We will start with Mr. Bergsten.

STATEMENT OF C. FRED BERGSTEN, DIRECTOR, PETERSON INSTITUTE FOR 
                    INTERNATIONAL ECONOMICS

    Mr. Bergsten. Mr. Chairman, let me start by congratulating 
you and this committee for the housing bill that passed the 
House yesterday. You have done an enormous service for the 
country. I want to congratulate you and indicate great support 
for that.
    I also want to indicate how that bill addressing the 
country's economic and financial problems is the perfect 
context in which to discuss today's issue, the exchange rate of 
the dollar, oil prices and the like, because they are so 
central to the economic and financial outlook. As I will 
indicate in my comments, what happens to the dollar could have 
a major, indeed decisive, impact on where the economy goes and 
the scope for policy to respond to the economic difficulties 
that we face. So I want to go through a quick analysis, as 
requested, of the dollar's impact on the economy, what it 
implies for policy, and a few suggestions for the committee and 
the Congress.
    First, just so we are starting from the same place, is the 
dollar weak? I would say, no. The dollar is at about the level 
that it was in 1980, again in 1995, and we still have a very 
large trade deficit, as Congressman Sherman indicated. The 
dollar went way up from 1995 to 2002. It has come back down 
over the last 6 years. It is just about where it started in 
1995, which is about where it was in 1980. So we have had lots 
of ups and downs. The dollar is certainly weaker, but it is not 
weak.
    What about its effects? The good news, and Mr. Sherman 
already mentioned that, is that the weaker dollar has already 
contributed to a very substantial improvement in the U.S. trade 
balance and thus our overall economy, and it is for sure going 
to lead to much more improvement. Every fall of 1 percent in 
the trade-weighted average of the dollar tends to strengthen 
our trade balance by $20 billion to $25 billion after a lag of 
2 to 3 years. Our net exports of goods and services in real 
terms, as included in the GDP account, have already 
strengthened by about $150 billion over the last 18 months, and 
we can expect a like improvement of another $150 billion or so 
in real GDP terms over the next 18 months or so, for a total 
gain from the weaker dollar and continued growth abroad of 
about $300 billion in our economy.
    In fact, that sharp reduction in the external deficit has 
provided all of the U.S. economic growth in the 4th quarter of 
last year and the 1st quarter of this year, the latest quarters 
for which we have data. There was no increase in domestic 
demand during that half-year period, but net exports have been 
growing at an annual rate of about a percentage point of GDP. 
Hence, they have kept us out of recession at least to date.
    This likely trade gain of about $300 billion in real terms 
translates into the creation of more than 2 million jobs for 
the U.S. economy. Moreover, these mainly export jobs pay 15 to 
20 percent more on average than the national wage.
    Given the fact that domestic demand has been flat and 
aggregate unemployment rising, these trade gains are extremely 
important. What it says is that the lower dollar and the 
globalization of the U.S. economy are providing a major boost 
to our economy just when we need it. That is the good news.
    The bad news is that a weaker dollar does, as several 
Members have already indicated, mean higher prices in the 
United States. Every decline of 10 percent in the average 
exchange rate of the dollar tends to produce a subsequent 
increase in the Consumer Price Index of about 1 percentage 
point. So the dollar, having fallen by about 25 percent over 
the last 6 years, we can expect something like a rise of 2 
percent in the price level in the United States.
    However, it is important to realize that a one-shot fall in 
the dollar leads to a rise in the level of prices but not to a 
higher rate of inflation. The inflation rate would increase 
permanently only if the dollar continued to decline, just as 
the trade balance would record further gains only if the 
currency were to keep falling to lower levels.
    Now, as Mr. Paul and others have mentioned, concern has 
been expressed that the weaker dollar has been an important 
contributor to the sharp rise in the price of oil. Chart 2 in 
my handout indicates the relationship, and I would come to a 
simple conclusion. Historically, there has been very little 
correlation between the dollar and world oil prices. When the 
dollar declined by 30 percent back in the mid-1980's, the oil 
price collapsed to less than $10 a barrel. Back when we had an 
upwards spike in oil prices in the early 1990's, around the 
time of the Iraqi invasion of Kuwait, that spike in oil prices 
correlated with a flat or rising dollar. Oil prices and the 
dollar rose together in the late 1990's.
    Now, during this last period, the global price of oil, as 
already mentioned, has risen about sevenfold, while the dollar 
has fallen by only about 25 percent. This is a far higher ratio 
of oil price rise to dollar fall than has existed over any 
previous, let alone extended, period. Moreover, the price of 
oil has risen sharply in all currencies, including the euro and 
other strong currencies, not just the dollar. Other 
commodities, even those that don't trade on exchanges, have 
risen as much as or even more than oil. And even for the short 
run over the last 6 weeks or so, while the dollar has 
stabilized, the oil price continued to escalate sharply. If you 
want to look at the last few days, the oil prices plunged 
without any concomitant rise in the dollar.
    So it is very hard to find any systematic correlation. I 
didn't bother you in my paper with regression analyses. We have 
tried to run regressions that throw in every possible time 
period, every specification. You just don't find the 
correlation.
    Other factors in the exchange rate, which I summarized in 
my statement, I think explain very persuasively the change in 
the price of oil.
    The Chairman. Mr. Bergsten, they changed the order of 
votes. I thought the first vote was one that I could easily 
miss. It is now one that I cannot miss. We may have to wait 
about 45 minutes. I hope you can accommodate us. I apologize, 
there is no way to tell. We are going to take a break.
    Mr. Bergsten. I just have 2 more minutes in my statement 
when I come to what I think is the key point.
    The Chairman. I apologize. I thought you were finished. It 
is dangerous to pause around here.
    Mr. Sherman. Mr. Chairman, will we come back while they 
debate the motion to recommit?
    The Chairman. We can vote on this one, which is 15 minutes; 
we can vote on the second one, which is 15 minutes, or we vote 
right away. There will then be about 40 minutes before they get 
back to voting. So that is what we will do.
    So please finish, Mr. Bergsten.
    Mr. Bergsten. Finally, and I think critically for this 
committee, the most uncertain impact of a weaker dollar relates 
to the foreign financing of the U.S. external deficits. Even 
with the trade improvements that I mentioned, we are still 
running annual shortfalls that will total at least $500 billion 
a year. These shortfalls require us to attract foreign 
financing of a like amount to balance our international books.
    Now, the lower dollar makes U.S. assets cheaper, and that 
ought to increase foreign interest in investing here. On the 
other hand, fears of further dollar declines could deter 
investors and, in fact, lead them to seek higher returns on 
their U.S. investments to offset that risk. The central 
question is, thus, foreign expectations of the future exchange 
rate of the dollar. This, in turn, poses the central challenge 
of the dollar for U.S. economic policy.
    Fears of further falls in the exchange rate could lead to a 
flight from dollar assets, by Americans as well as foreigners, 
incidentally. The consequent sharp decline of the dollar if 
there were such a flight could force the Federal Reserve to 
raise policy rates to fight the incipient rise in inflation 
pressure right in the face of financial fragility and a soft 
economy.
    As you well know, and I know you discussed it with Chairman 
Bernanke last week, the monetary authorities already face an 
acute policy dilemma; on the one hand a sluggish economy, on 
the other hand rising inflation.
    The Chairman. We have a vote, so you need to move quickly.
    Mr. Bergsten. So the conclusion is if the dollar were to 
fall out of bed, it would put policy in this country, 
particularly the Fed, in an impossible dilemma of having to 
raise interest rates to fight the inflationary effects of the 
lower dollar. Therefore, one last sentence, we may need a new 
policy instrument. I believe in that circumstance, we would 
have to consider joint intervention in the foreign exchange 
markets to keep the dollar from falling sharply without 
distorting monetary policy as it attempted to fight financial 
fragility and continued sluggishness in the economy.
    [The prepared statement of Mr. Bergsten can be found on 
page 38 of the appendix.]
    The Chairman. We are going to now go back and vote. I again 
apologize. As I say, they changed the order. We will go and 
vote. We will get at the end of that one vote. Members who want 
to can then take the second vote. We will then have another 40 
minutes, and I think that is the best we can do. So we are in a 
brief recess that I hope won't be more than 15 minutes.
    [Recess]
    The Chairman. I now recognize Joseph Kasputys, who is the 
chairman and CEO of Global Insight, the offices of which are 
about a mile from my apartment.

   STATEMENT OF JOSEPH E. KASPUTYS, CHAIRMAN AND CEO, GLOBAL 
  INSIGHT, ON BEHALF OF THE COMMITTEE FOR ECONOMIC DEVELOPMENT

    Mr. Kasputys. Thank you for pointing that out, Mr. 
Chairman. I should also say that I am here representing the 
Committee for Economic Development, of which I am the co-
chairman, and I would like to address the questions that the 
committee has called this hearing about.
    I would really like to point out our views on both oil and 
the dollar, but then go beyond that and point to our views on 
the role of the dollar in attracting foreign investment and the 
need for that foreign investment in the long term under the 
current policies that we find the United States following.
    We all know the U.S. economy is facing some very difficult 
times--the subprime housing price collapse and the resulting 
consequences for construction, financial institutions, 
financial markets, and households. At the same time, we have 
strong demand and capacity constraints, lifting the price of 
oil close to $150 a barrel, and it remains high despite some 
very recent downward adjustments. This has a big adverse impact 
on consumers, airlines, the automotive industry, and other 
industries as well. We have seen other commodities and food 
follow the same path, putting the policymakers in the United 
States in the difficult position of having to fight inflation, 
deal with an economic slowdown, and restore the credibility of 
financial markets all at the same time. Some of these problems 
have certainly spilled over to Europe; Asia has been largely 
spared, although not completely untouched.
    One could say that the U.S. economic difficulties we are 
currently experiencing, such as the subprime crisis, excessive 
housing prices collapsing, and the loss of confidence in U.S. 
financial institutions abroad, has contributed to a weaker 
dollar, and this in turn has contributed to higher oil prices. 
I would agree that there is some of that in the oil prices, but 
only to a minor extent.
    We believe that the major factor in determining oil prices 
is not the current level of the dollar, but the strong demand 
around the world, notably of Asia, a very tight supply/demand 
balance between the 88 million barrels or so a day that is 
required to meet growing demand versus low additions to supply 
due to a long-term lack of investment, natural disasters, and 
political problems, which often can be disruptive to oil 
supply.
    I would note that from 2005 to today, the oil price in 
dollars has increased by about 233 percent; the oil price in 
euros has increased by about 175 percent. So we can't say that 
the increase in oil prices is all due to the weakness of the 
dollar when you look at figures like that.
    One could also note that the Middle East oil exporters that 
have pegged their currencies for various reasons to the dollar 
want to maintain the real purchasing power of that dollar 
particularly so they can afford the imports that they buy from 
nondollar-based economies. In this regard, if you look at the 
Saudi currency over this same period, it has only depreciated 
by about 9 percent on a trade-weighted basis. The same thing 
can be said of the UAE. So it is not the depreciation of their 
trade-weighted currencies that is driving the oil prices.
    As Mr. Bergsten has pointed out, the weak dollar did indeed 
help exports in 2007 and 2008. Almost all U.S. growth is now 
linked to exports. Our current account balance, good news, has 
dropped from about 6.6 percent of GDP in 2005 until recently to 
about 5 percent of GDP.
    Is this really good news? Well, yes, it is moving in the 
right direction. But we still need to attract about $1.5 
billion a day to finance our current account deficit versus $2 
billion a day when the deficit was at its peak. It is still too 
high. The United States is continually adding to the problem in 
its net international investment position, which is 
unfavorable, and continuing to deteriorate.
    Now, with oil prices in 2008, it is likely we will face an 
increase in the oil bill, which will more than offset the good 
effects of the weak dollar on our exports. We are estimating 
that it is about a $90 billion swing there with a $260 billion 
increase in the oil bill, more than offsetting a $166 billion 
improvement in other parts of the current account.
    So the current account deficit will grow again relative to 
the GDP, and we believe this has negative implications for the 
dollar, and, if continued indefinitely, could result in very 
undesirable consequences for the economy.
    In September of last year, the Committee for Economic 
Development released a study entitled ``Reducing the Risks from 
Global Imbalances.'' The report we produced argued that the 
large global imbalances are unsustainable and, if not 
corrected, significantly raise the risks of financial and 
economic instability and the adoption of protectionist trade 
policies. This study noted, however, that market mechanisms 
were likely to reduce the imbalances, but this adjustment 
should be facilitated by sensible and self-interested policies 
by the major nations involved. The study outlined actions by 
the United States and other involved countries that would help 
the process of global adjustment and a reduction of imbalances. 
These measures would be most effective if adopted by all the 
countries contributing significantly to the imbalances.
    The immediate problems of the worldwide credit crunch and 
economic slowdown have drawn attention away from longer-term 
concerns about global imbalance and related economic pressures. 
We really think that we need to look longer term. The Federal 
budget deficit and our generally low national savings rate 
materially contribute to a persistent current account deficit. 
The growth in Federal entitlement programs the way they are 
currently structured is only going to increase and aggravate 
this further. And as the United States recovers, which will 
probably be in the end of 2009, we think the current account 
deficit will begin to grow again.
    So, we think there is a serious long-term structural 
problem where the United States is going to need to attract 
more foreign investment into the United States. And I am 
concerned with the degree to which we have been depending on 
nations that we trade with to recycle their dollars into low-
yielding Treasurys, and now we see about $3 trillion in surplus 
in the hands of countries, and about $1 trillion of that has 
been placed in sovereign wealth funds. These sovereign wealth 
funds are beginning to be managed by professional money 
managers. They are going to be looking for higher yields. They 
may not be willing to accept the low yields of Treasury bills.
    So what to do? We think, of course, the credibility of 
financial markets needs to be restored. And many things that 
started in this committee, enacted by the Congress, the 
stimulus that has been enacted, have all been good things, but 
more needs to be done on a long-term basis.
    The Chairman. We need you to wrap up in about a minute.
    Mr. Kasputys. Thank you.
    Along with measures being taken to support the U.S. economy 
currently, we have to address the global imbalances.
    We do think that oil prices will ease as world growth slows 
and new capacity is developed. However, the upward pressure on 
oil prices is more likely to be sustained longer than in 
previous cycles due to the very tight current oil supply and 
demand imbalance. Working on energy security and reducing 
energy dependence is really a win-win, which would help reduce 
the current account deficit and help the United States in many 
other ways.
    The CED calls for more coordinated international actions to 
reduce imbalances. We think that in the United States, we need 
to deal with persistent high Federal budget deficits, and we 
need to take measures to raise private savings, even though 
near-term actions are needed to stabilize the financial 
situation and do come at a cost.
    The Chairman. We have to take about 15 seconds. I don't 
mean to be rude, but I can't manufacture minutes. You have, I 
hope, some general conception of the time constraints, and you 
have to accommodate to them.
    Mr. Kasputys. One last sentence: The United States has a 
key role to play in a program to reduce imbalances by putting 
its own house in order, predominantly including action to 
reduce the Federal budget deficit that exists now and under 
current policies will only grow; and then the United States can 
provide leadership with other countries to get them to 
cooperate in a coordinated program that will reduce our 
vulnerability to the high current account deficit and 
dependence on foreign investment.
    Thank you.
    [The prepared statement of Mr. Kasputys can be found on 
page 51 of the appendix.]
    Ms. Velazquez. [presiding] Thank you.
    Our next witness is Mr. Walter J. Williams, economist, 
ShadowStats.com.

  STATEMENT OF WALTER J. WILLIAMS, ECONOMIST, SHADOWSTATS.COM

    Mr. Williams. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for the opportunity to 
discuss the implications of a weaker dollar for oil prices and 
the domestic economy.
    A weaker U.S. dollar helps to spike oil prices and 
otherwise generally fuels domestic inflation, reducing the 
purchasing power of consumers' paychecks and the real value of 
their assets. The underlying factors that have led to recent 
turmoil in the currency markets remain in play. While 
significant further weakness in the dollar would place 
additional upside pressure on oil prices and domestic 
inflation, it also could encourage oil producers to denominate 
oil prices in a currency or currencies other than the U.S. 
dollar, which would exacerbate U.S. inflationary pressures. 
Separately, further weakness in the dollar could threaten 
domestic financial market liquidity, complicating the systemic 
challenges already being addressed by the Federal Reserve.
    On the plus side for the economy, a weaker dollar tends to 
help narrow the trade deficit. Yet the positive effects are 
seen primarily in commodity-like goods. Where quality and 
features are important to the goods and services traded, the 
impact is quite muted.
    From the standpoint of consumer inflation, a number of 
factors influence prices, including the value of the dollar. A 
weaker dollar means that those living with dollar-denominated 
incomes and assets are losing purchasing power and real value 
against the nondollar-denominated world. Over the long term, 
that lost global purchasing power tends to be reflected in 
domestic inflation and a parallel loss in domestic purchasing 
power.
    For example, since March 1985, the dollar has lost 50 
percent of its purchasing power against the major Western 
currencies, while the dollar has lost 51 percent of its 
domestic purchasing power to inflation. There are different 
ways of measuring the dollar's value.
    An historically high negative correlation between movements 
in the dollar and oil prices suggest that the dollar weakness 
adds some upside pressure to oil prices. With oil denominated 
in dollars, dollar weakness provides an effective discount to 
nondollar-based economies due to the relative strength of the 
local currency. While dollar oil prices had nearly doubled for 
the year which ended June 30th, oil prices were up only 70 
percent in terms of the yen and the euro.
    In response, market forces tend to balance the effective 
discounts with upside pressure on the oil prices and dollars. 
Additionally, it is in the direct interest of oil producers to 
see upside pressure on dollar oil prices as an offset to global 
purchasing power being lost in weakening dollar-denominated 
revenues.
    As to the domestic financial markets, where the U.S. trade 
deficit has pumped excess dollars into the global markets, a 
significant dollar overhang has developed particularly with 
foreign central banks. The investment of these holdings in the 
United States has kept the domestic credit and equity markets 
relatively flush with liquidity. Perennial weakness in the U.S. 
currency, however, discourages such investment, and intensified 
dollar selling is a risk in the months ahead. Such selling 
could trigger dumping of the dollar and dollar-denominated 
assets. The same could result from efforts to mitigate the 
impact of higher oil prices with an offsetting decline in the 
dollar. Unless otherwise compensated for by the Federal 
Reserve, such action would drain liquidity from and 
correspondingly roil the U.S. financial markets.
    The relative value of a nation's currency is a measure not 
only of its trade position, but also of global capital flows 
that mirror how the rest of the world views that nation's 
economic strength, financial-system integrity, and political 
stability. While the U.S. dollar's exchange-rate value has 
experienced high volatility over time, it generally has trended 
sharply lower during the last 4 decades, having hit historic 
lows in recent months against currencies such as the Japanese 
yen and the Swiss franc. The current circumstance results from 
extended periods of deliberate debasement or neglect of the 
U.S. currency by various Administrations and Federal Reserve 
Chairmen.
    Contrary to popular conventional wisdom, the dollar does 
matter, and so does the budget deficit. The dollar issues are 
coming to a head. The deficits issues are related, but are 
still smoldering in the background.
    Underlying fundamentals that drive the real relevant value 
of the U.S. dollar against the currencies of its major trading 
partners could not be much more negative. The key factors or 
surrogates for global market concerns include the relevant U.S. 
condition on trade balance, economic activity, inflation, 
fiscal discipline, interest rates and political systemic 
stability. Only interest rates and related monetary policies 
are quickly addressable and present. Changes there could run 
counter to the Federal Reserve's needs and its current efforts 
to promote systemic financial stability and could be somewhat 
counterproductive in what I contend is currently a recessionary 
environment.
    Neglecting U.S. dollar weakness and providing nothing more 
than unsupported jawboning of a strong dollar policy begets 
further selling pressure on the dollar, promising further 
upside pressure on oil prices, further depreciation of U.S. 
consumers' purchasing power, and increased risk of a torrent of 
dollar dumping and resulting turmoil in the U.S. financial 
markets.
    Thank you.
    [The prepared statement of Mr. Williams can be found on 
page 69 of the appendix.]
    Ms. Velazquez. Thank you, Mr. Williams.
    Our next witness is Mr. Robert Murphy, economist, Institute 
for Energy Research. Welcome.

STATEMENT OF ROBERT P. MURPHY, ECONOMIST, INSTITUTE FOR ENERGY 
                            RESEARCH

    Mr. Murphy. I thank the Chair. I understand we are in a 
time constraint here, so I will just briefly summarize my 
written testimony. I am just going to talk about what the 
Institute for Energy Research believes to be the causes of 
record oil prices and then offer some possible remedies for 
that.
    I am an economist. You ask, why are oil prices so high? I 
am going to say it is because of supply and demand. On the 
demand side you have, as everyone has been alluding to, in the 
developing countries, demand for oil has been growing very 
rapidly from 2003 to 2007. For example, in China, petroleum 
consumption has increased about 8 percent per year over that 
period. And I want to stress that a lot of people misunderstand 
that, and they say, well, 8 percent a year is high, but, you 
know, oil has been going up a lot more than that. But the fact 
is China's consumption has been increasing 8 percent on average 
from 2003 to 2007 while oil prices were going through the 
ceiling.
    The way to compare and say how much has the demand itself 
shifted in terms of its effect on the price, you would want to 
say, well, if oil had stayed at $30 a barrel, which it was in 
2003, how much more would China's consumption have grown? So 
that 8 percent figure, some people misunderstand the 
significance of that.
    On the supply side from 2005 to 2007, world output was 
roughly flat. What happened was as non-OPEC production went up 
slightly in that period, OPEC production actually went down to 
almost perfectly offset it. But from the second quarter of 2007 
to the present, OPEC has actually been increasing. So the last 
quarter we have actually had the highest-ever world output of 
oil, but demand just keeps increasing, so that is what has put 
upward pressure on oil prices.
    The last component of this explanation which is relevant to 
today's testimony is the role of the dollar. So from June of 
2007 to June of 2008, oil prices increased about 104 percent, 
but at the same time, if you look at the euro price--or, excuse 
me, the dollar price to a euro, that has increased about 16 
percent, so that in a sense we can say, why did oil basically 
double in the last year? Well, at least 15 percent of that is 
solely attributable to the decline of the dollar against other 
currencies.
    I just would remind people that oil is a fungible commodity 
traded on a world market. So if the dollar falls against other 
currencies, you might not see the price of a haircut go up 
right away, but you will see the price of oil go up, other 
things being equal, because foreign countries can sell oil to 
other buyers. So if the dollar falls, the dollar price of oil 
is going to go up.
    If those are the causes, then the question is, what are the 
remedies? Now, just a caveat; here is an economist advising 
policymakers of their options. These aren't recommendations per 
se. There are various drawbacks to these things, environmental 
issues, concerns about budget deficits, what have you. But if 
the question is what can Congress do to bring down oil prices, 
here are some examples.
    In terms of conventional resources, we have 37 billion 
barrels of crude that are off limits by the government's own 
estimates, offshore and onshore Federal lands. So if Congress 
would remove the moratorium on those, then that is barrels of 
oil right there that could be developed and bring down oil 
prices. Also, if Congress legalized oil shale development, 
there are some 800 billion barrels of resources available 
according to government estimates. That is 3 times the amount 
of reserves that Saudi Arabia has, so there are plenty of U.S. 
oil supplies. The question is just, is the government going to 
allow American companies to develop them?
    Finally, what can the government do if it wants to raise 
the dollar's exchange value in the foreign exchanges? Of 
course, the Federal Reserve could raise the target rate, but 
also Congress could lower income tax rates. That increases the 
after-tax return to U.S. assets, and so investors around the 
world would tend to flock into those assets. For example, 
during the first Reagan Administration, after those tax cuts 
went through, the dollar soared on the international exchanges.
    Thank you.
    [The prepared statement of Mr. Murphy can be found on page 
60 of the appendix.]
    Ms. Velazquez. Thank you, Mr. Murphy.
    Mr. Kasputys, if I may, I would like to address my first 
question to you. In this Administration, 7.5 years in office, 
the United States has run up record domestic budget deficits to 
pay $800 billion for wars in Iraq and Afghanistan and a 
simultaneous $1.7 trillion tax cut. How have these domestic 
spending initiatives contributed to the weak dollar and the 
resulting increase in oil prices?
    Mr. Kasputys. Well, I think in terms of how the weak dollar 
has contributed to the oil prices, as I said in my statement, I 
really believe the weak dollar has only had a minor impact on 
oil prices, and we have seen oil prices increase in euro terms 
by a substantial amount, notwithstanding the weakness or the 
strength of the dollar. So there is no question in my mind but 
that the strong demand throughout the world, particularly in 
developing countries, as has been pointed out by other 
witnesses, with supply being very slow to come on line and 
subject to many disruptions, has had a great deal to do with 
the rise in oil prices. I think this is on a path of being 
corrected.
    To address your question, though, in terms of how have the 
continual very large budget deficits affected the dollar, I 
believe they have affected it adversely. The budget deficit, 
combined with a relatively low private savings rate, means that 
we are also running a very large current account deficit. We 
are consuming a lot more than we are producing. If we are going 
to consume more than we produce, we have to buy it overseas. If 
we buy it overseas, we have to pay the bill. More and more 
dollars are winding up in the hands of other countries, and it 
contributes to a general weakening of the dollar.
    Ms. Velazquez. Thank you.
    Mr. Bergsten, many economists estimate that nearly 40 
percent of the increased price American consumers are paying 
for oil is attributable to the weak dollar. Clearly, this 
leaves a significant amount of room for other factors that have 
also contributed to the price increase. Can you comment on how 
much the continued instability in the Middle East and the 
uncertainty of U.S.-Iranian relations have contributed to the 
increasing oil prices?
    Mr. Bergsten. I very much doubt the premise of the question 
that anything like 40 percent of the rise in the oil price is 
due to the lower dollar. I indicated in my statement that the 
relationships just don't support that at all. Mr. Murphy 
suggested 15 percent over the last year. If you take his 
methodology and look over the last 6 years, the dollar has come 
down 25 percent. The oil price has gone up 600 percent. So that 
means you could attribute maybe 3 or 4 percent of the total to 
the dollar.
    As far as the security premium due to Iran and other 
geopolitical factors are concerned, estimates range all over 
the lot from $10 to $50 a barrel in the price. That would be 
about 10 percent to considerably more than that. There clearly 
is a geopolitical premium, a security risk in the oil price. I 
don't think any economic or political science methodology 
exists that can quantify it, but it is not insignificant.
    As with all these other explanations, the question is what 
to do about it. And if anybody has a good idea for what to do 
about the Iranian nuclear problem that would take it off the 
agenda, I would certainly like to hear it, and it would help, 
among other things, in tempering the oil price.
    Ms. Velazquez. Thank you.
    Mr. Williams, would you like to comment?
    Mr. Williams. Yes. Relationships and these factors change 
over time. The effect of the falling dollar on oil prices is a 
factor, among many others. The supply factors are dominant--
supply and demand factors are dominant over time. But what we 
have seen in the last year has been increasingly unstable 
financial markets. Most recently you have had problems with the 
banking system, actions taken by the Fed to stabilize that 
circumstance, and those actions have intensified concerns in 
the currency markets that have led to having selling pressure 
on the dollar. It has made foreign investors very 
uncomfortable, and because of that discomfort, because of the 
extreme volatility, I think you have seen also an intensified 
relationship between the movement in the dollar and oil.
    Ms. Velazquez. Thank you, Mr. Williams.
    Mr. Paul.
    Dr. Paul. Thank you, Madam Chairwoman.
    My question is directed toward Mr. Williams and Mr. Murphy. 
It has to do with talking a little bit more about the weak 
dollar. I think everybody is talking about a weak dollar having 
an effect, some say a lot, and some say less, on the prices.
    But my basic assumption is that--and I don't think it is 
hard to argue that if you create a lot of new dollars, the 
value has to go down, unless some people argue, well, 
production is up, we might be able to, you know, stave off some 
price increases. But if the money supply goes up rapidly, and 
if we increase the money supply by 2 or 3 times immediately, 
the value of that money is going to go down, and prices will go 
up.
    Of course, the subject we are dealing with today is, does 
the money supply increase? Has the money supply been 
increasing? You know, in 1971, there was some restraint on the 
Federal Reserve to create money out of thin air; not much 
restraint, but there was some.
    Tell me a little bit about what is happening not only with 
oil, but commodities, because in one sense we are talking about 
oil, but we are really talking about the value of the dollar 
related to commodities. What has happened with the money supply 
since 1971, and how has that affected our prices? Is this 
significant or not? And, you know, how should we measure this? 
There was a time that we measured this by M3, the total money 
supply.
    The Fed creates money to help the politicians cover up 
their debt. They monetize debt. And then we have fractional-
reserve banking. And then when all that happens, we used to 
measure it, and it was called M3. But we don't even have this. 
And some people would still like that to have that number and 
think about the relationship, all this money, prices today 
specifically dealing with the price of oil.
    Could you expand a little bit on that, on this pressure we 
put on the Fed to monetize debt and fractional-reserve banking, 
what has happened to the money supply? Is M3 important? What is 
this relationship?
    Mr. Williams. Sure. What has happened over time, and indeed 
with the general monetary theory, the definition of inflation 
is basically an increase in money. If you look at the 
traditional equation on it, it has a level of money times its 
velocity--times velocity, which is the number of times the 
money turns over in the broad economy, equals the nominal GDP 
before inflation adjustment, which is effectively a constant 
dollar measure, a physical measure of the economy plus the 
measure of inflation, so that the inflation, if you reworked 
the formula, is pretty much a function of the growth of the 
money supply and velocity.
    Unfortunately, it is very difficult to come up with 
meaningful measures that fit into the theory. I believe the 
theory is correct. I think that has been demonstrated over 
time. But I will contend that you do not have a measure of the 
GDP and the GDP implicit price deflator or even a measure of 
the money supply that actually fully reflects or accounts for 
everything that is happening in the world. It is very difficult 
to move from theory to the real world.
    In terms of M3, though, that has been the broadest measure 
over time. The Fed stopped publishing it a couple of years ago. 
I have continued to track it, estimate it, largely using 
Federal Reserve numbers. What we are seeing right now is an M3 
as the broadest measure, which I believe is the best predictor 
of inflation, is up as of June, year to year, 15.8 percent, 
very close to 16 percent, and that is off its peak of 17.4 
percent back in April, but shy of the current period. The last 
time you saw anything close to that was back in June of 1971 
when M3 growth on a year-over-year basis hit 16.4 percent. That 
was 2 months before President Nixon closed the gold window and 
imposed wage and price controls.
    Now, if you want to predict inflation using the money 
supply, it is difficult to do it from a traditional theoretical 
standpoint. Over the last 25 years, I have worked in terms of 
coming up with practical ways of predicting inflation interest 
rates and economic activity using a variety of indicators that 
have leading relationships with what I am trying to predict. I 
found over time that with the money supply, the broadest 
pressure you can use would generally give you the best result 
in terms of what is going to happen to inflation. And what we 
are seeing with M3 right now suggests that where the official 
CPI is being reported year over year at about 5.0 percent could 
be in double digits.
    Ms. Velazquez. Time has expired.
    Mr. Sherman.
    Mr. Sherman. Yes. First a couple of questions for the 
record that I would like you to respond to in writing. One is, 
how do we achieve a sudden one-time-only decline in the value 
of the dollar without having a fear of further declines?
    The second question is for Mr. Murphy, and that is, you 
suggest that by reducing taxes on investment, that will cause 
the dollar to strengthen. I am assuming that you are guessing 
that decline in taxing on investment would be matched in an 
increase in taxes on labor or some sort of magical harmless 
cuts in expenditure; or alternatively, are you saying that a 
cut in taxes on investment would have a strengthening effect on 
the dollar that would massively outweigh the weakening effect 
of an increase in the Federal deficit?
    Now the questions to deal with orally. I have a question 
for which I am hoping each panelist can provide me a one-word 
answer. As the ranking member pointed out in his opening 
statement, I asked Mr. Bernanke when he was here last week 
about the price elasticity of oil, and he put forward the idea 
that a 1 percent decline in demand or a 1 percent increase in 
supply would result in a 10 percent change in the price. I 
would ask each of you to just give me your best number. I know 
it is an unfair question. I know there are lots of caveats. But 
all things remaining equal, a 1 percent increase in supply or 
decrease in demand would have an effect on supply of what 
percent?
    Mr. Bergsten. The 10 percent, I think, is okay, but over an 
extended period of time, it is very low, that response, that 
price elasticity is very low in the short run. And anything 
like a 10 percent change would have to take place over an 
extended period of time.
    Mr. Kasputys. I am not sure I can give you a one-word 
answer other than I agree with what Mr. Bergsten said. If we 
had a 1 percent increase in supply, right away it would be very 
significant because it would take out a lot of the fear of a 
real shortage by--
    Mr. Sherman. Would a 1 percent decline in demand have the 
same effect? I mean, supply and demand rules would say yes, but 
you may be--
    Mr. Kasputys. No, because we can see the supply. We are not 
sure when the demand is going to emerge. You can have China 
come back in very quickly based on policies.
    Mr. Sherman. So you would need to see a decline in demand 
that was structural and unlikely to be changed back?
    Mr. Kasputys. I agree. Yes.
    Mr. Sherman. Just as an increase in supply would have to be 
a new, producing oil well, not just a sudden sell from the 
SPRO.
    Mr. Kasputys. A structural change.
    Mr. Sherman. Structural long-term change is not--
    Mr. Kasputys. It is really net spare capacity. What you 
want to look at is net spare capacity worldwide.
    Mr. Sherman. Okay. Next.
    Mr. Williams. Well, you have had 10 percent swings both to 
the upside and downside, more than that in the last month or 
so, and that is really a significant shift in production.
    Mr. Sherman. That is just wild speculation.
    Mr. Williams. I know; 1 percent relative gain in supply 
versus demand certainly is a positive. I can't put a hard 
number on it. Ten percent might be fine, but, again, it is a 
very volatile number.
    Mr. Murphy. Yes, I would go with most of what they said. 
Right now, a 1 percent increase would roughly double or more 
than double world spare capacity. So, yes, that would have a 
tremendous effect, 10.378 percent.
    Mr. Sherman. 10.378. I like that precision. And we are all 
talking here about a world price. We are talking about world 
demand and world supply. A change of supply or demand in just 
one country would--oh, might have a much smaller effect on the 
world.
    I would also point out that--is my time expired?
    Ms. Velazquez. Almost.
    Mr. Sherman. I would also point out that we consume 25 
percent of the world's oil, and we produce roughly 5 percent, 
so a decline in our consumption would have a much more dramatic 
impact than an increase in our production. That is to say, a 1 
percent decline in our usage of 21 million barrels per day 
would have a much bigger impact than a 1 percent increase in 
our 5 million barrels per day.
    Do I have time for one more question?
    Ms. Velazquez. No.
    Mr. Sherman. No, I don't.
    Ms. Velazquez. Your time has expired.
    Mr. Shays.
    Mr. Shays. I thank the gentlelady for conducting this 
hearing.
    And, gentlemen, thank you for being here.
    I went through an epiphany, frankly, after Hurricane 
Katrina, realizing there were so many wells in the coastal 
area, the refineries, the fact that 11 States allow gas to come 
up to my State of Connecticut. And I hear a debate in my own 
State about, we are not going to have a line come through the 
State of Connecticut because it is going to help New York. 
Thank God there are people who allow energy to come to us 
domestically.
    But let me just say this as well in terms of 
internationally. We have Canada that is drilling right off its 
coast, Newfoundland, all along its coast, and I am told that at 
least 400,000 homes are heated by natural gas that comes from 
Canada. One, is that correct? And, two, tell me the negative 
impact of their mining and drilling off their coast on the 
Atlantic seaboard. Mr. Williams or Mr. Murphy?
    Mr. Williams. I am not familiar with the imports of natural 
gas from Canada, so I really can't give you an answer.
    Mr. Shays. Mr. Murphy, can you jump in there?
    Mr. Murphy. I can't definitively confirm that, but those 
numbers do sound plausible. And to my knowledge, there have 
been no adverse impacts environmental from that.
    Mr. Bergsten. Can I just add that Canada is the largest 
energy supplier to the United States, not Saudi Arabia.
    Mr. Shays. But, you know, when I look at the map, there is 
just this line. It is the border. And there is the sense that 
the field may go all the way down past New York. And it just 
seems to me--what I wrestled with, I understood why we didn't 
want to go after our reserves when we continue to waste so much 
energy. So I took the view that until we started to conserve, 
until we started to say we are going to do renewable, solar, 
wind, geothermal, biomass, I am not mining these reserves. But 
I am at a sense where we have it now, and we are starting to do 
that, and it seems to me that the way we are going to deal with 
this problem is to do all of the above, nuclear power and off 
the coast and so on. Yes, sir.
    Mr. Kasputys. I first got involved with energy in the late 
1960's and early 1970's. At that time, people were convinced 
there was no further natural gas to be found in the lower 48 
States. Since then we have found a great deal. And I think 
there is more to be found, both oil and gas, and we should look 
for it. We should look for substitutes. We should look for 
alternatives. Let us hope that Mexico becomes better at 
exploiting their oil resources, because that would be a good 
source for the United States.
    Mr. Shays. Thank you.
    But the bottom line is you had England and Norway say, we 
can mine the oil and natural gas in the North Sea. It had a 
huge impact on its economy, on its balance of trades and so on. 
So as an environmentalist, obviously I am concerned. But we are 
getting the oil from other places and the natural gas where 
they are delivering it. We are saying to Saudi Arabia, you need 
to produce more, and yet we are saying, no, no, no, no. And it 
just strikes me as getting to the point of absurdity.
    The bottom line--did you want to say something, Mr. 
Williams?
    Mr. Williams. Generally, along the lines that you are 
discussing, I have looked at the situation in the Gulf. You 
mentioned Hurricane Katrina. If you had a Katrina-sized storm 
go across the oil-producing fields there and hit the refinery 
area, you would see a doubling in gasoline prices almost 
overnight.
    Mr. Shays. Right.
    Mr. Williams. You need to diversify the fields and refinery 
facilities domestically.
    Mr. Shays. You are making a point I just want to emphasize. 
You are saying if we are going to get it from only one part of 
the United States, we are taking a huge risk. So you are not 
just saying diversify from oil to nuclear power or natural gas 
or coal or whatever, you are saying, don't get all of it from 
one area.
    Mr. Williams. Yes.
    Mr. Shays. Thank you. I yield back.
    Ms. Velazquez. Yes. Your time has expired.
    The committee will recess. We have a vote on the Floor. It 
will take approximately 10 or 15 minutes, and we will resume 
right after.
    [Recess]
    Mr. Green. [presiding] Please come to order. The hearing 
will resume. As you can see, I have grown a beard since I 
started this hearing this morning. And for edification 
purposes, the witnesses are not required to remain in their 
seats the entirety of the time that we are in recess.
    Mr. Bergsten. Now you tell us.
    Mr. Green. I know it is a bit late, but if we have one more 
recess, perhaps you will get to take advantage of it.
    Friends, thank you for your patience. Let me start by 
asking you about the Strategic Petroleum Reserve and a release 
of oil from the Reserve. Let's start with our first witness. 
Can you give me some indication as to how this will impact the 
price of oil? And if it is a significant impact, I am going to 
assume that it may have some positive impact on the dollar. I 
ask that you be as terse as possible because I have a few more 
questions.
    Mr. Bergsten. It has been a mistake for the Administration 
to continue adding to the SPRO as the oil price soared. Selling 
from the SPRO would be very constructive in helping bring oil 
prices down.
    Mr. Green. Thank you, sir.
    Mr. Kasputys. I think if we started to sell from the SPRO, 
we would have a short-term favorable impact on oil prices, but 
they would quickly return to market levels.
    Mr. Williams. I agree that it would help on the downside 
for the shorter term. The problem is that the Reserves are 
designed for some kind of a catastrophic event. We are still 
looking at somewhat normal market forces here, and you always 
have the potential of a catastrophic event where, if you drain 
those reserves, it would make the impact all the worse.
    Mr. Murphy. Yes. I would just echo those remarks. It 
certainly increases the supply, and the market price goes down. 
There are only 2 to 3 months' net imports in there, and if 
something happens in the Middle East, you might want to have 
the supply for that reason.
    Mr. Green. What could we do in addition to the release of 
that oil to have a continued impact on the price of oil by 
helping with the demand side?
    Mr. Murphy. Do you want me to just focus on the demand 
side?
    Mr. Green. Well, assuming that we release the oil from the 
SPRO, what, in addition to that, should we do?
    Mr. Murphy. My personal view would be that you would allow 
for energy companies to explore offshore and onshore Federal 
areas that currently are leased.
    Mr. Green. If we do this, the exploration does not have an 
immediate impact. Let us assume for a moment that it will have 
an impact, notwithstanding the fact that we import far more 
than we can generate by drilling. What will we do to have an 
immediate impact on the price? Because this is a question that 
the people I meet in my district ask me: What are we going to 
do about oil prices now? We know that we can release from the 
SPRO, and that will have an impact right away, hopefully. What 
else can we do right now?
    Mr. Murphy. Well, I just would challenge the premise of 
that, that what happens is--so it is true that if you allow for 
offshore drilling, that physically won't hit the market for 7 
to 10 years, but what would happen then is producers right now 
with excess capacity, knowing there is going to be more 
competition in the future, would increase production. And we 
saw when President Bush lifted the more--executive side of the 
moratorium, that week alone prices fell almost $16. There were 
other things going on in the news, but I think that certainly 
had an impact.
    Another example, Saudi Arabia, in May, refused to 
increase--
    Mr. Green. Before I go to another person, and I appreciate 
your comment, let me just add one more thing. If you say that 
this is--and many of you have said this--this is demand-driven 
by virtue of China and other countries desiring more, that 
demand does not seem to be subsiding for oil. And if this 
continues to be oil-based, and the demand continues to 
escalate, are you confident that what you are saying about the 
speculative aspect of this causing the prices to decline?
    Mr. Murphy. What I am saying, though, is not purely 
speculative. Like I said, Saudi Arabia did in May refuse to 
increase; when President Bush asked them a month later, they 
reversed themselves. And I think partly why they did that is 
the political climate here changed, and they realized it is 
much more likely that there are going to be a million barrels 
or what have you extra down the road.
    Mr. Green. Ten years down the road?
    Mr. Murphy. Yes. So pump more now.
    Mr. Green. Let us go to Mr. Williams.
    Mr. Williams. I don't see much that can be done to give you 
a quick fix on the gasoline price. Indeed, you need to increase 
domestic production, you need to develop alternate energy 
sources. Over time, that will help. But over the short term, 
outside of the Strategic Oil Reserves, I don't see anything.
    Mr. Green. We will hear from our next witness. That is Mr. 
Kasputys.
    Mr. Kasputys. I don't really think there is a quick fix 
that we can do. We are all somewhat stunned when we see oil 
going up very close to $150 and not knowing where it might 
stop. As I said in my remarks, I think it is generated 
principally by a supply and demand balance problem. The things 
that we can do are all longer-term things, like encouraging 
conservation. We might selectively put on certain taxes. I know 
it is very controversial. But I think seeing gasoline at $4 is 
not altogether bad, provided we can take actions to alleviate 
the impact on low-income people. And we can continue to work on 
conservation and alternate energy and fully developing the 
resources that we have. They are all largely long-term fixes.
    Mr. Bergsten. I am more optimistic than my colleagues. I 
think there are at least a couple of things you can do in the 
short run. One is SPRO sales. It would depend on how much and 
for how prolonged a period of time, but if you were prepared to 
announce an ongoing program, even if modest sales but 
continuing over several months, I think you could break some of 
the speculative psychology that is always in these markets. I 
am not charging speculators but saying that in any of these 
financial markets, when there is a bandwagon trend, the axiom 
in the markets is ``the trend is your friend.'' When the price 
is going up, people buy and push it up further. And there is 
always a speculative froth. Prices came down in the last few 
days; maybe some of that has now been terminated. But I think 
you could break some of that with ongoing substantial sales out 
of the SPRO.
    The other thing that you can do in the short run, and it 
was done a bit after Hurricane Katrina, is to relax some of the 
environmental regulations. Some of the environmental 
regulations that are promulgated by EPA limit the scope for 
U.S. refineries to convert certain types of crude oil into 
refined product. That is one reason the refinery shortage has 
been an important part of this whole problem. It is the reason 
also why we couldn't import more. So environmental regulations, 
if you want a short-run answer, look at that, too.
    Mr. Green. All right. We will now hear from Mr. McCarthy 
for 5 minutes.
    Mr. McCarthy of California. Thank you, Mr. Chairman.
    A question for Mr. Murphy. I think it was last week when 
Federal Reserve Chairman Bernanke was here for his testimony; I 
believe it was my colleague from California, Mr. Sherman, who 
asked him a question, and the Federal Reserve Chairman stated 
that a 1 percent increase in supply could lower prices by as 
much as 10 percent. Given when I listened to your testimony, 
talking about supply and demand, demand rise in China, and 
India and the Middle East, it is going so rapidly, do you agree 
with Mr. Bernanke that relatively small increases in supply 
would have a significant impact on hypersensitive markets?
    Mr. Murphy. Yes, I would agree. Everyone realizes that the 
oil market is very price-inelastic, meaning even as prices have 
gone way up, people haven't cut back consumption very much. So 
it works in the opposite direction that if you increase the 
available product even what seems to be a small amount, that 
could have a dramatic effect in the short run.
    Mr. McCarthy of California. Would you also then agree that 
a small drop in supply--the pipeline problem in Nigeria, a 
strike in Brazil, a statement by someone in the Middle East--
has the same but opposite effect?
    Mr. Murphy. Right. Spare capacity right now is about 1.5 
million barrels, so anything like that could really drive up 
the price of oil.
    Mr. McCarthy of California. I appreciate that.
    And following up from what the Federal Reserve Chairman 
said, his estimate of 1 percent would increase--in supply would 
lower prices by 10 percent. If I take the information based 
upon the Energy Information Administration, the recent 
worldwide daily production is about 865,000 barrels would be 1 
percent. I rather talk about 1 million barrels. It is easier 
for me. I am from Bakersfield, so I have to read my numbers a 
little bit.
    But I had an interesting weekend last weekend. I flew out 
with a delegation. We went to Golden, Colorado, and we toured 
the National Renewable Energy Laboratory there, solar and wind, 
and drove some of the cars as well, the hybrids. Then we went 
up to Alaska, went to ANWR. And I went and toured throughout 
there, went into the pipelines, seeing that in 1989, we put 2.2 
million barrels a day down there. Now we are only doing 700,000 
barrels down there. But I went over to ANWR where we are 
talking about using 1/100 percent of the 19 million acres, just 
2,000 acres. And they say they could do a million barrels a day 
underneath there if we were able to start drilling there.
    And what is interesting to me--and I was talking to another 
Congressman, Congressman Jack Kingston, and he recently asked 
the Energy Information Administration for an estimate on what 
the impact of prices would be if we had an additional 1 million 
barrels produced a day of productive capacity. That is right 
there in ANWR right next to where we are currently producing. 
In the response to Mr. Kingston's question, the Energy 
Information Administration estimates that if we were to bring 
another 1 million barrels of oil each day online, prices could 
be expected to drop by as much as $20 a barrel. Let me state 
that again: 1 million barrels of additional oil produced a day 
in ANWR, which we could do, would drop prices by $20 a barrel 
or about 50 cents a gallon.
    Mr. Chairman, I ask unanimous consent to submit the Energy 
Information letter to be included in the record.
    Mr. Green. Without objection, yes.
    Mr. McCarthy of California. But the one thing in listening 
to all this, supply and demand. And touring the renewables in 
Golden, Colorado, I have in my district the windmills, the 4th 
largest. We put the windmills up where the wind blows. I also 
have the Mojave Desert where we have solar. We put the solar 
panels up where the sun shines.
    Isn't it rational to drill for oil where the oil is? And 
the one thing I have found in this process with technology of 
how far we have advanced, when I went to one of the platforms 
which they drilled in the 1970's--we flew over one that is 
called Alpine, a fresher, a newer one, that, as you flew over 
it, there are no roads to this platform. They only built a 
little landing strip. So instead of taking 64 acres, they took 
6 acres. Instead of drilling down and having to do it numerous 
times, they go down and they go out 8 miles.
    One of the most interesting facts on the pipeline, how it 
went from 2 million barrels a day to 700,000, if we do nothing, 
we use 15 percent of the oil per year. So it only gets worse. 
Demand continues to rise, and supply goes down if you don't 
look for exploration. So from this weekend, I had a real eye-
opening experience, and listening to what the Federal Reserve 
Chairman said, 1 percent supply, 10 percent reduction; 
listening to what the Energy Administration said, that if we 
did 1 million barrels, which we could do with ANWR, we would 
lower the price by $20 a barrel, 50 cents a gallon.
    I really think, Mr. Chairman, now is the time to do it, and 
the American people desire it and request that we are able to 
have a vote on this on the Floor of the Congress. I think this 
is the direction we should go. We can't wait around much 
longer. I think it is kind of all of the above we can do, from 
the wind in Golden Colorado, putting it out to where the wind 
blows, to where the sun shines, to where the oil is. Having a 
complex all-of-the-above board, I think, would really put 
America to American energy policy. And I yield back.
    Mr. Green. The gentleman yields back.
    We will now hear from the subcommittee chairwoman, Mrs. 
Maloney.
    Mrs. Maloney. I thank my friend for yielding.
    Dr. Bergsten, you have talked about how the U.S. dollar 
needs to continue to fall to restore balance with our trading 
partners. For years now we have imported far more than we 
export, which has led to sharp job losses in manufacturing. And 
since manufacturing employment peaked in 1998, we have lost 
over 4 million manufacturing jobs. Shouldn't we focus our 
economic policy on making our goods competitive in the 
international market?
    Mr. Bergsten. We absolutely should, but I suggest in my 
statement today that the best way to do that is to make sure 
that the dollar is at a competitive level. The dollar has come 
down by about 25 percent on average over the last 6 years. We 
are now in the midst of an improvement of about $300 billion in 
our trade account, and as I indicated in my statement, that is 
creating about 2 million jobs in the U.S. economy, most of them 
in manufacturing. So we are actually in the process right now 
of recouping a substantial number of those jobs that were lost. 
Part of that job loss was the overvalued dollar and a big 
increase in the trade deficit. With the dollar having come back 
down not quite as far as it should, but most of the way, we are 
in the midst of a trade-led resumption of manufacturing jobs.
    I made the point in my statement that the entirety of U.S. 
output growth over the last 6 months has come from improvements 
in our trade balance. As you look out to next year, 2009, the 
OECD has predicted that almost all U.S. economic growth in 
terms of output and job creation is going to be export 
expansion and further reduction in our trade deficit. So we are 
right now in the process that you talked about, and, to me, 
that is by far the most encouraging component of the economy.
    Mrs. Maloney. It is now clear to many of us that for the 
past decade our economic growth has been bubble-driven, first 
with the stock bubble in the late 1990's and then with the 
housing bubble in the 2000's. At the same time, we have doubled 
a large trade deficit and lost millions of manufacturing jobs. 
Do you think it is possible that the reason that our economy 
over the last decade became so dependent on bubble-driven 
consumer spending and debt was because of our trade imbalances?
    Mr. Bergsten. I think there is a two-way relationship 
between the trade imbalance and the domestic bubble problems. 
On the one hand, the big trade deficit means we have to borrow 
huge amounts of money from abroad. That moves us into debt, but 
in the short run, it keeps our interest rates lower than they 
would otherwise be. That added to the propensity of the economy 
to have bubbles, particularly the interest-related bubble that 
we are now experiencing in housing.
    How much that effect is, is hard to say. Some people argue 
that the capital inflow from abroad kept U.S. interest rates 25 
basis points lower. Some would say it is higher, 50 to 75 basis 
points. It wasn't the major factor in low interest rates and 
the housing bubble, but it was certainly a factor.
    On the other hand, a more powerful relationship was the 
very rapid increase in U.S. consumer demand over this period, 
which sucked in a lot of imports. Another factor was the big 
Federal budget deficit, which put pressure on the economy, led 
to excess demand, more than we could produce at home, and added 
to the budget deficit. That in turn has now brought the dollar 
back down.
    But I want to again emphasize, because you started by 
talking about the doubling of the trade deficit, it actually 
more than doubled over the period 1995 to 2006, but it is now 
coming down very sharply. In real terms, it has come down about 
2 percent of GDP. It will probably come down another couple of 
percent over the next year or so.
    The reduction in dollar terms is not as great because of 
the higher oil prices. There is a tricky technical difference 
between the trade deficit in nominal dollar terms and the trade 
deficit in real volume terms. I won't go into that unless you 
want me to. But in the terms that count for output and job 
creation, we are in the midst of an export boom, and that is 
the only thing literally keeping the economy out of recession 
over this last year.
    Mrs. Maloney. Finally, my time is running out. The dollar 
has been falling relative to other major currencies such as the 
euro, but not as much relative to the Chinese yuan. Now, the 
United States continues to have a large trade deficit with 
China as we import stuff from China far more than we export. 
And what do you think is the proper relationship of the yuan to 
the dollar, and how do you think we can get there?
    Mr. Bergsten. We published a new study on that at my 
institute just yesterday. The conclusion of that is that the 
Chinese currency needs to rise by at least 30 percent against 
the dollar to bring their surplus down to even a reasonable 
level. It still would be pretty high. It is now over 11 percent 
of their GDP. It needs to come down a lot. The Chinese could 
permit that to happen quite easily.
    The reason that the Chinese currency has been so weak is 
flat out manipulation of the exchange rate by the Chinese 
authorities. They have been intervening massively in the 
currency markets, to the tune of $50 billion per month, and 
that has depressed the price of their currency. It has kept the 
dollar overvalued against the Chinese renminbi. By simply 
backing away from their intervention policy, the Chinese could 
permit their currency to rise to an appropriate level, which 
would be considerably higher than it is now.
    Mrs. Maloney. My time has expired. Thank you, Mr. Chairman.
    Mr. Green. Thank you.
    Mr. Cleaver will be recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    This will be to any of you who would choose to respond.
    There is talk about a hope for a release of oil from the 
Strategic Petroleum Reserve. In 1991, I think, was the last 
time gasoline prices dropped 30-something percent. We had a 
different price from the beginning, however. I spoke with an 
economist yesterday who said that if we did, in fact, go into 
the Reserve, and prices did not drop, that it would be 
devastating to the dollar and to the U.S. economy. Do you agree 
or disagree? Anyone can answer.
    Mr. Bergsten. I don't think it would be devastating. I am 
pretty confident, as were others on the panel earlier, that 
sales from the SPRO would bring some relief to oil prices. Keep 
in mind that the Administration has been continuing to buy for 
the Reserve despite the passage of legislation to halt the 
build-up of SPRO reserves. The Administration, at least until 
very recently, has continued to buy under contracts that had 
existed before the legislation that had to be honored.
    If you went from buying to selling, you would get a double 
effect. You would stop the upward pressure from the buying, and 
you would generate downward pressure from the selling. So it 
wouldn't be like going from zero to minus one. It would be 
going from plus one to minus one.
    I looked at the numbers. In the week which ended June 27th, 
which happened to be the last week I had numbers for, there 
were 140,000 barrels per day added to the SPRO, just less than 
a month ago. On the ratios we were talking about before, a 
million barrels a day leads to a drop of $20 in the oil price. 
That alone would be a couple of dollars on the oil price right 
there. So if you added to that some sales, I think you would 
get a lot of bang for your buck.
    Mr. Kasputys. If I might, my view of sales from the SPRO 
would indeed have a short-term impact on oil prices, but it 
would be transitory. We wouldn't really have permanently fixed 
anything.
    Mr. Cleaver. No. I understand that.
    Mr. Kasputys. So prices would go back to where the market 
wanted them once those sales were over. We would certainly have 
a break in psychology, with short-term impact, but you are not 
really addressing any fundamental problem by doing that.
    Mr. Bergsten. Can I just challenge that in the sense that I 
don't think it is inconsistent with what Joe said. Sales from 
the SPRO, even if done on, say, a 3-month basis, I mean, you 
could--the Administration could announce a program of sales of 
so much per day for a 3-month program. It is not just a one-
shot, short-term thing, which happened in the case of Iraq in 
1991 and again after Katrina. There were some sales out of the 
SPRO after Katrina, but they were very small, only for a couple 
of days. You could do much more than that for 2 months, 3 
months, even 6 months, and calibrate the amount. It would not 
run down the total to a level that would obviate the strategic 
purpose. But as Joe just said, I think it could break some of 
the market psychology, which, at least until very recently, has 
been that everything goes up. And there is a lot of speculative 
froth in that. There is a lot of ``trend is your friend'' 
thinking, a lot of market momentum activity the traders always 
respond to.
    So if your sales could kind of turn the tide even for the 
short run, I think it could have some significant lasting 
impact. It is certainly a measure to consider. And keep in 
mind, as I said, you are moving from purchases to sales. You 
get a double impact.
    Mr. Kasputys. I don't disagree with what you said, but if I 
could just respond to that. At the end of the period of 3 or 6 
months of sales from the SPRO, at that point you have a smaller 
SPRO, so you have a greater degree of vulnerability, and that 
can figure into the psychology of the pricing of the oil 
markets as well.
    Mr. Cleaver. Well, Japan has the second largest reserve. 
What if they dropped it at the same time?
    Mr. Bergsten. Yes. If we were going to do it, we should try 
to mobilize not only Japan, but others in the International 
Energy Agency. I presume you are aware that in the OECD there 
is an IEA, an International Energy Agency, set up after the oil 
shocks in the 1970's to coordinate the consuming nations' 
efforts to counter the OPEC cartel.
    Under that IEA arrangement, each country takes on a 
commitment to build its own SPR. So all of the member countries 
in the IEA, like Japan, all the Europeans and others, have 
strategic reserves. If we want to maximize the impact on the 
world price, what we should obviously do is go to all of them 
and see if they would join us in sales from our respective 
SPRs. That would then multiply the effect we are talking about 
just from sales from our own national SPR. That would be 
particularly powerful in psychological terms because it would 
mean that all of the oil-importing countries were acting 
together.
    Mr. Cleaver. It is still short term.
    Mr. Bergsten. It still would have a short-term effect. But 
again, I would argue then you would have an even more powerful 
psychological effect that could turn the market momentum.
    Mr. Cleaver. Mr. Williams.
    Mr. Williams. Congressman, I believe your question was, 
what if the market didn't respond?
    Mr. Cleaver. Yes.
    Mr. Williams. And indeed, where you would expect the market 
to respond, albeit short term regardless of however you play it 
out, that would be devastating to market psychology because 
that is the one area I think that people increasingly are 
looking at as something the government could do to provide some 
immediate relief. And if it didn't, it would have a sharply 
negative effect on the markets. I would expect that it would 
provide some relief. But answering your question, if it didn't, 
yes, I think that would be negative for the markets.
    Mr. Cleaver. That was the proposition of the economists.
    Mr. Murphy.
    Mr. Murphy. And it is ironic that they are arguing with 
each other, and I am going to disagree with him now.
    Just to very quickly answer your question, yes, it is 
conceivable. Suppose they go ahead and say, we are going to 
sell more, and then war breaks out with Iran the same day, 
obviously, gas prices are probably going to go through the 
roof. And so, in a sense, you could say, oh, we sold from the 
SPR, and it didn't make gas prices go down. But I think the 
people in the market, the traders would know what was guiding 
their decisions, and so they would understand what offsetting 
factor there was. So, no, I don't think it would be devastating 
if that were to happen, because people would realize what was 
the offsetting factor.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Green. The Chair now recognizes Ms. Speier for 5 
minutes.
    Ms. Speier. Thank you, Mr. Chairman.
    This would be a question for all the panelists.
    You have heard a lot of questioning in the last couple of 
hours about what we can do to try and bring the cost of 
gasoline down. Mr. McCarthy, who has since left, my colleague 
from California, was talking about the importance of drilling 
in ANWR because it could have a 50-cent-per-gallon impact.
    I have a different idea that I would like to explore with 
you, and that is good old conservation. There is a movement of 
which I am a part right now to reduce the national speed limit 
from 65 or 70 miles an hour to 60 miles an hour. And when we 
did that back in the 1970's, and there were studies done by the 
National Science Foundation and by the Department of Energy, 
for every mile over 60, there was a decrease in efficiency by 
about 1 percent. And it was estimated that, presuming you were 
going 70 miles an hour and now you are going to drop down to 60 
miles an hour, that you could see a savings per gallon of gas 
of about 45 cents a gallon, presuming gas is now at 4.50 a 
gallon; something that would be immediate, something that would 
have a double effect, I think, because not only would you be 
using less gas, but you are reducing the demand and increasing 
the supply.
    Now, you are the economists. I would like to hear your 
response to that.
    Mr. Kasputys. Well, can I say that the impact of 
conservation on energy consumption has actually been phenomenal 
over the last 30 years. We are far less dependent per unit of 
GDP on energy than we were at the time of the Arab oil embargo 
of October of 1973, which was a huge wake-up call. And since 
that time, lots of conservation initiatives have been 
undertaken, and they have made a material difference. And if we 
had not done those, we would be in much worse shape than we are 
today; probably we would be looking at $250 to $300 oil if you 
could buy it at all. So I think there is still tremendous 
potential in conservation in many forms.
    That specific one could have an impact. It depends on how 
much regulation we want to put up with. But, generally, yes, 
conservation is something that is still under exploited.
    Mr. Bergsten. You have my vote unambiguously. And you might 
have added that you will save some lives, too.
    Ms. Speier. Well, the study by the National Science 
Foundation suggests 2,000 to 4,000 lives a year are saved.
    Mr. Murphy. My reaction would just be that, yes, there are 
all sorts of measures people could take. Also, educating the 
public as to inflating their tires properly, and things like 
that.
    My only concern would be to educate people and let them 
make those tradeoffs themselves, because of course, the 
downside is you are driving longer; you don't get to your 
destination. So there is a trade-off. And the Institute for 
Energy Research typically would like consumers to be able to 
make those decisions once they have the information.
    Ms. Speier. Well, aren't we paying for a trade-off now that 
Bear Stearns has gone sideways? I mean, we create all these 
opportunities for less regulation, and when we do, oftentimes, 
we are paying for it down the road in very Draconian ways. That 
is rhetorical.
    Mr. Williams. It would have the effect that you are hoping 
for in terms of reducing gasoline prices. The issue I think is, 
other than that, I mean, I was around when the last--
    Ms. Speier. So was I; I was waiting in those lines just 
like you were, probably.
    Mr. Williams. We do have--and I can remember that, 
generally, it was not too popular with the populous. And in 
fact, when the system began to unwind and go back to the over-
55 speeds, the general reaction I saw was that--gut reaction, 
anecdotal evidence--people who drove a lot were generally quite 
pleased to see that. So I think the issues are more indeed in 
terms of what you want the government imposing upon the 
individual. In terms of having the effect that you would like, 
yes, you would have that effect.
    Ms. Speier. Let me just suggest that even the American 
Trucking Association now supports this proposition, which was 
not the case back in the mid-1970's. But it is affecting all of 
their bottom lines. And UPS, for one, not only is requiring all 
their drivers to drive 55 miles an hour, but they can only make 
right turns now. No longer can they make left turns because 
they have been able to document that doing so costs a lot of 
money in terms of gasoline consumption.
    Mr. Bergsten. UPS and the Postal Service are doing the same 
thing--no left turns.
    The people who object to your proposal on the grounds that 
it adds regulation to the economy, and recall the gas lines of 
the 1970's and link that to regulation, I think miss a simple 
point. There were overregulation problems that led to the gas 
lines; but they were overregulation problems on the supply 
side. They were price controls on energy, oil, and natural gas 
that we had in this country which distorted our markets badly 
and deterred output. And then we tried to regulate the 
distribution of gasoline and other products when the oil crises 
hit. Those were regulations, as I say, on the supply side of 
the market, and they had the predictable negative effects on 
supply.
    You are trying to limit demand through a regulatory device, 
and that is very different. And I would think that a 
combination of market incentives, which we have already got 
with the higher price, plus improved CAFE standards, the kind 
of thing you are talking about, are all very desirable in this 
context.
    Ms. Speier. Mr. Chairman, thank you.
    Mr. Green. Thank you. I will allow the answer. You were 
about to answer, sir?
    Mr. Kasputys. I would like to make one other comment.
    In my company, I have about 130 people that do nothing but 
study the automotive market. And the current price of oil and 
gasoline is roiling the automotive market. It is changing 
consumer behavior very rapidly. You are absolutely right to be 
focusing on the automobile. There is much more that can be 
done, and to some degree, it is really encouraging to see how 
quickly consumer tastes are changing to force some change that 
we have tried to get through legislation and through regulation 
for a long time. But I think maybe the consumer is really going 
to demand it this time, and I think you are absolutely in the 
right place to look.
    Mr. Cleaver. Will the gentlewoman yield?
    I am not opposed to what you were saying. Yesterday, I just 
read--I can't remember the exact statistic.
    Mr. Green. Mr. Cleaver, the time has expired for the lady, 
but if you have a unanimous consent request for an additional 1 
minute; I think Mr. Sherman is going to have a unanimous 
consent request. So perhaps we will have a second round, and 
that way we will get to your concerns, Mr. Cleaver, and perhaps 
the lady might have additional concerns as well.
    So at this time, without objection, we will have a second 
round. And let's limit it to maybe 3 minutes as opposed to 5 
minutes.
    Mr. Sherman. I will try to talk quickly.
    First, I want to commend Chairman Frank for holding these 
hearings at the request of roughly a dozen Republicans, none of 
whom are here at the present time.
    I want to comment that the things we can do to lower oil 
prices have different time horizons. If we can do something on 
the psychology, that takes effect at a frenetic pace. If we 
deal with the SPR, that puts oil on the market within days. If 
we deal with conservation, some of that takes place within 
days, as people decide in my district to use public transit 
even though it is inconvenient; sometimes months; sometimes 
years, as they adjust their behavior.
    But in terms of production, there we are talking either 
years or decades between when you take an action and when oil 
is actually on the market, with the exception of the Saudis, 
who have some oil fields ready to go. I am not saying they 
could turn on the spigot in a week, but they certainly could in 
a month.
    I would like to shift to the issue of speculation being 
part of the cost. And this could be either motivated by either 
evil speculators or by people afraid of Middle East political 
developments, however you want to characterize it. It occurs to 
me that somebody sold an oil future for August 2008 oil 4 years 
ago. They probably priced that at $50, $60 a barrel, if my 
memory serves me.
    There is a lot of buying and selling of oil futures that 
don't have a physical effect that I can ascertain. That is to 
say, today a certain number of barrels will be produced, 
physically, and taken to refineries. Today a certain number of 
barrels will be demanded, physically, not by speculators who 
don't actually burn in their tank.
    So I figure that the most important thing for me is, how 
much oil is going to the refinery in my area and at what price? 
And how much is being demanded by people in my area? And if 
that price is too high, then the supply and demand in my area 
at least will push the price down.
    I may be a little vague in formulating the question here, 
but how is it that speculators can affect not the price of some 
futures commodity, which is a security, but rather can affect 
the price of oil, which you would think would be set by 
physical supply and demand, how much oil is there available to 
burn today, and how much do they demand it? And I want to put 
aside for a moment the one group of folks that I know can 
affect the price, and that is anyone who can afford the 
physical product, and that is the Saudis by not opening their 
spigot.
    Can anybody explain to me why today's physical supply and 
physical demand is not where to look in terms of the price I 
will be paying at the pump?
    Mr. Murphy. If I may, sir, you are right. The mechanism 
through which speculation in theory could affect the spot 
price--
    Mr. Sherman. If I can interrupt you, there was speculation 
in silver where somebody just hoarded the silver, and it was in 
their warehouse. But with the exception of Saudis undeveloped 
oil fields, I don't know anybody who is hoarding oil except, I 
guess, our SPR.
    Mr. Green. The gentleman's time has expired. However, we 
will hear the answers.
    Mr. Murphy. I will be very brief. You are right. In theory, 
what will happen is the speculators, by buying futures 
contracts, push up the futures price. That would give people an 
incentive to buy at the low spot, store it, and then sell it. 
But what we have seen over the last year is that inventories 
have actually been declining, and so that is why the CFTC and 
others have said that they don't think excessive speculation is 
what is driving the recent spike in oil prices.
    Mr. Sherman. Does anyone else have an answer?
    Mr. Green. We will allow you to answer.
    Mr. Bergsten. I think it depends a little bit on what you 
call speculation. One person's speculation may be another 
person's investment. You mentioned a couple of categories. 
There is a third category. People who are worried about 
inflation, who are worried about stability of prices, and that 
produces what is often called a flight to commodities as an 
investment alternative to traditional currency-based 
investments or financial assets. That flight to commodities, 
which I think we have seen some signs of over the last year or 
two, can add something to the price, even if those people don't 
take physical delivery. They may buy spot. That is adding to 
the demand for the market on that given day. And at least most 
of the energy experts that I have talked to and whose views I 
respect would add that as a modest but nevertheless noticeable 
element in the overall picture.
    Mr. Green. I want to thank the witnesses for being so 
generous with their time.
    We have two additional members who would like to ask 
questions.
    Mr. Cleaver, do you yield?
    Mr. Cleaver. I will yield, Mr. Chairman.
    Mr. Green. Then we will go back to Mrs. Speier for an 
additional 3 minutes.
    Ms. Speier. Thank you, Mr. Chairman.
    In this speculation market, many of us received from one of 
the carriers, maybe all the airline carriers sent this out to 
their e-mail list, basically saying: Send a letter to Congress. 
Tell them to deal with the commodities market and create some 
semblance of sanity there.
    One of the points in the letter suggested that a barrel of 
oil trades 23 times before it gets to the end user. And, 
understandably, the airlines are concerned about the cost of 
jet fuel. So they believe that there is too much speculation 
going on, that it is being driven by Wall Street, and that 
there needs to be some strictures put in place so that the cost 
of jet fuel is not artificially raised beyond the pocketbooks 
of the airline industry.
    Do you have any comments on that?
    Mr. Williams. It is, to a certain extent, still supply and 
demand. The airlines themselves are speculators in this field. 
They cover their exposures by buying futures contracts on oil 
or on jet fuel.
    But one factor that has come in here, and it actually comes 
back to the original concept of the hearing, is that we have 
seen an extraordinary period of time in the last several months 
where the markets have been unstable. The financial system has 
been a little bit on the edge. The Federal Reserve has been 
working to maintain stability of the banking system. And as all 
these different actions have been taking place and all the 
stories keep floating around, people have gotten very nervous 
about what might be happening. You have seen some flight from 
the dollar. People don't want to necessarily be in dollar 
assets, or they are afraid that maybe there is going to be 
inflation, and the actions that are being taken to prop up the 
system are inflationary. So that because of these factors and 
because of the weakness in the dollar that you don't 
necessarily want to be holding the currency-related assets, 
that there has been some movement in the commodities as a way 
of protecting your wealth, of protecting your assets.
    I will contend that it is very difficult to tell the 
difference between a speculator who is, using the term very 
loosely, who is in there buying contracts because he is hoping 
to protect his wealth, and an airline that is in there 
speculating, buying contracts to protect its costs. So it is a 
difficult issue to address.
    There is some effect there, but again, the dollar, the 
weakness of the system, global concerns about the financial 
stability in the United States, have been more factors behind 
driving the oil prices higher than any pure speculation per se.
    Mr. Kasputys. I think, if I may, the use of futures 
contracts, which can be bought, sold, traded, is a very 
important tool to consumers of energy in industrial and 
corporate organizations, airlines, and even in the energy 
industry. I am all for transparency, but I would not be for 
regulating it or limiting it. I think futures contracts are an 
important tool. It is a useful tool. Yes, it will, at 
inflection points, tend to accelerate the rate of change, but 
it can go down just as rapidly as it goes up.
    Mr. Bergsten. I would add one other point on that. It 
really goes to Mr. Sherman's question, what is speculation? One 
reason economists tend to think that speculation in the narrow 
sense does not have much market effect is it is very temporary. 
People will buy today, sell tomorrow.
    But there is an alternative interpretation, which is that 
commodities and oil, in particular, have now become an asset 
class for investors, that 5 years ago, maybe even 3 years ago, 
there was really no asset class included in the normal 
portfolio of investments, which was oil or commodities more 
broadly.
    Now, for some of the reasons we have stated--Mr. Williams 
just did, I did earlier--people may now believe they should put 
some modest percent, 5 percent, even 10 percent of their total 
investment portfolio into ``real assets,'' meaning commodities: 
some energy, some gold, some other commodities.
    To the extent that is a permanent change, from 0 to 10 
percent, as part of investment portfolios kind of normalized 
across the financial community, that would be a permanent 
increase in demand for that kind of asset and could therefore 
have a more lasting effect.
    Mr. Green. Thank you for your responses.
    The Chair will note that some members may have additional 
questions for the panel which they would like to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to the 
witnesses and to place their responses in the record.
    Before adjourning, on behalf of the chairman, the ranking 
member, and all of the members of the committee, we want to 
thank you for your patience today and for your indulgence.
    Again, the hearing is now adjourned.
    [Whereupon, at 4:42 p.m., the hearing was adjourned.]














                            A P P E N D I X



                             July 24, 2008

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

