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




   ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE 
                        MANIPULATION? (PART II)

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

                                HEARING

                               BEFORE THE

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                             JUNE 23, 2008

                               ----------                              

                           Serial No. 110-128


      Printed for the use of the Committee on Energy and Commerce
                        energycommerce.house.gov













   ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE 
                        MANIPULATION? (PART II)

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

                                HEARING

                               BEFORE THE

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 23, 2008

                               __________

                           Serial No. 110-128


      Printed for the use of the Committee on Energy and Commerce
                       energycommerce.house.gov



                  U.S. GOVERNMENT PRINTING OFFICE
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                    COMMITTEE ON ENERGY AND COMMERCE

                  JOHN D. DINGELL, Michigan, Chairman

HENRY A. WAXMAN, California          JOE BARTON, Texas
EDWARD J. MARKEY, Massachusetts          Ranking Member
RICK BOUCHER, Virginia               RALPH M. HALL, Texas
EDOLPHUS TOWNS, New York             FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey       CLIFF STEARNS, Florida
BART GORDON, Tennessee               NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois              ED WHITFIELD, Kentucky
ANNA G. ESHOO, California            BARBARA CUBIN, Wyoming
BART STUPAK, Michigan                JOHN SHIMKUS, Illinois
ELIOT L. ENGEL, New York             HEATHER WILSON, New Mexico
GENE GREEN, Texas                    JOHN SHADEGG, Arizona
DIANA DeGETTE, Colorado              CHARLES W. ``CHIP'' PICKERING, 
    Vice Chairman                    Mississippi
LOIS CAPPS, California               VITO FOSSELLA, New York
MIKE DOYLE, Pennsylvania             ROY BLUNT, Missouri
JANE HARMAN, California              STEVE BUYER, Indiana
TOM ALLEN, Maine                     GEORGE RADANOVICH, California
JAN SCHAKOWSKY, Illinois             JOSEPH R. PITTS, Pennsylvania
HILDA L. SOLIS, California           MARY BONO MACK, California
CHARLES A. GONZALEZ, Texas           GREG WALDEN, Oregon
JAY INSLEE, Washington               LEE TERRY, Nebraska
TAMMY BALDWIN, Wisconsin             MIKE FERGUSON, New Jersey
MIKE ROSS, Arkansas                  MIKE ROGERS, Michigan
DARLENE HOOLEY, Oregon               SUE WILKINS MYRICK, North Carolina
ANTHONY D. WEINER, New York          JOHN SULLIVAN, Oklahoma
JIM MATHESON, Utah                   TIM MURPHY, Pennsylvania
G.K. BUTTERFIELD, North Carolina     MICHAEL C. BURGESS, Texas
CHARLIE MELANCON, Louisiana          MARSHA BLACKBURN, Tennessee
JOHN BARROW, Georgia
BARON P. HILL, Indiana
DORIS O. MATSUI, California

                                 ______

                           Professional Staff

                 Dennis B. Fitzgibbons, Chief of Staff

                   Gregg A. Rothschild, Chief Counsel

                      Sharon E. Davis, Chief Clerk

               David L. Cavicke, Minority Staff Director

                                 _____

              Subcommittee on Oversight and Investigations

                    BART STUPAK, Michigan, Chairman
DIANA DeGETTE, Colorado              JOHN SHIMKUS, Illinois
CHARLIE MELANCON, Louisiana              Ranking Member
    Vice Chairman                    ED WHITFIELD, Kentucky
HENRY A. WAXMAN, California          GREG WALDEN, Oregon
GENE GREEN, Texas                    TIM MURPHY, Pennsylvania
MIKE DOYLE, Pennsylvania             MICHAEL C. BURGESS, Texas
JAN SCHAKOWSKY, Illinois             MARSHA BLACKBURN, Tennessee
JAY INSLEE, Washington               JOE BARTON, Texas (ex officio)
JOHN D. DINGELL, Michigan (ex 
    officio)

                                  (ii)












                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Bart Stupak, a Representative in Congress from the State of 
  Michigan, opening statement....................................     1
Hon. Ed Whitfield, a Representative in Congress from the 
  Commonwealth of Kentucky, opening statement....................     4
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, opening statement.................................     5
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, opening statement.......................................     7
    Prepared statement...........................................     9
Hon. Jay Inslee, a Representative in Congress from the State of 
  Washington, opening statement..................................    10
Hon. Greg Walden, a Representative in Congress from the State of 
  Oregon, opening statement......................................    11
Hon. Charlie Melancon, a Representative in Congress from the 
  State of Louisiana, opening statement..........................    13
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, opening statement..............................    14
Hon. Mike Rogers, a Representative in Congress from the State of 
  Texas, prepared statement......................................    16
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, prepared statement......................................   104

                               Witnesses

Fadel Gheit, Managing Director and Senior Oil Analyst, 
  Oppenheimer & Co., Inc.........................................    17
    Prepared statement...........................................    19
Roger Diwan, Partner and Head of Financial Advisory, PFC Energy..    25
    Prepared statement...........................................    27
    Answers to submitted questions \1\...........................
Michael W. Masters, Managing Member and Portfolio Manager, 
  Masters Capital Management, LLC................................    41
    Prepared statement...........................................    43
    Answers to submitted questions...............................   440
Edward M. Krapels, Ph.D., Director, Energy Security Analysis, 
  Inc............................................................    61
    Prepared statement...........................................    63
    Answers to submitted questions...............................   451
Doug Steenland, President and Chief Executive Officer, Northwest 
  Airlines.......................................................   137
    Prepared statement...........................................   139
    Answers to submitted questions...............................   454
Steven R. Williams, Chairman and Chief Executive Officer, 
  Maverick USA, Inc..............................................   148
    Prepared statement...........................................   150
Eugene A. Guilford, Jr., Executive Director and Chief Executive 
  Officer, Independent Connecticut Petroleum Association.........   164
    Prepared statement...........................................   167
    Answers to submitted questions...............................   458
Walter Lukken, Acting Chairman and Commissioner, U.S. Commodity 
  Futures Trading Commission.....................................   196
    Prepared statement...........................................   200
    Answers to submitted questions...............................   461
James Newsome, Ph.D., Chief Executive Officer and President, New 
  York Mercantile Exchange, New York, New York...................   234
    Prepared statement...........................................   236
    Answers to submitted questions...............................   488
Sir Robert Reid, Chairman, ICE Futures Europe, Intercontinental 
  Exchange, Inc., Atlanta, Georgia...............................   240
    Prepared statement...........................................   242
    Answers to submitted questions...............................   493
Michael Greenberger, J.D., Professor of Law, Director, Center for 
  Health and Homeland Security, University of Maryland, 
  Baltimore, Maryland............................................   251
    Prepared statement...........................................   254
    Answers to submitted questions...............................   509

                           Submitted Material

Slides accompanying Mr. Stupak's opening statement...............   304
Chart entitled ``Jet Fuel--A New Reality'', submitted by Mr. 
  Green..........................................................   307
Congressional Record excerpt, submitted by Mr. Burgess...........   308
Letter of June 20, 2008, from U.S. Commodity Futures Trading 
  Commission to Messrs. Dingell and Stupak.......................   309
Reports, dated 2008, from Credit Suisse Commodities..............   311
Slides presented during hearing..................................   344
CFTC Fact Sheet..................................................   363
Letters from Fuel Coalition......................................   367
    Dated June 11, 2008, to Representatives Reid, McConnell, 
      Pelosi, and Boehner........................................   367
    Dated June 20, 2008, to Mr. Stupak...........................   369
Report, dated January 29, 2003, from Congressional Research 
  Service........................................................   371
Letter of June 18, 2008, from Joint Trades to Senators and 
  Members of Congress............................................   388
Glossary of Key Terms for hearing................................   390
Senate Testimony of Michael W. Masters, dated May 20, 2008.......   394
News clips, dated June 19, 2008..................................   413
Subcommittee exhibit binder......................................   531

----------
\1\ Mr. Diwan did not answer submitted questions for the record.

 
   ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE 
                        MANIPULATION? (PART II)

                              ----------                              


                         MONDAY, JUNE 23, 2008

                  House of Representatives,
      Subcommittee on Oversight and Investigations,
                          Committee on Energy and Commerce,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 11:00 a.m., in 
room 2123, Rayburn House Office Building, Hon. Bart Stupak 
(chairman of the subcommittee) presiding.
    Present: Representatives Stupak, Melancon, Green, Inslee, 
Dingell (ex officio), Whitfield, Walden, Burgess, and Barton 
(ex officio).
    Also Present: Representatives Ross and Rogers.
    Staff Present: Scott Schloegel, John Sopko, Richard Miller, 
John Arlington, Kyle Chapman, Carly Hepola, Katherine Graham, 
Alan Slobodin, Peter Spencer, and Whitney Drew.

  OPENING STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Stupak. This meeting will come to order.
    Today we have a hearing entitled, ``Energy Speculation: Is 
Greater Regulation Necessary to Stop Price Manipulation? Part 
II.''
    Each member will be recognized for an opening statement. I 
will begin.
    Today's hearing will examine whether excessive speculation 
in the oil futures market is contributing to the unprecedented 
$70 increase in crude oil prices in just 1 year. This spike has 
sent gasoline up 107 percent to more than $4 a gallon, And 
diesel costs are up 188 percent to $4.70 per gallon.
    The wallets of consumers have been hit hard and industries 
that depend on energy are hemorrhaging in red ink. And for some 
companies, their very survival is in jeopardy.
    But what has caused this unprecedented rise? Is it too much 
demand chasing too little supply? Or is it excessive 
speculation and greed inflating prices? Here is what some of 
the oil experts have said.
    Quote, ``I cannot think of any reason that explains the 
run-up in crude oil price besides excessive speculation.'' 
Fadel Gheit, managing director, Oppenheimer & Company, who will 
testify today.
    Another quote: ``There may now be upwards of $25 to $30 of 
speculation in the price of crude, which continues to soar 
despite stockpiles in the U.S.'' MF Global Energy Risk 
Management Group.
    Quote, ``The proper range of oil prices should be somewhere 
between $35 and $65 a barrel.'' John Hofmeister, president of 
Shell Oil Company.
    The International Monetary Fund also echoes these views.
    Quote, ``It appears that speculation has played a 
significant role in the run-up in oil prices as the U.S. dollar 
has weakened and investors have looked for a hedge in oil 
futures and gold. What this means is that oil has been 
transformed from an energy source into a financial asset, like 
gold, where much of the buying and selling is driven by 
speculators instead of producers and consumers. It means that 
bets are placed driven by interest rates, inflation 
expectations, and portfolio manager investment decisions,'' end 
of quote.
    The growth of commodity index investment supports the IMF 
conclusion that oil has become a financial asset. They have 
skyrocketed from $13 billion in 2003 to an estimated $260 
billion in March of 2008.
    Just this past weekend, the Secretary of Energy and Oil 
Ministers met in Saudi Arabia to discuss the oil crisis. 
However, the Secretary of Energy could have made a much shorter 
trip to New York or Chicago to find an immediate way to address 
high prices at the pump. We must end the excessive speculation 
in the energy markets. Even the Saudi oil minister has argued 
that high oil prices are due to excessive speculation in the 
markets. Bringing down oil prices will require a multi-pronged 
approach of conservation, strengthening the value of the 
dollar, and ending excessive speculation in the energy markets. 
My bill, H.R. 6330, known as the ``Prevent Unfair Manipulation 
of Prices'' or PUMP ``Act of 2008,'' will deliver the quickest 
and most comprehensive reforms needed to end excessive 
speculation.
    Since the most popular commodity index, called the Goldman 
Sachs Commodity Index, has 78 percent in energy commodities 
like oil and gasoline, it seems fair to ask whether a 
twentyfold increase in commodity index investment is 
contributing to a bubble in oil prices. Lehman Brothers 
estimates that the benchmark crude oil futures price goes up 
about 1.5 percent for every $100 million in commodity index 
investments.
    Why is this phenomenon significant to you when you fill up 
your gas tank? Because your pension fund manager may be using 
your retirement money to drive up the price of oil. What would 
happen if pension fund managers decided to increase their 
commodity investment by another twentyfold? We don't know the 
answer and apparently neither does anyone in the 
Administration, but nothing is standing in their way from 
increasing such investments.
    This is what the experts are saying. Let's look at some of 
the data.
    Chart number 1 shows the number of futures contracts for 
crude oil has grown 425 percent, almost in lock step with the 
oil price increases over the past 5 years.
    Chart number 2 shows that the speculators have increased 
their share of futures contracts in oil from 37 percent in 2000 
to a whopping 71 percent in April 2008. Meanwhile, the 
producers and refiners who actually use the futures market to 
hedge price risk have shrunk from 63 percent to 29 percent.
    What is going on here? Have speculators hijacked trading on 
the futures exchanges?
    We are told we should be grateful to speculators for 
providing liquidity that allows the futures markets to operate, 
but this data suggests that the oil futures market is drowning 
in liquidity. Today we hope to learn whether this wave of 
speculation has separated prices from the very supply and 
demand fundamentals that are supposed to balance the market.
    The Commodity Futures Trading Commission, CFTC, tells us 
the speculators are simply following the price signals set by 
physical consumers and producers. But given this imbalance, you 
have to wonder if the regulator is missing the forest for the 
trees.
    Chart number 3 shows the rapid growth in swaps dealers 
buying oil futures. Swaps dealers are investment banks who set 
up the commodity index deals for pension funds and sovereign 
wealth funds.
    [The information appears at the conclusion of the hearing.]
    In 2000 these swap dealers had only 10 percent of the 
contracts to buy futures contracts. However, that number has 
tripled to 30 percent in 2008. In fact, the New York Mercantile 
Exchange, NYMEX, has granted 117 hedging exemptions since 2006 
for West Texas Intermediate crude oil contracts, many of which 
are for swap dealers with no physical hedging positions. Is it 
a coincidence that investment banks tripled the number of 
futures contracts they are buying at the same time that oil 
prices are skyrocketing?
    Today we want to find out whether the CFTC understands the 
degree to which speculators of various stripes and motivations 
have seized control over a significant majority of oil futures.
    We want to find out whether the CFTC is going to shed light 
on the vast over-the-counter market, where energy derivatives 
are traded but go unregulated.
    We want to find out if the CFTC and its staff are 
sufficiently motivated to question the activities of Wall 
Street and its powerful investment bankers.
    We want to explore the arcane loopholes which allow 
investment banks and commodity dealers to evade speculative 
position limits that are supposed to prevent price distortion.
    CFTC claims it found no evidence that the futures markets 
have been subject to excessive speculation, but on May 29th it 
issued a special call to swap dealers for data on their 
investment in commodity indexes. We note this action came 9 
days after one of our witnesses, Mike Masters, questioned the 
impact of an estimated twentyfold increase in commodity index 
investments.
    Today we will also assess the impacts to key sectors of our 
economy, such as the airlines, trucking, and petroleum 
marketing. Airlines are eliminating service to over 100 cities, 
laying off thousands of workers, and projecting up to $13 
billion in losses this year due to jet fuel price increases 
that cannot be passed on to the consumer.
    Last week, CFTC, Commodity Futures Trading Commission, 
reversed its long-held view regarding one loophole that allows 
foreign boards of trade to offer electronic trading screens in 
the United States. But it still allows the trading on these 
terminals to play by less rigorous regulatory standards in a 
foreign country. When we held our last hearing on energy 
speculation on December 12th, CFTC opposed the idea of 
requiring ICE Futures in London to abide by U.S. rules 
governing excessive speculation regarding crude oil. Six months 
later, I am pleased to see the CFTC dropped its opposition and 
will require ICE traders to be governed by certain U.S. rules.
    This is not the only loophole we need to examine. We also 
need to look at eliminating exceptions for swap dealers, 
providing greater transparency for trading in the $9 trillion 
over-the-counter market for commodities. We will look at 
whether it makes sense to prohibit index speculators from using 
commodity markets and whether increasing margins on financial 
speculators is a way to burst the oil price bubble.
    Make no mistake about it: Excessive speculation in 
commodity markets is having a devastating effect at the gas 
pump and is rippling throughout our entire economy. If we do 
not act now with swift diligence, we risk having our economy 
brought to its knees. This committee has responsibility for 
energy policy and we intend to make sure that we find 
solutions, place them on the President's desk, and deliver 
relief to the American people. We hope today's hearing will 
help illuminate this issue for the administration and the 
American people; then we can work together on a bipartisan 
basis to solve this problem.
    I next go to the gentleman from Kentucky, Mr. Whitfield, 
for his opening statement, please.

  OPENING STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN 
           CONGRESS FROM THE COMMONWEALTH OF KENTUCKY

    Mr. Whitfield. Well, Chairman Stupak, thank you very much.
    And we certainly welcome our witnesses today on this 
important hearing relating to energy.
    Last week, the Energy Information Administration reported 
the gasoline average price was $4.13 a gallon across the 
country, more than $1 a gallon over last year. Diesel prices 
last week averaged $4.70 per gallon, almost $2 per gallon more 
than this time last year. Heating oil and jet fuel prices are 
also at record highs, as is the cost of crude oil, which has 
risen almost $70 per barrel, double the price a year ago.
    The American people and others want to know, is this due to 
supply and demand? Is it due to excessive speculation in the 
futures markets? Is it due to the declining value of the 
dollar, refinery capacity, or a combination of all of these 
things?
    This morning, we are going to hear from witnesses who will 
describe the economic impact that these prices are having on 
their businesses and how that is affecting their continued 
opportunity to provide jobs. We will also hear from energy 
market economists and participants who will explain the recent 
run-up in prices and help us understand, hopefully, whether the 
growth in noncommercial speculation in the energy commodities 
market is inflating oil prices significantly beyond underlying 
market fundamentals.
    The energy futures market is certainly a complicated 
market, and it serves an important function for those who 
actually buy and sell oil to hedge price risk and to reduce 
price volatility. It also appears that it has served financial 
markets more broadly as a hedge against the weakening dollar 
and inflation.
    The numbers here are as dramatic as those we see at the 
pump. Over the past 5 years, the number of oil futures 
contracts has jumped from 700,000 to more than 3 million. A 
large portion of this growth has involved not traditional 
physical oil hedgers, but institutional investors such as 
public and private pension funds who are now getting into this 
market.
    The value of open interest associated with these 
institutional investors has risen from a mere $13 billion to 
$260 billion over the past 5 years. And this rise appears to 
correlate to the run up in oil futures prices.
    We need to understand exactly what is causing this increase 
in prices, especially any recent factors that have propelled 
those prices to current historically high levels. Is this a 
speculative bubble driven by the market expectations and 
speculative fervor that prices will continue to rise? Are these 
expectations realistic? Does this run-up reflect the growing 
role and goals of various institutional investments and 
commodity index funds?
    And what does all this mean for traditional market 
participants concerned about the physical supply and delivery 
of oil? Is the Commodity Futures Trading Commission doing 
enough? Does it need more information from exchanges and from 
over-the-counter markets? Do margin requirements need to be 
changed? So we will be hearing from the Commodity Futures 
Trading Commission today.
    And I would also mention that many members on this 
committee cosponsored legislation introduced by Ranking Member 
Barton a few weeks ago to have an interagency study of the 
effects of speculation on energy prices and to have more 
comparable regulation over foreign and domestic markets that 
trade U.S. commodities.
    We will also discuss other rules and regulations, such as 
increasing margin requirements that I mentioned earlier. All of 
these matters are going to be open for discussion this morning.
    I want to thank Chairman Stupak for holding this hearing. 
It is certainly a timely issue, one that the American people 
are extremely focused on. And I look forward to the testimony 
of all of our witnesses and the opportunity to ask them 
questions to help us better understand the situation we are in 
today.
    I yield back my 45 seconds.
    Mr. Stupak. Thank you, Mr. Whitfield.
    Mr. Dingell for an opening statement, please.

OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Dingell. Mr. Chairman, first of all, I commend you for 
your superb leadership of this subcommittee. And, second of 
all, I commend you and thank you for this hearing today.
    Today, working Americans are seeing energy costs take an 
ever-larger bite out of the family budget. Costs have soared 
for gasoline, electricity, and heating, and increased fuel 
prices have driven up the price of food and everything else in 
our society.
    This hearing today is laying the preface for this committee 
to begin to move forward on legislation cosponsored by 
virtually the entirety of this committee and our good friend 
Mr. Barton, the Ranking Minority Member. It is our intention to 
gather the facts today to try to find out exactly what is going 
on so that we may respond to the concerns that the American 
people have on these matters.
    Dramatic increases in fuel costs are affecting virtually 
every sector of the American economy. For fuel-intensive 
industries, in particular, this is a crisis. A case in point is 
the airline industry, and I want to welcome Mr. Doug Steenland, 
President and CEO of Northwest Airlines, who will be testifying 
today on the problem faced by his company and by the airline 
industry as a whole.
    Simply put, millions of Americans are feeling the pain from 
extraordinary increases in the price of oil, which is carrying 
through to price increases in everything else in the economy, 
especially in the energy area.
    This brings us to the central issue of this hearing: what 
caused this dramatic rise in prices? Are record oil prices 
simply a function of supply and demand, or are they a result of 
excess speculation, or both?
    The International Monetary Fund recently concluded that 
``speculation has played a significant role in the run-up of 
oil prices''. A Lehman Brothers analysis suggests that more 
than 50 percent of the price of a barrel of oil may be 
attributable to speculation. The Saudis note that oil supply 
and demand seem to be in balance and that there is no 
substantive basis for current prices. Even the Department of 
Energy's own Energy Information Administration says that ``the 
flow of investment money'' has contributed to a spike in oil 
prices.
    It is commonly held by economists, and I have been told by 
one of the great ones in a private discussion, that probably at 
least 25 percent of the shoot-up in oil prices comes from 
speculation.
    It is unfortunate that the Secretary of Energy dismisses 
speculation as a cause of spiking oil prices and that the 
Secretary of the Treasury agrees, shrugging it off as a ``tough 
period''. Admittedly, he is right, it is a tough period. But 
there is a cause, and it must be ferreted out. In short, real 
solutions from this administration are harder to find than $3-
a-gallon gasoline.
    The oil producers say that the answer is to drill for more 
oil. The environmental community says the answer is to conserve 
energy, to change the way we live, work, and play. Both sides 
have a valid point. We should search for more oil, although I 
note that the oil companies aren't drilling on land they 
already have. And the environmentalists are right--we need to 
conserve energy. But both are long-term solutions that will 
likely take at least 10 years; they will do little to solve the 
immediate problem we face, and such actions will not curb the 
current excess speculation and manipulation in the oil markets.
    Mr. Chairman, as our witnesses will testify today, the 
sharp rise in energy prices during the Bush administration has 
been outpaced only by the rise in speculation. Energy 
speculation has become a fine growth industry, and it is time 
for the Government to intervene.
    We need to consider a full range of options to counter this 
rapacious speculation. For example, we should examine imposing 
50 percent margin requirements on financial speculators; 
setting position limits on transactions across all future 
exchanges; requiring full disclosure of all trading by 
investment banks in all markets; preventing pension funds and 
others from using the commodity markets as an investment 
vehicle; and prohibiting investment banks from owning energy 
assets. These and others ideas need to be debated, evaluated, 
and acted upon sooner rather than later.
    Mr. Chairman, I look forward to the testimony of the 
witnesses and working with you and my colleagues on this 
committee to identify the causes of the problem and to address 
this problem, which is of perhaps the greatest magnitude that 
we have confronted in the energy area in my career in this 
Congress.
    Thank you, Mr. Chairman.
    Mr. Stupak. Thank you, Mr. Chairman.
    I next turn to Ranking Member of the full committee, Mr. 
Barton from Texas, for an opening statement, sir.

   OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Barton. Thank you, Mr. Chairman.
    I am going to put my formal statement in the record and 
just speak off-the-cuff.
    You know it is an important hearing when Mr. Walden flies 
all night to be here, and Mr. Burgess and myself got up around 
4 o'clock in the morning in Texas to be here. And I am sure 
that Mr. Rogers and maybe you, Mr. Stupak, and even Mr. Dingell 
and Mr. Inslee--Mr. Inslee flew all night from Washington 
State. We don't normally have hearings at 11 o'clock on a 
Monday morning. The fact that we are having this hearing and 
that we are all here shows how important it is.
    It is very important, because every week probably every 
family in America that doesn't live in a central city and use 
public transportation is paying hundreds of extra dollars out 
of their pocket to have the mobility that we take for granted 
to go to work, go to school, and do all the things that 
Americans do in our great society.
    Let me say at the very beginning that speculators are not 
the cause of high energy prices. We have high energy prices 
because there is less than a 1 or 2 percent margin of supply 
over demand in world markets today. When you have that tight of 
a supply margin, a surplus reserve margin, you create a 
situation where speculators can drive the price higher because 
of the uncertainty principle concerning who is going to get 
that next barrel of oil.
    I could make some news today if the Secretary of Energy or 
the President of the United States would authorize me to 
announce at this hearing that the Strategic Petroleum Reserve 
is going to begin to sell 2 million barrels of oil a day 
beginning 2 weeks from tomorrow.
    We have the capacity to produce about 6 million barrels of 
oil a day out of the SPR. If we were to put 2 million barrels a 
day of oil on the world market, we could do that for over a 
year. And if the President were to announce that, probably the 
price of oil, the futures market, I don't know how far it would 
fall, but it would almost certainly go below $100 a barrel and 
stay there.
    We don't use the SPR for those purposes. So the President 
is not going to make that announcement unless we change the law 
or unless, by act of Congress, we direct the President to do 
that.
    But the fundamental problem that we have is that the world 
is using 85 million to 86 million barrels of oil every day, and 
the world is producing 85 million to 86 million barrels of oil 
every day. And we have been stuck in that rut for the last 2 
years, maybe 3 years.
    High prices have not resulted in the supply increase that 
pure markets say should result. Why is that? Part of the reason 
is we are not drilling in the United States in areas that we 
know there is oil and gas. We are the only nation in the world 
that has reserves that we are not developing because of a 
conscious decision. You can argue the debates of that decision, 
but the fact is we are the treasure house for energy resources 
in the world, much more so than Saudi Arabia. So, as long as we 
keep the supply constant and the demand goes up, you create an 
opportunity for speculators to move in.
    And what Chairman Stupak said earlier is exactly right. 
When he put those charts up on the board, you look at the 
positions on the New York Mercantile Exchange, you look at the 
volume of trading that has increased on the Intercontinental 
Exchange, and most of it is in what people call video barrels.
    Now, I didn't know what a video barrel was until 2 or 3 
months ago, but a video barrel is a barrel of oil that is never 
going to be produced, it is never going to be consumed, but it 
is going to be traded by somebody who has no intention--no 
intention--to produce that oil and no intention to put that oil 
on the market. It is people at keyboards all over the world who 
are just deciding there is money to be made because of the 
tight market in oil.
    And what Chairman Stupak said about the various swaps and 
the sovereign wealth funds and all the institutional investors, 
they are moving into oil because they look at the supply-demand 
situation and they don't see a supply increase, so they figure, 
``Well, heck, we have broken all the psychological barriers. We 
have broken $100-a-barrel oil. Now, people like Boone Pickens 
are talking about $200-a-barrel oil. So there is no 
psychological barrier. Why not? Why not?''
    And when we get to the technical part of this hearing, you 
are going to see that the long positions have just grown beyond 
expectation and that all the physical regulations that we put 
in place on the U.S. market so that we can't have a repeat of 
what the Hunt brothers tried to do in the silver market 10 or 
15 years ago, the CFTC is giving exceptions. They have given 
conscious exceptions. And Chairman Dingell and Chairman Stupak 
have written a very thoughtful letter asking for precise data 
on why those exceptions were given and how those data are being 
traded.
    So the purpose of today's hearing--and it is a thing to 
have it on a day when we don't vote until 6:30. We won't be 
coming in and out. Once we get started, we are going to have 
the ability for the members of this Oversight Subcommittee to 
function in the truest sense of oversight for the Energy and 
Commerce Committee. We can listen to the witnesses. We can get 
into questions for 10 minutes at a time and really educate both 
the Members of Congress and the American people on this market 
and then decide what to do.
    And the most important thing about this hearing--I am very 
glad that we have the gentleman from Great Britain that is with 
the Intercontinental Exchange. Because it won't do any good if 
we get more transparency and more regulation that prevents 
unnecessary speculation in the U.S. exchanges if all that does 
is take it to the international exchanges. So I am very glad 
that we have our foreign visitors here.
    Mr. Chairman, this is an excellent hearing. You have a 
great group of witnesses. We have plenty of time. I look 
forward to the participation in the hearing today.
    With that, I yield back.
    [The prepared statement of Mr. Barton follows:]

                      Statement of Hon. Joe Barton

    Thank you, Chairman Stupak and Mr. Whitfield, for this very 
timely and important hearing on the impact of speculation on 
energy prices. I very much support this continuing oversight. 
This hearing can help us find ways to ensure our futures 
markets are working correctly and not being impacted by 
excessive speculation.
    This Congress needs to face reality about our energy needs. 
We need more American-made energy, including energy from oil, 
coal, natural gas, and all the viable alternatives. Another 
reality is that our nation's economic strength depends on 
affordable energy for turning on the lights, getting to work, 
and cooking dinner without having to file bankruptcy papers.
    Oil prices have been subject to 4 to 5 years of negative 
expectations about the tightening of world oil supply and 
America's own commitment to tap its ample supplies. A clear 
signal to world markets that America is waking up to these 
realities and finally seeking to use its own vast energy 
resources would help change expectations and help lower futures 
prices.
    Another economic reality is that our economy relies on 
well-functioning commodity markets to help energy producers and 
energy consumers to hedge their respective price risks, so that 
they can do their work efficiently. Well-functioning futures 
markets require transparency and clear rules to guard against 
manipulation, excessive speculation, and other problems that 
can harm consumers.
    Some of the recent rise in oil prices is believed to be 
linked to runaway speculation in the futures exchanges, 
particularly speculation by non-commercial players. This has 
raised concerns on both sides of the aisle about the rules that 
govern these exchanges--and whether there are loopholes and 
other inequities across the foreign and domestic trading venues 
which are causing problems.
    We don't want our U.S. market at a competitive disadvantage 
to foreign markets. And we don't want these foreign markets 
trading U.S. energy futures without being subject to the 
transparency requirements and trading limitations that our 
domestic markets have.
    I am encouraged to see that the Commodity Futures Trading 
Commission has announced modifications to its Foreign Board of 
Trade process to address the disparities between the United 
Kingdom and our regulatory structures. This action is something 
that would have been required in H.R. 6130--legislation that 19 
Republicans and I introduced last month. I only wish CFTC had 
not waited until legislation was proposed to get started on a 
job that should have begun awhile ago.
    The CFTC says it will require other foreign exchanges to be 
comparably transparent and provide similar position and 
accountability limits on speculators that are applied to the 
U.S. exchange. This is a solid first step to getting control of 
any runaway speculation.
    The CFTC will form a federal interagency task force to 
examine the issues we will discuss today. This is also a good 
thing, along the lines of our legislation. I look forward to 
discussing with our witnesses today some of the questions that 
should be addressed in this study. For example, how futures 
prices in the cash market, especially in the forward months, 
impact the price of energy and other decisions in the physical 
marketplace.
    I also look forward to discussing whether recent CFTC 
actions are sufficient to safeguard against manipulation. For 
example, the CFTC did not address exemptions from trading 
limits provided for so-called swaps transactions, involving 
commodity index funds, which have grown tremendously with the 
weakening U.S. dollar.
    We'll hear today that these non-commercial speculators have 
come to dominate futures trading over traditional speculators. 
I would like to know what that means for the integrity of these 
markets.
    Many Members of both the House and the Senate have 
introduced all kinds of legislation dealing with futures 
markets and the CFTC, requiring all sorts of things from energy 
futures studies to the raising of margin requirements for 
speculators. I am cosponsoring H.R. 6238, Chairman Dingell's 
bill, to establish an interagency working group to study the 
factors that affect the pricing of crude oil and refined 
petroleum products, and make recommendations on appropriate 
regulation. I hope that part of what we learn today will be 
what kinds of further congressional action are appropriate and 
necessary.
    Finally, let me say that the straightforward transparency 
that's necessary for the markets is equally necessary for these 
proceedings today. This subcommittee traditionally takes its 
testimony under oath because it puts a high premium on the 
absolute accuracy of the information it receives. Today's 
subject deals with a matter that affects the lives of millions 
of our people, and I don't think it is possible to understate 
the strength of our expectation that we will receive only 
verifiable facts here today.
    Mr. Chairman, there are many witnesses who have a lot to 
say today. I thank you again and yield back the remainder of my 
time.

                                #  #  #

                              ----------                              

    Mr. Stupak. I thank the gentleman.
    Mr. Inslee for an opening statement, please, sir.

   OPENING STATEMENT OF HON. JAY INSLEE, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF WASHINGTON

    Mr. Inslee. Thank you.
    I first want to thank Chairman Stupak. Nobody in Congress 
has done more than Bart Stupak to really peel away the layers 
of the onion that are really hiding this explosion of 
speculation in the oil futures market. And I appreciate his 
work and his work on the PUMP Act that was introduced last week 
to really bring some sunshine to this.
    I want to make four points.
    First, when the Saudi oil minister tells you you have a 
problem with oil prices, you know you have a problem. When Jose 
Canseco tells you you have a problem with steroids in baseball, 
you know you have a problem. When the Saudis tell you you have 
a problem in the oil markets, you know you have a problem. So I 
am happy we are here today to discuss that.
    Second, the approach that we have taken, both with this 
hearing and Mr. Stupak's PUMP bill, is to actually do something 
that could have an effect on prices in the relatively short 
term.
    Some people have suggested drilling in some of the most 
pristine areas in the country, even if it succeeded 20 or 30 
years away, it is something our grandchildren could possibly 
enjoy but we would not. Ending rampant speculation in the oil 
future market has the capability of doing something for us who 
are approaching AARP age and above. And that is why it is 
appropriate for us to get to something that could actually have 
an impact today, this year, rather than something several 
decades hence.
    Third, those who have argued that somehow we need to have 
all of this enormous liquidity in the market in order for the 
markets to function, ignore the charts that Mr. Stupak has put 
up, showing that the markets are drowning in liquidity. To 
argue that we need more liquidity is something like arguing the 
Iowa farmers need more liquid, more liquidity, in Iowa right 
now.
    We have a flood of liquidity in the market. We have had an 
explosion of speculative positions in these markets, as opposed 
to real physical risk associated with this. And it is clear 
that we have a problem in part because of the Enron loophole.
    And this is the fourth point I want to make. We really have 
seen this movie before. Now, I am from the Seattle area. And a 
few years back, because Congress willfully turned a blind eye 
and, more importantly, the administration turned a blind eye to 
manipulation of markets in the Enron scandal, it cost my 
constituents literally a billion dollars on the west coast of 
the United States.
    And we remember very well arguing with the Administration 
that the executive branch of the Government had some obligation 
to rein in this speculative manipulation of the market that was 
taking place in the dark. And the response by the 
Administration is, ``No problem. There is no problem.''
    And I was reminded of a conversation when I heard Secretary 
Bodman yesterday say, or the day before yesterday, saying, 
``There is just no evidence of speculation in this market.'' 
And a little bell went off in my head, where have I heard that 
before? Well, I heard it when we went to Vice President Cheney 
years ago, and I pled with him to take action in the original 
Enron scandal because it was obvious that there was a problem 
in these markets. It was obvious somebody was gaming the system 
and that speculation found a way to, in fact, have a price 
result.
    And I showed him a piece of paper showing that actually 32 
percent of all the generating capacity in the United States was 
turned off one morning when there were brownouts in California. 
And I asked him for relief. I asked the Vice President to do 
something to rein in this speculative manipulation that was 
obviously going on. And I will never forget because he looked 
at me and he says, ``You know what your problem is? You just 
don't understand economics.''
    Well, I think it turned out that we did understand 
economics. And I think we do understand liquidity, and we do 
understand excessive speculation. And we now understand what 
happens when we remove the protection of the consumers by 
creating this Enron loophole. And we are experiencing the 
results of that today.
    So I am very appreciative of the chairman's peeling back 
and shedding a little light. Here is one economic principle 
that I know: Bad things happen in the dark. And that is where 
these markets are right now, they are in the dark. And it is 
time to shed a little light on them, and I am looking forward 
to this hearing.
    Thank you.
    Mr. Stupak. I thank the gentleman.
    Next, Mr. Walden for an opening statement, please, sir.

  OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF OREGON

    Mr. Walden. Thank you very much, Mr. Chairman.
    And I appreciate the hearing that we are having today and 
the list of very distinguished witnesses that we will hear 
from. And hopefully we will all emerge from this better 
educated about the markets and the problems associated with 
them and ways that we might address them thoughtfully and in a 
way that will help our consumers and this country.
    As I read through the testimony, it reminded me of the GAO 
investigation I called for several years ago, which was 
completed and revealed issues involving the market last fall. 
And I think, for those who haven't read it, you may want to get 
a copy of it, ``Commodity Futures Trading Commission: Trends in 
Energy Derivative Markets Raise Questions About CFTC'S 
Oversight.'' I was not alone in requesting that. A lot of other 
folks got involved, as well. But I think it is a very good 
report that outlines the problems that are out there.
    And as I read some of the testimony, it becomes clear that 
different experts have different opinions on how much 
speculation is involved in this market. Clearly it has grown 
dramatically. Clearly it is having an effect. And the question 
is, how do we get transparency, how do we get appropriate 
regulations, so that we don't have a repeat of what we saw with 
Enron, as my colleague from Washington State--I being from 
Oregon, I have folks who suffered similarly. And I think 
transparency and proper regulation is important.
    But I also know, in reading through the testimony, that 
those who dismiss supply and demand and international troubles 
as the reason for the run-up in price basically say those 
things have all been counted in the market a long time ago. And 
so it seems to me, if you want to stick it to the speculators 
who are inappropriately manipulating the market, then you do 
market reforms but you also add to supply.
    And I, for one, have supported increased mileage standards. 
I drive hybrid vehicles. I believe in conservation, investment 
in new technologies. But I also agree with the Ranking Member 
that I think it is time to develop America's resources.
    Now, you will hear that that is a fool's errand because it 
might be 7 or 10 years before that oil would ever come to 
market. And yet I believe that markets respond to signals. And 
had President Clinton not vetoed the bill that Congress, before 
I got here, passed to allow America to access oil reserves in 
Alaska that President Carter had set aside up on the very 
northern part of that State, that was 1996, if it took 10 
years, we would have 2 years of oil that would have been coming 
out of Alaska now.
    So the decisions we make today will affect the markets. I 
think if we indicated a change in American policy to allow us 
to access our Outer Continental Shelf and to allow us to 
develop other sources of oil, we would have an effect on the 
market.
    Unfortunately, this committee, at some point in the Energy 
Bill of 2007, which I ultimately voted for, stuffed in a little 
provision that even precludes the use of oil fuel derived from 
tar sands in Canada from being used for military purposes by 
the United States military. I am not quite sure what the 
scientific basis of that is, but it was a political decision 
that sent, kind of, a perverse signal to the market that we are 
not going to accept that kind of fuel.
    At a time when fertilizer prices and inputs are up a couple 
hundred percent in my district, at a time when diesel is nearly 
double what it was a year ago, at a time when the underlying 
cost structure for farmers has artificially been inflated 
because of the run-up in the input prices, we have to assess 
all of these issues: our access to supply domestically; invest 
in the new technologies; and make sure that the markets are 
working appropriately. And that means more transparency and 
more investigation into the system.
    So, Mr. Chairman, thank you for this hearing today and I 
look forward to hearing from all of our witness.
    Mr. Stupak. Thank you.
    Mr. Melancon for an opening statement, please.

OPENING STATEMENT OF HON. CHARLIE MELANCON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Melancon. Thank you, Mr. Chairman, for holding this 
hearing.
    I appreciate the opportunity, coming from Louisiana, a 
producing State that has been producing energy for this country 
for decades and without little reward or appreciation. 
Unfortunately, our prices are as high as everyone else's. There 
has been a saying for years in Louisiana, if we can find that 
valve and turn if off, people would appreciate what we do in 
Louisiana; Texas, for that matter, and the other Gulf States 
that are producing off their shores.
    You know, I am here today to try and understand and to 
hopefully help in remedying the problem of high prices to the 
American citizens and, best I can tell in my recent 
conversations, to the people of this world. The cost everywhere 
is just going up, and we need to find what has caused it. We 
don't need knee-jerk reactions. We don't need to continue to 
try to blame the people in the past that took actions, because 
there are some moratoriums that are out there from other than 
Democrats and there were some actions by other than Democrats 
in the last Congress that dealt with not drilling off of 
Florida's coast. So there is enough blame to go around.
    What we need to do is we need to sit down and hunker down 
together, as a Congress, as Americans, and try and figure out 
what it is that is wrong with the system and produce positive 
legislation, and hope that we can get the proper executive 
action that may be needed to stem the drastic rise of energy, 
and particularly gasoline and diesel fuel and other energies 
that are causing our businesses and business people and 
citizens throughout the country to suffer.
    It really has come home. When I do get home on weekends is 
when I hope to see my children. And when their excuse for not 
being able to see me is that, ``Daddy, the price of gasoline is 
so much that we are trying to conserve, and we are not making 
trips just so.'' And I keep saying, I would wish that this 
would be one of your priorities. However, I understand where 
they are coming from.
    And I appreciate, Mr. Chairman, you calling this hearing 
and hope that it will help us to understand better what goes on 
out there and to remedy that situation if it can be.
    I yield back my time.
    Mr. Stupak. I thank the gentleman.
    Mr. Burgess for an opening statement.

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE 
              IN CONGRESS FROM THE STATE OF TEXAS

    Mr. Burgess. Thank you, Mr. Chairman. And I, too, 
appreciate you holding the hearing today. I look forward to 
learning a great deal about this subject. We, of course, had 
the hearing in December, which was very instructive.
    Just to think back to my past life--I haven't been here 
that long. When I was a simple country doctor, if someone asked 
me about futures, I really wouldn't have known what they were. 
I wouldn't have known that they are important. I wouldn't have 
known that they were around so that they would excise some of 
the volatility from the market and they, in fact, performed a 
useful function in that arena.
    Speculation involves someone putting up capital and risking 
that capital. If the market doesn't behave as intended, then 
that capital can be lost. If the market goes up, obviously that 
individual who is invested is going to be rewarded. But 
manipulation really has no place in our markets.
    And Mr. Chairman, back in September of 2000, I remember 
hearing on one of the financial programs on the radio that they 
expected the market--the market then was in a downturn, and 
they expected the stock market in general to recover after the 
presidential election, because they always do. And then several 
months later, listening to the same radio station and a similar 
radio show, the question was raised, well, why didn't the 
market recover after the presidential election? A lot of 
reasons were given; perhaps the long length of time it took to 
decide the election. But the other thing that was brought up 
was that there was just an enormous amount of money sitting on 
the sidelines, that people were somewhat skittish about the 
market and were holding off reinvesting. Well, we now know 
where that money went. It went into oil futures.
    Now, it is my hope that, as a result of this hearing today 
and perhaps others that we will do in the future, again I don't 
have a quarrel with the speculators, but I do hope that people 
realize when they bet against the United States of America they 
may well lose. And, in fact, I hope they do, because I hope we 
are able to bring prices down--mechanisms such as Mr. Barton 
suggested, mechanisms such as Mr. Walden suggested, things that 
will increase supply, and therefore bring down some of the 
price pressure.
    But we also have to have in mind firmly about the future. 
Now, one of the questions that is going to be posed in probably 
several different ways today is, should we increase the margins 
on these futures contracts? And currently my understanding is 
those margins are 5 to 7 percent. And perhaps they should be 
higher, much higher, in the range of 30 to 50 percent.
    Should we also look at the fact that when you buy an oil 
futures contract maybe you ought to have some place to put the 
oil that you're going to buy? In other words, if you have no 
place to put it, then clearly you are only buying the contract 
to resell it and hopefully make a profit in the process.
    We are going to hear a lot of information today about the 
lack of transparency, particularly the over-the-counter trading 
and the Intercontinental Exchange. I certainly can not drive 
around my district back home in Texas without hearing people 
wonder if it's not the weakness of the dollar that has caused 
the price of oil to increase so dramatically. But when you 
dissect it out, the dollar has lost 30 percent of its value and 
the price of oil has increased 400 percent. So clearly there is 
more going on than just the weakness of the dollar.
    So when we know--and we have heard other people reference 
it this morning--when we know, to some degree, how manipulation 
of the prices perhaps occurred, why have we not repealed that 
ability that was passed by Congress in 2000?
    A lot of people sitting on both sides of this dais actually 
voted for that bill. I have the roll-call vote here in front of 
me, if anyone is interested. Speaker Pelosi voted for that 
bill. This is the Commodity Futures Modernization Act, 19 
October 2000. Chairman Dingell voted for this bill. Chairman 
Stupak voted for this bill.
    Well, now that we know what we know, what has taken us so 
long to repeal it? After all, we're 18 months into a 
Democratically controlled Congress, and with all of the 
enlightenment that was supposed to follow that, why are we 
still now talking about it?
    Well, speculation does create liquidity. There is a 
troublesome aspect here. We were warned about these oil prices, 
we were warned in this Congress, in September of 2005, after 
Katrina and Rita. And Chairman Barton tried to do something 
about it. He introduced legislation in October that would've 
increased supply, would've increased refining capacity, 
would've increased new drilling capabilities, and he was 
rebuffed.
    So now it is incumbent upon this Congress to look ahead. 
And don't just look at what's going on right now. Let's look 10 
years into the future. We can see a day where demand will 
greatly exceed supply. If this is just an oil bubble right now, 
then so be it; maybe we can deflate it. If we do, I hope we do 
so gradually, because I don't know that our economic system can 
contain another shock like it did with the banking industry. 
But nevertheless, we are looking at a world where demand will 
greatly exceed supply.
    So right now, right now, in a bipartisan way, let's resolve 
this issue. Let's resolve this issue so we are prepared for 
that future energy shock.
    And I would ask many of those who are going to be 
testifying in front of us today: Clean up your act. Let's all 
declare victory. Because, after all, we know that business has 
to go on. And the economy could scarcely afford a rapid 
deflation of the oil prices. But, at the same time, we cannot 
sustain, our economy cannot sustain the price set at the 
current level that it is.
    Thank you, Mr. Chairman, for your indulgence. I'll yield 
back the balance of my time.
    Mr. Stupak. I thank the gentleman.
    Well, that concludes the opening statements of the members 
of the subcommittee.
    I'd like to recognize my colleague, Mr. Rogers. He's a 
member of the full committee, and he is here to participate 
today, but unfortunately will not be able to give an opening 
statement.
    Mike, do you have an opening statement you would like to 
submit for the record?
    Mr. Rogers. I do, Mr. Chairman.
    Mr. Stupak. OK, without objection, it will be submitted for 
the record.
    [The prepared statement of Mr. Rogers follows:]

                     Statement of Hon. Mike Rogers

    Mr. Chairman,
    Thank you for holding today's hearing. Mr. Chairman, we 
will hear a great deal of testimony today and I am going to 
keep my remarks brief. I appreciate your indulgence in allowing 
me to participate in today's hearing and I am confident that 
the extensive witness list today will help this committee learn 
more about an important issue. Like most Members of this 
committee I want to see American's pay less for gasoline. And 
like many members of this committee I believe that speculation 
does play a part in the cost of oil. I hope that today's 
hearing sheds some light on just what the impact of speculation 
is on oil prices, and what Congress can do to bring down the 
cost of energy.
    That said, I do think we need to take a moment to think a 
bit about what the larger problem is here. The cost of oil is 
driven by supply and demand, and today demand is at or above 
supply. That means that every barrel of oil is going to be 
expensive, and even if we eliminate every speculator, something 
that I doubt we can actually do, the cost of barrel of oil is 
still going to be very expensive.
    Mr. Chairman, today's hearing is important and helpful. But 
we are kidding ourselves and kidding the American people if we 
do not do much more to add supply, domestic supply, of oil and 
gas.
                              ----------                              

    Mr. Stupak. I also expect--in fact, Mr. Ross from Arkansas 
has just landed. He will be here shortly. He is also a member 
of the full committee, and he will be participating this 
morning, also through questions.
    So we look forward to those two members participating with 
us here today.
    I'd ask the first panel of witnesses to come forward.
    On our first panel we have Mr. Fadel Gheit, who is Managing 
Director and Senior Oil Analyst at Oppenheimer & Company; Mr. 
Michael Masters, who is Managing Member and Portfolio Manager 
at Masters Capital Management, LLC; Mr. Roger Diwan, who is 
Partner and Head of Financial Advisory at PFC Energy; Mr. Ed 
Krapels, Ph.D., who is Director at Energy Security Analysis, 
Incorporated.
    Gentlemen, welcome. I know some of you, as well as many of 
the witnesses on the other panels, have traveled great 
distances to be here with us today. We appreciate your 
willingness to be here and share your knowledge with the 
committee.
    It is the policy of the subcommittee to take all testimony 
under oath. Please be advised that under the Rules of the House 
you have the right to be advised by counsel during your 
testimony. Do any of you wish to be advised by counsel? 
    Everyone is nodding their head no; I will take it as a no. 
Therefore, I'm going to ask you to please rise, raise your 
right hand and take the oath.
    [Witnesses sworn.]
    Mr. Stupak. Let the record reflect that the witnesses 
replied in the affirmative. You are now under oath.
    We will now have a 5-minute opening statement from our 
witnesses. You may also submit a longer statement for inclusion 
in the record.
    So we'll begin opening statements, go from my left, your 
right.
    Mr. Gheit, if you will begin, please, with an opening 
statement, sir.

  STATEMENT OF FADEL GHEIT, MANAGING DIRECTOR AND SENIOR OIL 
                ANALYST, OPPENHEIMER & CO., INC.

    Mr. Gheit. Mr. Chairman, good morning. My name is Fadel 
Gheit. I'm----
    Mr. Stupak. Can you move that forward? Just pull it forward 
there.
    Mr. Gheit. Good morning.
    Mr. Stupak. Good morning.
    Mr. Gheit. We are on.
    Mr. Stupak. It's on.
    Mr. Gheit. Over the last 12 months, as you all stated, oil 
prices more than doubled, but industry fundamentals have little 
changed. The same old factors--supply disruption in Nigeria, 
Venezuela, Iraq, Iran--all these factors were already embedded 
or reflected in oil prices a year ago when oil prices were $65. 
Nothing I can think of that changed over the last 12 months, 
with the exception of the devaluation of the dollar, caused oil 
prices to more than double.
    I have been for a while saying that oil prices are 
inflated. They are not supported by market fundamentals. And 
the reason I base my conclusion that oil prices are extremely 
high is that I have been in this business almost 30 years. I 
talk regularly to the COOs of oil companies, from the largest 
of them all to very small, independent oil and gas companies. 
They all come to the same conclusion, that oil prices do not 
reflect market fundamentals. In my view, we can produce oil 
profitably at less than half the current price levels.
    Now, there was no unexpected changes in the industry 
fundamental in the last 12 months when oil prices were $65. Now 
oil prices are double that today and are likely to go higher, 
because, again, the speculation will continue, the same 
tightness in the market will continue.
    We saw what happened yesterday in the gathering in Riyadh 
or in Jeddah. And basically the Saudi Government said that it 
is speculation, it is taxes by countries, as well as the 
devaluation of the dollar, and their continued demand increase 
in China and India.
    The changes in demand in China and India was not new. 
Actually, demand growth has been trimmed over the last 12 
months because of the global economic slowdown. The oil 
industry, as I said before, can profitably produce oil at less 
than half the current price.
    Now, what do we do about speculation? A lot of people talk 
about speculation. Some people say it has very little to do 
with the spike in oil prices. Some people think it more than 
doubled--or the cause of doubling oil prices.
    As I recommended to the Senate panel in December of last 
year, we should raise the margins requirement to 50 percent, 
similar to what is required on stocks. We should bar companies 
operating in the U.S. from trading oil futures on exchanges not 
in compliance with the regulators. We cannot close the door 
here and open a window outside of the U.S.
    We should set trade and volume limits by commercial in 
relation to physical needs, only those companies that will 
physically use the oil. We should set industry standards for 
airlines, for oil companies, for refiners, to see what is the 
appropriate level the physical inventory that they should 
hedge.
    Now, we should limit trading by financials to a percentage 
of the commercial volume. Yes, some people say we need the 
liquidity and these people provide service. But we don't want 
them to control the market, as they have in the last few years.
    We should bar investment banks and other financial traders 
from owning energy assets. We should separate crude oil trading 
from other trading and investment services. We should require 
full disclosure by investment banks of oil trading results. We 
should impose stiff penalties, including jail terms, on 
violators.
    That is the end of my statement.
    [The prepared statement of Mr. Gheit follows:]



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    Mr. Stupak. Thank you, Mr. Gheit.
    Mr. Diwan?

    STATEMENT OF ROGER DIWAN, PARTNER AND HEAD OF FINANCIAL 
                      ADVISORY, PFC ENERGY

    Mr. Diwan. Thank you and good morning. I would like to 
concentrate today my remarks on the structural changes really 
that have occurred in the last few years in the oil market and 
how the mechanism of oil price recovery have shifted from the 
physical to the financial world.
    If you can pull my first slide, please.
    As you can see, actually, prices have moved in a narrow 
band until 2003 and were largely determined by the level of 
inventories. The main reason for this narrow band was due to 
the existence of a very large amount of unused capacity within 
OPEC, what we call in our jargon ``spare capacity.''
    The system broke down in 2003, first and foremost because 
the world basically faced two consecutive shocks: a supply 
shock in 2003 when problems in Venezuela, Nigeria, and Iraq 
reduced supply; followed by a demand shock in 2004 when global 
demand increased by over 3 million barrels per day. These two 
combined forces basically wiped out all the remaining spare 
capacity within OPEC and left only an estimated 2 million to 
2.5 million barrels of cushion, most of it in Saudi Arabia.
    During that time, the benchmark, WTI, doubled from $35 to 
$70, as the world started to adjust to this concept of low 
spare capacity. The other important phenomenon during that 
period was the lack of growth in crude supply from non-OPEC 
countries despite the price rise. It is that fact that has 
really cemented the fundamental shift in perception from an era 
of plenty to an era of scarcity.
    This era of scarcity is now defined by a supply narrative 
that is firmly established in the oil market and, in 
particular, among the financial players. It is, in fact, that 
narrative that helped usher in what I call the 
``financialization'' of oil markets.
    This ``financialization'' can be seen in three key 
developments between 2003 and 2006, all of them pointing to the 
fact that oil price discovery moved from the physical to the 
paper market.
    The first one is a dramatic increase in importance of the 
financial player in oil futures, with a multiplication by five 
of the number of financial companies trading on NYMEX and the 
rapid takeoff of the ICE exchange. As their number grew, their 
weight grew. And we have seen an increase in liquidity and 
money inflow.
    And, actually, during that first phase of financialization, 
we saw a very strong correlation between the net inflow of 
money to the futures and the oil prices. In the second phase, 
the financial player grew to become more sophisticated. And we 
saw another correlation between basically the net length of the 
noncommercial and oil prices.
    Clearly, the most troubling issue has certainly been the 
doubling oil prices in the last 10 months. And to understand 
that, we need to understand that, since August 2007, oil has 
become the hedging instrument against the weakening dollar and 
rising inflation.
    If you can see my second slide, please.
    And what happened basically is, as the U.S. Fed started to 
ease monetary policy in September 2007 with zero interest rate 
cuts, the U.S. dollar weakened. As the dollar weakened, dollar-
priced oil has emerged as natural hedge, not unlike gold. And 
we have a very strong negative correlation between oil and the 
dollar.
    So how did we get to the point where oil became a hedging 
tool, a new asset class, and not just the price of a commodity? 
The combination of increased liquidity, new players, and new 
instruments, such as the index funds, have allowed oil to 
become another asset class used by portfolio managers.
    By having oil futures and index funds as part of the 
portfolio of asset classes available to them, we have created 
linkages with the rest of the financial instruments and opened 
oil to be used as a hedging mechanism. So now oil prices are 
very much driven by what I call the macro fundamentals, such as 
interest rates, currency rates, or inflation expectation, 
through these portfolio effects as much as by the oil 
fundamentals, which are traditional supply and demand analysis.
    The instruments of choice for this transmission between oil 
and macro fundamentals are the commodity index funds. These 
index funds have become the primary tool for hedging, 
investing, or speculating commodities. They now represent the 
single largest component for futures.
    It is undeniable that the lack of position limits for these 
index funds has created the useful backdoor, allowing the 
financial community to invest more money in oil futures than 
the regulators intended originally. And since they are used to 
hedge potentially much bigger markets, like currencies, they 
have room to continue to grow.
    Now that oil has in effect become a new asset class, we 
should make sure to have the right regulatory framework and 
make sure that we do not give incentives to invest in one asset 
class over the other, be it through regulatory loopholes or a 
lower transaction cost such as the margin calls.
    Thank you.
    [The prepared statement of Mr. Diwan follows:]

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    Mr. Stupak. Thank you. Mr. Masters please, for an opening 
statement. You'll want to turn on that button there. Make sure 
the green light's on there. There we go.

STATEMENT OF MICHAEL W. MASTERS, MANAGING MEMBER AND PORTFOLIO 
            MANAGER, MASTERS CAPITAL MANAGEMENT, LLC

    Mr. Masters. Mr. Chairman and members of the Committee, 
thank you for the opportunity to testify today on the topic of 
energy speculation. Commodities futures markets exist solely 
for the benefit of bona fide physical hedgers, not for 
speculators. The futures markets provide physical hedgers with 
two vital functions, price discovery and risk hedging. In fact, 
producers and consumers in the energy markets priced nearly all 
spot market transactions at the futures price plus or minus the 
differential.
    As an example, the heating oil distributor buying from 
their local wholesaler pays the nine max futures price, minus a 
local differential. That means that when the futures price 
rises by a dollar, then the spot price will also rise by a 
dollar. Price changes for energy commodities originate in the 
futures market and then are transmitted directly to the spot 
markets. So what happens in the futures markets does not stay 
in the futures markets.
    Index speculators, a group that I define in my written 
testimony, have driven up futures prices and damaged the price 
discovery function. Slide one.
    Index speculators have poured billions of dollars into the 
commodity futures markets, speculating that commodity prices 
will increase. As the slide shows, assets allocated to 
commodity index trading strategies have risen from $13 billion 
at the end of 2003 to $260 billion by the middle of March of 
2008.
    Mr. Barton. Would the gentleman suspend? Mr. Chairman, 
could you have the big screen put down?
    Mr. Stupak. We were just talking about that.
    Mr. Barton. Because I can't see that, plus the glare, it's 
hard to see.
    Mr. Stupak. Kyle, could you we get the big screen down?
    Mr. Barton. Thank you, Mr. Chairman.
    Mr. Stupak. Hang on, Mr. Masters, so we can get it up there 
and----
    We'll get going here. It's on page 5 of Mr. Master's 
testimony, that same chart if you want to follow along. Mr. 
Masters, if you want to continue where you left off. Thank you.
    Mr. Masters. Sure. Thank you.
    As you can see from the chart, the prices of the 25 
commodities that compose these indices have risen by an average 
of 183 percent. Index speculators have bought more commodities 
futures contracts in the last 5 years than any other group. If 
they had been the largest buyer of futures contracts, is it not 
reasonable that they would have had one of the largest impacts 
on futures prices? Importantly, physical hedgers are motivated 
by only one thing: risk reduction. Producers and consumers only 
trade futures in order to hedge their actual physical 
production and consumption. Their trades are always based on 
actual supply and demand fundamentals that they are 
experiencing in the real world. Their trading decisions 
strengthen the price of discovery function.
    In contrast, index speculators invest in a broad basket of 
commodities and therefore do not express a view on any single 
commodity. They do not trade based on underlying supply and 
demand fundamentals. Therefore, their trading decisions damage 
the price discovery function. In fact, if a pension fund 
decides to allocate $100 million to a commodity index, the $40 
million that consequently flows into West Texas Intermediate 
crude oil has nothing to do with the real world supply or 
demand for crude oil. Every single WTI futures contract that is 
traded for any reason other than the supply and demand of 
physical crude oil is a contract that weakens the price 
discovery function. In 1998, physical hedgers outnumbered 
speculators by a 4:1 ratio. Today index speculators are the 
800-pound gorilla that dominates the futures markets. Together 
with other speculators, they now outnumber physical hedgers by 
a 2:1 ratio.
    There are three steps that Congress can take to immediately 
reduce excessive speculation and strengthen the price discovery 
function. First, I recommend that Congress convene a panel 
composed exclusively of physical commodity producers and 
consumers for every commodity. This panel should set hard and 
fast speculative position limits at the control entity level. 
These limits must apply to every market participant whether 
they directly access the futures markets or trade in the over-
the-counter markets through swaps and other derivatives.
    Second, the panel should numerically define what exactly 
constitutes excessive speculation as a percentage of open 
interest. Third, Congress should eliminate the practice of 
investing through passive commodity index replication because 
of the damage that it does to the price discovery function. 
Another avenue might be found in the Commodity Exchange Act 
which states, when discussing speculative position limits that 
``such limits upon positions in trading shall apply to 
positions held by and trading done by two or more persons 
acting pursuant to an expressed or implied agreement or 
understanding the same as if the positions were held by or the 
trading were done by a single person.''
    Since index speculators are all acting in express agreement 
by following the exact same index trading methodology, they 
should all be collectively subject to the speculative position 
limits of a single speculator. If this provision of the 
Commodity Exchange Act were enforced, then the amount of money 
allocated to index replication strategies would have to drop 
from the current level of $260 billion to a limit of a single 
speculator, approximately $4 billion.
    In closing it is important to realize that Wall Street is 
very good at inventing and promoting novel investment 
strategies. Unfortunately, they are not good at foreseeing the 
long-term consequences of the instruments that they create. The 
recent subprime debacle which has now grown into a worldwide 
financial crisis shows us where unbridled financial innovation 
can lead.
    This concludes my testimony.
    [The prepared statement of Mr. Masters follows:]

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    Mr. Stupak. Thank you, Mr. Masters. Dr. Krapels, if you 
will, for an opening statement please. I should note for the 
record, Congressman Gene Green from Texas has joined us.

    STATEMENT OF EDWARD N. KRAPELS, PH.D., DIRECTOR, ENERGY 
                    SECURITY ANALYSIS, INC.

    Mr. Krapels. Good morning, Mr. Chairman and members of the 
Committee. Thank you for your invitation to participate in this 
panel. I'll try to avoid duplicating what my predecessors have 
said. And I don't have pictures that are any better than 
theirs. So let me try to make four or five of what I think are 
commonsense statements.
    First of all, let me agree with Congressman Barton that it 
isn't just speculation that's driving up the price of oil. 
There is a very comprehensive set of physical market 
fundamentals that have led to tight markets. Trying to figure 
out precisely how much of today's price is physical versus 
financial is a very difficult exercise and one that's, at the 
end of the day, not terribly productive.
    Having said that, though, I agree with my fellow panel 
members. And I would say that there are four things that we 
should look at when we think about the effect of the financial 
markets on the price of oil. First of all, there are always 
bubbles in financial markets, right? Arguing that this is not a 
bubble in the oil market or that oil markets are somehow exempt 
from having bubbles is not productive. Globally, there is so 
much money in today's investment world that where the money 
flows affects the value of the assets that the money flows to. 
And money, clearly, has flowed into commodities and into 
energy. That effect has had an effect on energy prices.
    There's a wonderful book that came out a year or so ago 
called A Demon Of Our Own Design, by a name Richard Bookstaber 
from Morgan Stanley. And he wrote something that Michael has 
just said. I quote him: ``more often than not, crises aren't 
the result of sudden economic downturns or natural disasters.'' 
Virtually all mishaps over the past decades had their roots in 
the complex structure of the financial markets themselves. We 
do create instruments that are so sophisticated and so 
difficult to understand in their interaction with one another, 
and that has happened in the oil business.
    My second point is that in the commodities sectors, as 
Roger and Michael have said, index and sovereign fund managers 
have increased their exposure to financial energy contracts. 
There is no question about that. The data speak for themselves.
    The third point is that those who say this has no effect on 
prices often argue--and I'm sure you have heard this phrase--
well, there's a short for every long. Well that's true. But at 
what price does a short have to be short in order to meet the 
demand? And it is like any other commodity. If we lived in a 
small town and we had all owned a house and suddenly a person 
that has much more money than the rest of us moved in and bid 
up the price of our houses, the increase in the size of the 
funds that these people have is so enormous that there can be 
no doubt that this increase in the demand for paper barrels has 
bid up the price for paper barrels.
    Finally, the potential market power of large entities--and 
we're talking now about market power in the old-fashioned FERC 
sense of the word--is enhanced by the generous leverage that's 
allowed for commodity trading.
    Now, a couple of points about how those of us in the 
analysis business try to keep up with this. For years, we have 
had the Commodity Futures Trading Commissions's Commitment of 
Traders' reports. Those have been very useful. But the data in 
that report are so imperfect that until very, very recently, we 
didn't know how much of the effect of speculation was actually 
shown as commercial rather than noncommercial. And these 
changes in the transparency of the data have been very, very 
important to help us understand what's really going on in the 
oil market.
    Finally, I agree with most of the recommendations of my 
fellow panel members. I think that it is time for Congress to 
require much greater disclosure from all exchanges that deal 
with U.S.-traded commodities. I think it is time to require all 
exchanges in OTC markets to impose and enforce limit positions. 
And I think it is time to reduce the leverage that are allowed 
in commodity trading, and particularly oil.
    Let me make a final statement. We like to blame other 
people for our problems. We blame the Chinese. We blame the 
Saudis. We blame OPEC. But I remember earlier this morning the 
statement from that great American philosopher Pogo, who said 
many years ago, ``we have met the enemy, and he is us.''
    Mr. Stupak. Thank you. Thank you all for your testimony.
    [The prepared statement of Mr. Krapels follows:]

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    Mr. Stupak. We will begin questioning. I think we'll 
probably go one or two rounds with this panel. So we'll try to 
keep it at about the 5-minute point.
    Mr. Gheit, if I may, your testimony says that the doubling 
of crude oil prices in the past year was mainly due to 
excessive speculation, not due to an unexpected shift in market 
fundamentals. What do you mean by excessive speculation?
    Mr. Gheit. Well, we look at the base case. A year ago, oil 
prices were about $60, $65, and everybody expected that oil 
prices would probably come down, not go up because we started 
the year, if you recall, at almost $50 oil. Actually the end 
of, 2006, I believe, that OPEC had to cut production to prevent 
a meltdown, as you called it, in oil prices.
    So last year, as oil prices went to $60 or $65, all of a 
sudden we had finally outages and that was because--or at least 
that was what the speculators put as the reason for why we 
should put oil prices up. But the fact of the matter, even--oil 
prices should be going down, not up. Because there was not 
enough refining capacity to use the excess oil on the market.
    Mr. Stupak. So if we have excess oil now on the market, and 
in your testimony you go on and you say, large investment banks 
keep fanning the flames by making exaggerated price predictions 
that they believe they can help achieve, given the Government's 
unwillingness or inability to hold them accountable. As you 
know, Goldman Sachs recently predicted that oil prices of $150 
to $200 a barrel and yet are probably the largest commodity 
dealer on Wall Street. Without singling out any particular 
company, is there an actual or apparent conflict of interest in 
an investment bank taking up the price of commodities through 
its research arm while speculating on it at the same time?
    Mr. Gheit. Absolutely. Unequivocally and absolutely. I 
mean, it becomes a self-fulfilling prophecy. When the largest 
trader predicts the price of a commodity, guess what's going to 
happen to the price?
    Mr. Stupak. It's going to go up.
    Mr. Gheit. It's going to follow the leader.
    Mr. Stupak. Let me ask you this. The Securities and 
Exchange Commission prohibits insider trading by requiring 
disclosure when investments exceed 5 percent in a stock. 
However, there's nothing comparable for commodities. What would 
be the best way for Congress to address this matter? Should all 
investment banks and other noncommercial interests have to make 
public their holdings of oil futures or inventories?
    Mr. Gheit. Absolutely. Absolutely. Disclosure is the best 
thing. As somebody has said, they operate well in the dark. 
When you shed the light on them, there's no place for them to 
hide. There are a lot of conflicts of interest. They create 
this financial instrument that nobody really knows how it works 
except they themselves. They create--this is the black box, if 
you will. And it pulls on currency, it pulls on the stocks, it 
pulls on other things. So once you catch one, the other will go 
unnoticed. So it's impossible for us to quantify the impact 
because it has a lot more to do than only the commodity.
    Mr. Sestak. Thank you. Mr. Masters, how much do you 
estimate that crude oil prices have been inflated by excessive 
speculation above supply and demand fundamentals? In raising 
concerns about the multitude of commodity index investing, are 
you suggesting that supply and demand fundamentals have no role 
in oil prices?
    Mr. Masters. Thank you, sir. Basically what I'm suggesting 
is that there is supply and demand fundamentals. But in this 
case, what we've got is we've got supply and demand and demand. 
We've got financial investor demand that we've never really 
seen before in these markets. And that long-only financial 
investor demand has come into these markets, has altered the 
price discovery function of the markets, and has altered the 
price.
    So when we talk to physical producers, refiners, consumers 
of energy, they all tell us basically the same thing, that they 
think that crude oil should trade somewhere around the marginal 
level or equilibrium level of the cost to produce, the marginal 
cost of production, which they tell us is in the neighborhood 
of $65 to $70 a barrel.
    Mr. Stupak. So it should be at $65 or $70 a barrel now 
before the speculators get to it?
    Mr. Masters. That's what they tell us. I mean, one of the 
important points here is that--just as I can't specifically 
tell you what the number is from the speculators, I can't 
specifically tell you, or neither can anybody else, what the 
specific level of prices would be from China or India or any 
other component in the price. But I think there's clearly a 
great deal of the price that is coming from excessive 
speculation.
    Mr. Stupak. Let me--Kyle, turn to number two if you will, 
please. Let me ask you this question, I'm using Commodity 
Futures Trading Commissions's data now. And we estimate that 71 
percent of the trading on the West Texas Intermediate crude oil 
contract is done by speculators. And only 29 percent by 
physical hedgers. The CFTC weakened its regulations in 1998 by 
allowing its changes to set soft accountability levels instead 
of hard position limits for commodities like oil.
    You recommended in your testimony setting hard speculative 
limits for immediate month in the cumulative for all the 
months. Those speculative limits effectively wring out the 
excessive speculators without damaging the important role 
traditional speculators play in the commodity markets?
    Mr. Masters. I think so. The analogy I would use here is, 
it's like filling up your tires with tire pressure. If your 
tire pressure--if you need 30 pounds of tire pressure in your 
tires and you only put 10 pounds of air in there, you need more 
or you're not going to be driving very well.
    What we've got here----
    Mr. Stupak. Wait a minute. It's just going to buzz for a 
second here.
    OK. Go ahead.
    Mr. Masters. So what we've got here is a situation in which 
people are trying to put 60 or 90 or 120 pounds of pressure in 
the tire. You know eventually the tire's going to explode. It 
doesn't work. So we need sufficient speculation. But we don't 
need unlimited speculation. A little speculation helps grease 
the engine, helps grease the wheels, if you will, allows the 
purpose of the futures markets to work, which is price 
discovery and risk reduction for actual physical hedgers. The 
genius of the 1936 Commodity Exchange Act was that it allowed 
the functioning of the markets, it allowed speculators to 
participate in the markets, but it didn't let speculators 
dominate the markets. So position limits allow enough 
speculation to occur to grease the wheels but they don't allow 
speculators to dominate the price discovery function of the 
market, and that's the idea.
    Mr. Stupak. One last question, and then I'll go to Mr. 
Whitfield. And we'll go a second round because I do have 
questions for Dr. Krapels and Mr. Diwan. Both Secretary Paulson 
and Secretary Bodman have argued speculation is playing no role 
in the rising oil prices, the CTFC seems to agree with them. 
What are the costs of inaction, in your view, if Congress fails 
to address this matter? Will it correct itself?
    Mr. Masters. Caines had a great expression. He is a famous 
economist. He said, ``In the long run, we're all dead.'' This 
is a situation in which this crisis needs to be solved. If this 
is an acute crisis. You know, what we have got here is we have 
got someone that is morbidly overweight. That person clearly--
there are chronic solutions to his problem. He probably needs 
to diet. He probably needs to exercise. There's a lot of things 
that he needs to do. But right now he's having a heart attack. 
And if we don't take action right now, then we're going to have 
a real problem. This is an acute problem right now.
    And this is a problem that can be solved very quickly with 
changes in the regulatory framework. So I think, as I've said 
in my testimony, I think the time for studies and examination 
has passed. You know, like the FDA does, let's do the studies 
before we allow the approval of a drug to come to market.
    So basically, I think that if we do some of these actions, 
some of the things that I'm talking about, we can greatly deal 
with this amplification of prices created by excessive 
speculation. And then we'll have time to deal with some of the 
chronic solutions for the energy infrastructure in this 
country.
    Mr. Stupak. Thank you. Mr. Whitfield for questions please.
    Mr. Barton. Parliamentary inquiry, Mr. Chairman. We 
normally do 10 minute questions, rounds. You took almost 10 
minutes in that one. Are we doing 5 minutes just because of the 
number of panels?
    Mr. Stupak. By number of panels, number of people who are 
interested, we'll probably go two rounds.
    Mr. Barton. OK. Thank you.
    Mr. Whitfield. Mr. Masters, you just indicated that this 
problem could be solved rather quickly if we took steps 
regarding the regulatory monitoring of speculators in the 
market. Let's say the Congress passed legislation adopting 
these regulatory changes and the Senate passed it and the 
President signed it, how soon would we see a significant 
reduction in retail gasoline prices?
    Mr. Masters. Without being able to predict the future, my 
estimation would be within 30 days.
    Mr. Whitfield. Within 30 days of the President signing the 
bill?
    Mr. Masters. Yes, sir.
    Mr. Whitfield. OK. Now I'm going to ask you another 
question, how much would they be reduced roughly?
    Mr. Masters. I'm not sure I have a crystal ball that great. 
I would just go back to what I said earlier. My sentiments is 
prices would probably drop over a reasonably short period of 
time back to somewhere closer to the marginal reduction cost of 
oil.
    Mr. Whitfield. Of $65 to $75 a barrel?
    Mr. Masters. $65 to $70, then I think it's reasonable to 
conclude that that is about halfway where prices are today. I 
would think that gas pries would reflect that in relatively 
short order.
    Mr. Whitfield. So you are saying if we adopt these 
regulatory changes, we could almost cut the retail price of gas 
in half in a relatively short period of time?
    Mr. Masters. Yes.
    Mr. Whitfield. Dr. Krapels, what do you say?
    Mr. Krapels. To the chagrin of some of my colleagues at the 
company that I work in, I tend to agree with Mr. Masters. I 
think the amount of speculation is really substantial. And I 
don't think it would take 30 days after the President signing 
the bill. I think it would happen more quickly than that. Once 
the market understood this was happening, I think a lot of the 
funds would withdraw their positions and try to liquidate in as 
orderly a fashion as they could.
    Mr. Whitfield. Mr. Diwan, what do you say?
    Mr. Diwan. I don't know how quickly it takes to get prices 
down. But it's clear that prices will reflect closer to 
marginal cost of producing oil. I think the marginal cost is 
slightly higher than what Mr. Masters just said. But that could 
come fairly quickly. It can overshoot on either side. But 
what's interesting is that the long-term price curve, so how 
futures, price of oil do 5, 10 years, right now is around $140. 
And that is the expectation, that prices continue to stay at 
these levels at a marginal cost, which doesn't make a lot of 
sense.
    Mr. Whitfield. Mr. Gheit.
    Mr. Gheit. Well, let me start----
    Mr. Whitfield. Pull the mike up please.
    Mr. Gheit. Let me start by saying the marginal cost is a 
moving target. Because of the chicken-and-the-egg situation. 
The reason that you have higher marginal cost is because where 
oil can be obtained very cheaply, we're locked out, whether 
it's Russia, whether it's Iraq--Russia can produce oil under 
$10 per barrel. Iraq can produce oil at similar or even lower. 
So the marginal cost is a moving target. The fact of the matter 
is, if you look at the finding and development costs of the 
industry, in the last 5 years, it averaged less than $15. There 
is a rule of thumb that the price of the commodity is not 
sustainable at more than triple the replacement cost. So it 
should be around between $45 and $60.
    So, meeting with the head of most of the oil companies that 
we cover, only a year ago they were amazed at the 
sustainability of $60 oil. The chairman of the largest oil 
company in the world 5 years ago said at the time he doesn't 
see any justification for oil prices above $40. So the world 
has not changed significantly over the last few years to 
justify $140. And then you have people predicting $200 oil. If 
we don't do anything about it, their prediction will come true.
    Mr. Whitfield. But you're saying the production of oil is 
way over $15 a barrel. I mean, production cost----
    Mr. Gheit. It's just replacement costs of the reserve in 
the ground. There is another $15 or $20 to extract it. And then 
there is $15 or $20 per barrel which is the profit and taxes. 
That's how it works. It's the one-third rule.
    Mr. Whitfield. My time has expired.
    Mr. Stupak. Mr. Inslee for questions, please. I should note 
Mr. Ross has joined us, a member of the full committee not the 
subcommittee. But we would appreciate it if you want to submit 
an opening statement, we'll accept it and you will have time to 
ask questions.
    Mr. Inslee.
    Mr. Inslee. Thank you. Mr. Masters, for my opening 
comments, you may have noted that I have minimal high regard 
for this administration's capability of dealing with this 
problem. And I note that it was something like 9 days after you 
put out a suggestion in Senate testimony that we needed to have 
a more transparent market. Is there any reason for the CFTC not 
to have been engaged in this information gathering before your 
Senate testimony?
    Mr. Masters. Not that I can think of, no.
    Mr. Inslee. And tell me what tools with existing statutes 
do you think the CFTC has to at least go in the right direction 
in this regard.
    Mr. Masters. One of the things which I read earlier in my 
oral testimony and it's also in my written testimony is the 
Commodity Exchange Act enforcing that agreement--I won't read 
it again. But we feel like if you treat index speculators, 
which are effectively acting very much like each other, they 
look like one large speculator. If you enforce the provisions 
of that Act through the CFTC--and maybe that would be through 
the FTC, I'm not sure--but effectively you would greatly reduce 
their ability to engage in index speculation. So that's 
certainly something that you could do right away without--I'm 
not sure you really need much congressional action there at all 
to accomplish that.
    Mr. Inslee. Isn't it true that the CFTC, for years, had 
been issuing exemptions for these index positions and had full 
knowledge that there were massive positions being taken in 
these indexes?
    Mr. Masters. That's correct.
    Mr. Inslee. Could you--and this is an open question. Could 
you, gentlemen, compare and contrast the situation--Mr. Masters 
uses the term demand on demand as I think, as I understood his 
testimony about the pernicious effects of this. Does this 
demand on demand problem exist in other commodities? And could 
you compare this to other commodities? Should we compare it to 
other commodities?
    Mr. Krapels. I think a similar syndrome affects every 
commodity that's subject to the GSCI. The demand for paper 
barrels, if you will, or for paper positions or for paper 
contracts is a separate issue from the demand for physical 
barrels. And for many years, we've looked at the demand for 
paper barrels and just asked a question, what does it take to 
balance that market? If you have--if you remember Econ 101, if 
you have a sudden increase in demand for a commodity, it's a 
shift in the demand curve to the right, if you remember those 
awful charts. And the only way that you can get that market to 
equilibrate is if prices go up an awful lot. So a demand shock, 
which is what Mr. Masters has described for us today, is 
exactly what's occurred in the oil market as a result of the 
commoditization of oil.
    Mr. Inslee. So could you explain the financialization for 
oil compared to the lack of financialization of other 
commodities?
    Mr. Krapels. Well, I think that other commodities have been 
financialized. What makes oil so interesting is that it is a 
global commodity. I think a lot of analysts of the correlation 
of oil prices with other economic indicators have concluded 
that oil makes a good portfolio addition for a lot of 
investors. So a lot of thought went into the pension fund's 
movement to commodities. And when they move into commodities, 
they move largely into energy. From their perspective, it's a 
rational strategy and unlike a lot of other speculators, 
there's no malice aforethought here. They simply do what they 
have to do to keep their pensioners happy. So it's a kind of an 
accidental overflow, if you will, into a relatively small 
commodity market.
    Mr. Inslee. Thank you. Mr. Gheit, I want to ask you as far 
as the timing of impact, if our options are to drill in some 
other places that we haven't drilled domestically in the United 
States, which I am told will take several years or decades, and 
taking some action to reign in some of this excessive 
speculation, which would have a quicker response?
    Mr. Gheit. We can put--we can put an end to speculation 
very, very quickly. We cannot produce oil out of those 
untouched areas very quickly. It will take 3 to 5 years, 
realistically speaking, if we start today to have a meaningful 
impact on our supply or demand function. But speculation, we 
can put an end to it in 30 days. If there is a will and there 
is a way to do it, we can do it.
    Mr. Inslee. There is a will. And we're looking for a way. 
We hope to get both. Thank you.
    Mr. Stupak. Mr. Barton, for questions please.
    Mr. Barton. Thank you, Mr. Chairman. I could ask questions 
all day. So I'm going to try to limit myself. My first 
question, I just wanted to make sure I understand generically 
what you guys do. Do you risk your own money or do you advise 
others on how to risk their money?
    Mr. Gheit. I will start. I don't risk my money or other 
people's money. I don't risk anybody's money.
    Mr. Barton. You don't risk any money. So you don't advise 
anybody?
    Mr. Gheit. I'm a research analyst. I cover 22 oil and gas 
companies here in the U.S. I talk to those companies regularly. 
I have been for almost 22 years.
    Mr. Barton. I have limited time. I just need to know if 
you're advising or----
    Mr. Gheit. We advise investors. We don't advise--we don't 
advise anybody to buy or sell crude futures. We advise investor 
to buy which stocks we think----
    Mr. Barton. I would like the next gentleman to answer.
    Mr. Diwan. I never invested in the oil market. I'm an 
advisor to a lot of people.
    Mr. Barton. Thank you.
    Mr. Masters. The answer to your question is, we do take 
risks both with our own money and with other people's money. 
Not in commodities futures, though.
    Mr. Barton. OK.
    Mr. Krapels. We are consultants to the oil industry, not 
traders.
    Mr. Barton. OK. So you're not playing in the market in the 
sense that you're putting your own money up or down. You're 
trying to give good advice in what the market is. The next 
question is to Mr. Diwan. If we had 100 million barrels of oil 
production capacity available in the world market right now, in 
other words, we could produce 100 million barrels a day, is it 
your opinion that price would be based on the price of 
production as opposed to the marginal demand price that we have 
today?
    Mr. Diwan. Well, prices would be significantly lower 
because basically the market will be constantly facing the risk 
that some of the OPEC producers will overproduce and increase 
the stocks. This is what happened in '98 when demand collapsed. 
When you have a large spare capacity, you give incentive to 
anyone who owned that capacity to produce.
    Mr. Barton. Which is what we had until about 5 years ago, 
according to your chart.
    Mr. Diwan. Exactly. And we built that spare capacity, if 
you want, by accident, over the '80s when we significantly 
reduced demand. And--or when prices were very high and we were 
able to invest to increase production. The problem we have 
right now here is we have very high prices, but that has not 
changed the supply function. We have not been able to increase 
our supply globally outside of OPEC over the last 5 years which 
tells me there is a problem and that problem in a way is what's 
attracted a lot of money into the oil complex.
    Mr. Barton. I want to go to Dr. Krapels next. And I've had 
conversations with all the major CEOs of the American oil 
companies in the last 4 or 5 years, in some cases, the last 4 
or 5 weeks. And what Mr. Gheit said earlier about--he didn't 
mention by name. But I know who he's talking about because I 
had that same conversation 2 years ago when the prices started 
jumping up in the $70 to $80 a barrel range, I was told that 
those prices couldn't last, and so the majors didn't make the 
capital investments. In some cases they didn't have places to 
invest in. And in other places they just didn't believe that 
the high prices were realistic. Dr. Krapels, do you believe now 
that there's enough evidence over the last 2 years that it 
would make sense for the major privately owned oil companies of 
the United States to make these huge investments based on $100 
a barrel oil or $120 a barrel oil?
    Mr. Krapels. No, sir. I don't think they're going to make 
those investments. I think they will be looking at on the 
margin, something like the Tarsans in Canada as perhaps the 
marginal--the large source of marginal supply. And that could 
be recovered in the $60 per barrel category. I don't know a 
single oil company that would make $100 investments because I 
think they believe this price is unsustainable.
    Mr. Barton. Let me ask the next question. Since you 
gentlemen are reputedly some of the most expert people in the 
United States on where the oil markets are, if you were 
advising Exxon-Mobil or Chevron Texaco or Conoco-Phillips, what 
price would you advise them on to base their investment 
decisions on in terms of major capital investments for new 
production? What's the price you would advise them on?
    Mr. Gheit. Let me take this question since I talk to these 
companies on a regular basis. I would say between $45 to $60, 
no more than $60. Actually, they said themselves they do think 
that any oil company that spends an oil price above $60, they 
would be very disappointed
    Mr. Barton. Forty-five to sixty. Thank you. Mr. Diwan.
    Mr. Diwan. Well, it is the chicken-and-the-egg thing here, 
because what you have at the same time oil prices rising to 
$140, but if you invest too much money, Wall Street will slam 
you because you are overinvesting. If you are investing, if you 
believe these prices will stay. So you have--if you want the 
mechanism. I think certain marginal projects right now are 
invested at $100 in the oil sand. And the reason I think the 
prices are much higher is because we need the very big energy 
input.
    Mr. Barton. What price would you put your reputation 
behind?
    Mr. Diwan. Below $100.
    Mr. Barton. Below $100. OK. Next, Mr. Masters.
    Mr. Masters. That's not going to be my field of expertise 
but I would think that price would be below $100.
    Mr. Barton. OK. Below. Dr. Krapels.
    Mr. Krapels. Congressman Barton, did you see the movie 
There Will Be Blood?
    Mr. Barton. I have not. I do know who Pogo was. I'm one of 
the few people old enough to remember Pogo.
    Mr. Krapels. There is a wonderful scene in that movie of a 
man in California digging a deep well until he reaches oil. And 
I went to the movie with my wife. And we said, that's the 
marginal producer. He's dug a well by hand and that's the $130 
per barrel oil right there. I'm in the $60 camp.
    Mr. Barton. Are we going to have another round, Mr. 
Chairman?
    Mr. Stupak. Yes.
    Mr. Barton. I will yield back.
    Mr. Stupak. Thank you. Mr. Green for questions.
    Mr. Green. Thank you, Mr. Chairman. Like my colleagues, I 
apologize for being late because this is an issue that's so 
important to our country. And I'd like to ask unanimous consent 
that my statement be placed into the record.
    Mr. Stupak. Without objection.
    [The information follows:]

                      Statement of Hon. Gene Green

    Mr. Chairman, thank you for holding this second O&I hearing 
today on energy speculation.
    This hearing could not be more timely.
    Gas prices are hovering over $4 a gallon nationwide, and 
every day I hear from constituents back home asking me what 
Congress can do to bring down the skyrocketing cost of energy.
    As a Representative from Houston, Texas--the energy capitol 
of the world--I know there are no easy answers or quick fixes.
    Energy prices are set on the world stage and are influenced 
by a variety of factors.
    Global crude prices, increased demand from India and China, 
reduced energy supplies, extreme weather conditions and 
geopolitical events all play a part in price formation.
    While I agree that as a nation we should both conserve and 
invest in renewable sources of energy, I also believe we need a 
long-term strategy of increasing domestic oil and gas supplies 
to help mitigate basic supply and demand fundamentals.
    I hope with today's prices many of my colleagues will agree 
to this basic tenant of a balanced energy policy.
    What also concerns me are reports by several economists and 
analysts that question whether the standard economic principles 
of supply and demand are no longer the primary factors 
affecting energy prices.
    In recent years, the percentage of physical hedgers who 
actually rely on the market to lock in future selling prices is 
being dwarfed by the entrance of speculators who never take 
physical delivery of oil and gas supplies.
    Some estimate that commodity index speculation has 
increased 1900 percent since 2003, and the number of futures 
contracts has also hit record levels.
    Commodity index speculators -- comprised of sovereign 
wealth funds and pension funds -- are entering the market in 
droves to diversify their portfolio assets and hedge against 
inflation.
    Foreign boards of trade, which operate outside of the 
jurisdiction of the Commodities Future Trading Commission, are 
also heavily trading West Texas Intermediate futures contracts 
here in the U.S.
    If energy prices are indeed being manipulated by the influx 
of speculators and unregulated foreign boards of trade, the 
consumer runs the risk of paying distorted prices to drive, 
fly, and heat and cool their homes.
    Legislation has been proposed in this Congress, including 
by my good friend Chairman Stupak, that seek to bring more 
accountability to commodity transactions.
    Our highest priority in Congress should be to foster fair, 
open, and transparent markets for American consumers, 
businesses, industry, and utilities.
    Mr. Chairman, I hope today's panel will help flesh out 
these very complex issues, and I look forward to working with 
you and other members on improving the transparency of our 
energy markets.
    I yield back the balance of my time.
                              ----------                              

    Mr. Green. Mr. Masters, according to the CFTC data, ag 
institutional investors are overwhelming on the wrong side of 
the market in ag subsidies in betting that prices will continue 
to rise. Do you think that's true with energy as well? If so, 
why is that given that many analysts believe prices are too 
high and are due to a downward correction?
    Mr. Masters. So the way that institutional investors today 
are predominantly investing in the commodities futures markets 
is through a strategy called index replication. This is based 
on the Goldman Sachs and the Dow Jones AIG index of 
commodities. In the Goldman Sachs index, for instance, there 
are 25 key commodities. When they invest, they invest in every 
one of these commodities simultaneously many times. I mean, 
they're buying an index. And so whatever weight that index is, 
is for that specific commodity future, is in that index, is 
what they're going to invest in that specific commodity.
    So, for instance, West Texas Intermediate, they're going to 
put 40 percent of every dollar they put in the index into West 
Texas Intermediate because 40 cents of the dollar goes in there 
by virtue of the index.
    For some of the other commodities, like wheat, I believe, 
that's 2 percent.
    Mr. Green. I only have 5 minutes. We may have a second 
round. But if you could give us a more concise--I have 
questions for the other panelists.
    Mr. Masters. OK.
    Mr. Green. But that's generally the idea?
    Mr. Masters. That's generally the idea.
    Mr. Green. Has rapid run-up in oil prices adversely 
affected oil producers who have sold their production at lower 
pricer earlier? And has this led margin costs? And how costly 
has this been?
    Mr. Masters. That's been a very big issue. You know, some 
of the investment banks have said, well, we should really be 
applauded for helping drive up prices because this has allowed 
other hedgers to be able to hedge at higher prices. And I agree 
with them that they've helped drive up prices. More importantly 
though----
    Mr. Green. I think they would probably be in a really small 
minority in our country, even from the oil patch where I come 
from.
    Mr. Masters. Yes, sir. Right now the problem is, as you 
suggest, many people that used to hedge because of the price 
volatility that's been created in these markets are now not 
hedging. So some of that supply that would have come on the 
market is not coming on the market because people are literally 
afraid to hedge. We've talked to a lot of physical producers, 
some of which did hedge at much lower prices and have had to 
cover or rebuy what they sold at much higher prices which has 
had a very--in some cases force them out of business.
    Mr. Green. OK. I have a question for all the panelists, 
John Hofmeister, the previous CEO of Shell, recently suggested 
by restricting access to domestic supplies, U.S. policymakers 
are sending a signal to investors that output would be 
constrained, thereby driving up the price. He said, ``there is 
no confidence that we can explore and produce more barrels 
given the United States is not letting us do it, and that it's 
preventing people from having optimist outlook on oil futures. 
So it looks like demand will continue to run ahead of supply.'' 
Do you agree with this assessment? And would increasing 
domestic supplies of energy here at home send the right signals 
to investors, for that matter, foreign nations that the U.S. is 
serious about meeting its own energy needs, thereby reducing 
speculative prices?
    Mr. Gheit. I agree.
    Mr. Diwan. They think the problem is bigger than just the 
United States being able to produce more. The question is, can 
the world produce more and where is that oil going to come 
from.
    Mr. Krapels. I agree with Roger. There's a limit to how 
much more we can produce. Even if we open everything up--all of 
our frontiers areas. But it sure would send the right signal if 
we did.
    Mr. Masters. I would just go back to what I said before 
about there's an acute problem and there's a chronic problem. 
And the chronic problem is long-term energy security. The acute 
problem is financial speculation in the commodity futures 
markets.
    Mr. Green. Mr. Chairman, I know I'll wait for the second 
panel. But I appreciate the opportunity. There are a lot of 
things we can do. And I think your effort is in one of them as 
we look at the speculating market. But there are other things 
that we can do that would actually make the price of fuel much 
cheaper for our constituents. Thank you.
    Mr. Stupak. Thank you, Mr. Green. Mr. Burgess is not here. 
Mr. Walden for questions.
    Mr. Walden. Thank you, Mr. Chairman. I appreciate that. You 
know, farmers are very good at reducing the price of their 
crops. They do so by reacting to price signals and when wheat 
or corn prices are high, they all rush out and plant wheat or 
corn, whatever is high. As a commodity, the oil market is not 
much different. It would--you'd think that with prices at this 
level, there would be avid exploration so you could take 
advantage of it. Mr. Diwan, is that not the case in the oil 
market?
    Mr. Diwan. Well, you need to have access to areas which 
have good reserves to explore and to produce. And this is 
really the first time when you have such an increase in prices 
where we have not had a response on the supply side. And 
there's a lot of reason for that, not only that you don't have 
access to the best basins in the world, 77 percent of the world 
reserves are closed basically to oil companies.
    Mr. Walden. Where are best basins?
    Mr. Diwan. In OPEC countries or in Mexico or in a number of 
areas where you do not have access to the reserves. The other 
issue is, you have a lot of aging fields where the decline 
rates are accelerating. So even if you are bringing a lot of 
new supply on the market, it is just replacing what we're 
losing every year. So to recall on our jargon, the wedge, and 
that wedge is growing bigger and bigger every year. So if you 
bring 4 million barrels per day of new supply this year, you 
basically stay put because you have lost 4 million barrels per 
day.
    Mr. Walden. So supply and demand does play a significant 
role in the decisionmaking by those in the market?
    Mr. Diwan. Absolutely. And there's a supply narrative, this 
notion that we don't have supply increase in the future which 
has brought up a lot of the financial players in the market 
because basically they're not taking a lot of risk here. Due to 
the way I describe it is you really have two types of news in 
this market. You have the bullish news, when something happens 
in a small country or you lose a little bit of production or 
the very bullish news when something big happens like in 
Nigeria. You don't have risk on the downside. And that shift of 
the risk from all upside to little downside is what's 
attracting the speculators to the market.
    Mr. Walden. And by that--I'll wait. You see you won the 
prize for the best answer. There will be six of them. We're 
adjourning the House right now, I think.
    So by that, you're saying that there's little risk that 
we're going to add significantly to supply, which is why then 
the speculators continue to bet long saying, I don't see the 
price coming down.
    Mr. Diwan. Correct. What can bring really the prices down 
in this environment is a demand going down, and for demand to 
go down as we see it right now, it takes prices to increase. So 
as the more you push prices, the more you'll increase risk. But 
we--it's difficult to manage in the demand collapse if you 
don't have an economic collapse.
    Mr. Walden. Well I'll tell you, in my part of the world, 
there are people who are beginning to think we are having that 
economic collapse. When you look at the doubling of the price 
of fertilizer and diesel and every other input and then you go 
to the grocery store and the price of food's going up. I'll 
tell you, family budgets are in pretty bad shape.
    Mr. Diwan. But in the rest of the world, demand is still 
growing. So we still have a decent demand growth right now 
despite these prices. And the reason is price subsidies. So if 
you look at the demand growth in the world, it's really 
concentrated in two areas of the world. It's in China. It's in 
the Middle East. And it's in some countries which have large 
mining operation because you have the commodity boom. So the 
demand in these areas is not very responsive to prices so it 
continues to grow.
    Mr. Walden. Because demand in the U.S. has actually gone 
down, hasn't it, at the steepest curve since World War II. It 
used to be if that happened, we'd affect the market and the 
price, right?
    Mr. Diwan. But that's been the trend if you want over the 
last 6 years. If you take the global growth and demand over the 
last 6 years, the cumulative growth of demand over the last 6 
years, over 80 percent has happened among the OECD countries. 
So the OECD countries, developed countries have a smaller 
impact on the demand side because of the price signals, because 
of policies being put in place, et cetera, et cetera. While 
where you have price subsidies, demand keeps growing because 
you have population growth and economic growth.
    Mr. Walden. So it looks like you have a three-part problem 
here. One is the weak dollar which is related to our economy. 
Two is the transparency, perhaps, in the trading itself and new 
investors coming in that never planned to take possession of 
the oil or the gasoline. And three is this belief and probably 
based in reality that nobody's turning up the spigot or they 
can't.
    Mr. Diwan. They can't.
    Mr. Walden. Because some of those fields are actually going 
down, not up. And meanwhile the United States puts 80 to 85 
percent of its offshore oil potential out of reach by Federal 
law and 60, 70, 75 percent of the onshore is not accessible by 
Federal law. And there's no evidence we're going to change 
those laws. So from a U.S. perspective, unless we change the 
law, which I think we should, and at least send a signal that 
we are serious about becoming more energy independent, we're 
going to continue to see these high prices.
    Mr. Diwan. Correct. But the way we look at it, we try to 
look at it globally. It's very difficult to imagine how the 
world is going to produce 15 million barrels per day more than 
what we are producing now, and how that world is going to be 
able to consume 100 million barrels per day.
    Mr. Walden. And one final question, if I could, you said 
earlier I believe--I had to step out for a minute--but in terms 
of price signals for the future, something under $100, right?
    Mr. Diwan. Correct.
    Mr. Walden. How far under $100? $30? $99?
    Mr. Diwan. To produce energy it requires a lot of energy. 
So the higher the price, the higher the marginal cost. We are 
seeing right now some investment where the companies are 
assuming prices over $80.
    Mr. Walden. Wow.
    Mr. Diwan. And if prices shoot down below that or below, at 
$60, all the marginal projects above $60 will immediately stop 
and that, again, will impact on the supply and it will further 
reduce supply and accelerate the decline rates.
    Mr. Walden. All right. My time has expired. Mr. Chairman, 
thank you. Thank you to our panelists.
    Mr. Stupak. Thank you. Mr. Ross for questions, please.
    Mr. Ross. Mr. Chairman, thank you for including me, 
allowing me to be a part of this subcommittee for the purpose 
of this discussion today because this is, in my opinion, a very 
critical issue facing our country and, quite frankly, the 
world. I think from what we're seeing happening in the energy 
market has a lot to do with this economic recession that we're 
in and how fast we get out of it.
    Mr. Ross. My question for any of you who--in any form or 
fashion--participate in either trading or encouraging others to 
trade in the futures market, could I just get a show of hands? 
Which ones of you are involved in that, anyone? No one will 
admit it? So let me ask you this: do you know people who trade 
in the futures market?
    Mr. Diwan. Sure.
    Mr. Krapels. Of course.
    Mr. Ross. Everybody does. In your opinion, doesn't have to 
be scientific, but based on your expertise, what percent of 
those who play the market could actually accept delivery of 
diesel fuel or gasoline if they had to?
    Mr. Krapels. It's a tiny fraction. It's less than 1 percent 
of all the trades that are done physically.
    Mr. Ross. So all the people playing the markets on diesel 
and gas and oil and all that, you're telling me that that's the 
1 percent of all those that are doing that could actually set 
delivery if they had to?
    Mr. Krapels. That's correct.
    Mr. Ross. Everybody agrees to that?
    Mr. Masters. I think it may be a higher number than that. 
Because many physical players could accept delivery but they 
typically don't accept delivery. They typically are just using 
the futures markets as a hedge.
    Mr. Ross. What would happen to oil and gas prices if only 
those that could accept delivery were able to----
    Mr. Diwan. Well, you can go back to a very small market. 
But if you have also a very small market, it's much easier to 
manipulate. So liquidity is very important. If you have only a 
few producers and a few consumers, the big producer or the big 
consumer could have enough muscle on that market to have a big 
impact on prices. So reducing market dramatically I'm not sure 
is a way to avoid manipulation.
    Mr. Ross. Mr. Chairman, I would----
    Mr. Stupak. If I may----
    Mr. Ross. I yield to the Chairman. That's the only question 
I had for this panel.
    Mr. Stupak. Let me ask this question, and it's a little bit 
along the lines of what Mr. Ross was just asking. And Mr. 
Walden brought it up about other areas that should be open to 
exploration in the market. But there is a proposal right now 
that there are 40 million acres on the Outer Continental Shelf 
that's not being used for exploration tied up in these leases. 
Should those leases, much like we do on timber sales, you can 
only hold them for 5 years, if you don't use it, then you lose 
that lease? Would that help this situation? They are talking 
about go and drill elsewhere, but we have 40 million acres that 
are tied up that no one's drilling on. Should we use-it-or-
lose-it type proposal? Mr. Gheit.
    Mr. Gheit. This is definitely a good thing to keep oil 
companies' feet to the fire. If they don't develop the 
technology, if they are not willing to invest, I have no 
problem to renew the leases every 5 years. Let somebody else 
take a shot at it. You just don't hold it for future technology 
20 or 30 years from now. Hoarding land is just as bad as 
anything else.
    Mr. Diwan. Well, again, I think this is a bit simplistic. 
If you look at what's happening in the U.S. the service sector 
is totally overheated. We don't have enough people. We don't 
have enough companies. We don't have drill shifts. We don't 
have enough of everything. We went through 20 years of 
underinvestment. Now we're back into the super cycle of 
investment. The industry is really working very hard. The 
notion that they're just sitting on the land and hoarding, I 
mean, when you work with oil companies, they're looking 
constantly where to put more money in the ground to produce 
more oil at these prices. If they're not willing to produce oil 
at these prices, they should be in a different business.
    I don't know a lot of oil companies who are not willing to 
invest at these oil prices. The question is, are the land they 
are sitting on propitious for production? Do we have technology 
to look? Do we have technology to drill? Do we have the 
technology to hook up all of these things?
    Mr. Stupak. Why should the Federal Government put up more 
land if you are not drilling on the land you already have 
leased?
    Mr. Diwan. Well, the question is, are the lands that they 
have right now good land or not, or cow pasture? That is the 
question and when you look at an oil company every year they 
have a budget to spend and they are trying to push that budget 
as much as possible. They take the best land they have and they 
drill those first. And the next year they do the same and the 
same and the same.
    Mr. Stupak. But obviously they thought there was some value 
there or they never would have bid for the lease rights to 
begin with.
    Mr. Diwan. Right. If you look at the economics of exploring 
and producing oil, the cheapest part is the land. So it's 
easier to get a lot of land than get a lot of drill ships.
    Mr. Green. Mr. Chairman, if you would yield just briefly.
    Mr. Stupak. Sure.
    Mr. Green. Having owned pine trees before and comparing 
that to an oil lease, pine trees can grow up very well on an 
acre of ground, but obviously we don't want to put a derrick on 
every acre of ground. And if you have 1,000 acres, you'll go 
where you think your seismograph is the best. So I think it's a 
false comparison. And we'll debate that probably on the floor 
pretty quick. But to compare this, I don't mind a use-it-or-
lose-it because if somebody is sitting on potential production, 
I want them to do it. But I think the numbers are probably not 
as--compared to a timber lease as you would.
    Mr. Stupak. It's a good analogy. That's why you call it 
paper barrels.
    Mr. Ross. Mr. Masters, do you care to comment on that, or 
Mr. Krapels?
    Mr. Krapels. No. I think Roger has it right.
    Mr. Stupak. OK. I go to Mr. Burgess for questions. Mr. 
Burgess, please.
    Mr. Burgess. Thank you, Mr. Chairman.
    Mr. Masters, if I could, on your four-point plan that 
you've outlined for us, and thank you for doing that, step four 
you talked about investigate physical hoarding of commodities 
by investors. Do you have current evidence of this occurring?
    Mr. Masters. Yes.
    Mr. Burgess. And have you made it available to the 
committee?
    Mr. Masters. I think we have, yes.
    Mr. Burgess. All right. Mr. Chairman, I would just 
respectfully ask that that be shared with us if for some reason 
I don't have that.
    Mr. Masters. That wasn't in the footnotes. It's in the 
footnotes, but the actual documents we've submitted to the 
Chairwoman.
    Mr. Burgess. All right. Bloomberg on their print side in 
the June 16th--in the June 16th article, they talk about 15 
supertankers stationed in the Persian Gulf capable of storing 
more than 30 billion barrels of crude, according to ship-
tracking data compiled by Bloomberg. Do you have any 
information about that?
    Mr. Masters. I'll defer to Roger.
    Mr. Diwan. Yes, we do actually. You have 15 or more tankers 
full of uranium crude. It's a very heavy crude, it's very 
difficult to sell, and there's no market it for it right now. 
So the Iranians have two options. One is to store it or to shut 
the field; and the other, store it and wait for the demand to 
emerge when the refiners come back for maintenance. It 
basically outlined that some segment of the market, the one for 
heavy crudes, is actually very sloppy, and there's not a lot of 
demand for it.
    Mr. Burgess. Now, I guess one of the things I've never 
understood is in this whole run-up of gas prices, is why diesel 
shot up so much faster than refined gasoline, and would this 
type of crude not be suitable for recovering diesel fuel?
    Mr. Diwan. If you have the refinery tools to do it, yes. 
The problem is in spring in general refiners go under 
maintenance. But there's a different reason why diesel is doing 
well and gasoline not doing very well. Gasoline is a U.S. fuel. 
So if U.S. demand for gasoline is down, global gasoline prices 
are not going to do very well. Diesel is really a global 
commodity, and when you have high growth rates in China and the 
Middle East, it's mostly for diesel. So diesel is a broader 
commodity than gasoline in that sense. And the strength and 
demand both in China and the Middle East is really about 
diesel.
    Mr. Burgess. OK. Thank you.
    Staying on the four-point plan if we could for just a 
moment. Dr. Krapels, do you have an opinion on the step one 
that established limits that apply to every market participant? 
I assume here we're talking about the amount that must be put 
up for margin and the ability to take possession of a commodity 
where the contract is bid upon.
    Mr. Krapels. Am I in favor of position limits?
    Mr. Burgess. Yes.
    Mr. Krapels. Yes.
    Mr. Burgess. And is that--of all the four proposals that 
are there before us, is that the one that is likely to have the 
most immediate and profound impact on the price? I know Mr. 
Masters thinks so because he wrote it and put it first. I read 
Dr. Krapels. I would be interested in your opinion.
    Mr. Krapels. I think it would, of the four different 
recommendations that are practical, and they're likely to be 
acceptable. I think that is one that would get the biggest bang 
for the buck.
    Mr. Burgess. So it has a score, scores high on the 
practical scale. It doesn't seem to me to be that difficult, 
but then I'm not a great student of petroleum engineering. 
Would this be difficult to enact and create or create and 
enact?
    Mr. Krapels. From a legislative or regulatory standpoint?
    Mr. Burgess. From a regulatory standpoint.
    Mr. Krapels. I would think not.
    Mr. Burgess. I wouldn't either. And if step one by itself 
were taken without all the other steps taken, would that move 
us closer to that marginal price that we've heard talked about 
this morning on the panel?
    Mr. Krapels. I think it would help. And the devil is in the 
details. How quickly would we establish those limits; would it 
be phased in or an immediate approach?
    Mr. Burgess. Well, and that's actually one of the things I 
wanted to ask about. What is the danger in enacting this too 
quickly? If we've already seen some of the difficulties we've 
had in the financial sector of our economy, is there an 
unforeseen consequence of moving too quickly in this regard, or 
should we just simply work to get this, at least step one, 
enacted and bring the cost down close to the marginal cost of 
production?
    Mr. Krapels. I may be different from my fellow panelists 
here. I think you would want to take your time and give people 
some time to unwind their positions. And I think if you don't 
give them time, I think there could be substantial damage.
    Mr. Burgess. What is the timeline likely to look at?
    Mr. Krapels. I would give market participants a year in 
which these sorts of limits would become enforced.
    Mr. Burgess. And are our other panelists in agreement with 
that?
    Mr. Masters. I think that's too long. I don't think that's 
necessary.
    Mr. Burgess. A year is not necessary?
    Mr. Masters. A year is more--I mean, that's--look, I mean, 
one of the things that's important to understand is that 
because commodities are uncorrelated with other asset classes, 
and then I don't consider commodity futures an asset class to 
begin with, so I'll just say that on the record, but they 
typically behave in ways that are different from other parts of 
one's portfolio. So it's very likely that prices of commodity 
futures, and therefore prices of commodities, would come down 
relatively quickly.
    Now, the interesting thing about that, because today the 
vast majority of institutional investors' funds are still in 
stocks and bonds, it is also very likely that those prices 
would go up relatively quickly. So, yes, they're going to lose 
on their commodity position, which on a gross average is 
roughly 1 percent of their portfolio, but with a 50 percent or 
more position in common stocks and fixed income, they're going 
to way offset that in the benefit that they get in the rest of 
their portfolio. So this would actually have a very powerful 
positive effect on their portfolio.
    Mr. Burgess. Unless they were invested in the financial 
sector.
    Thank you, Mr. Chairman. I'll yield back the balance of my 
time.
    Mr. Stupak. Mr. Rogers for questions.
    Mr. Rogers. Thank you, Mr. Chairman. Thank you for allowing 
us to participate today.
    Can you give me some comparable asset classes to oil and 
how they might be regulated? And I'll open it up to any 
panelist. Is there anything comparable to oil, Mr. Masters?
    Mr. Masters. Commodity futures, we don't consider that an 
asset class to begin with. They're not capital markets. One of 
the issues here is that capital markets investors have sort of 
imputed some biases on the commodity futures markets. Commodity 
futures markets are much smaller. They have a different set of 
regulations than capital markets, and because of that, they 
should be treated on a much different basis.
    Mr. Krapels. I think within the energy sector natural gas 
seems a little bit like oil, if that's the drift of your 
question.
    Mr. Rogers. And it's regulated differently?
    Mr. Krapels. I think it's regulated in many of the same 
ways as crude oil is. And it has some of the same 
characteristics in terms of the inflation of potential 
speculator positions in the natural gas market.
    Mr. Rogers. And so what I heard today was that it's not 
just speculators. Speculators are certainly a problem in the 
market. But we do have a demand and supply issue as we move 
forward. So something comprehensive both on the demand and the 
supply side is probably the best policy as we would move 
forward if we wanted to impact both prices and our ability to 
be immune, if you will, from governmental changes on demand. Is 
that correct? I mean, nuclear, coal-to-liquids, alternative 
energy, hydrogen, lithium ion battery, all of the things that 
we talk about now, including impacting supply, that would be on 
the demand side. But impacting supply with production would be 
helpful, wouldn't it?
    Mr. Krapels. If I may, may I just take 2 minutes on that? I 
completely agree. If you remember Roger's graph where the price 
went to $65 and then $75 and then $80, and then it shot up in 
the last $50 to $60 of price escalation. As a commonsense 
matter, it's an issue of degree of price pressure. At $70 and 
$80 a barrel I think we will develop a lot of alternative 
technologies in the electric space. I think we'll develop a lot 
of conservation initiatives in the transportation sector. It's 
the $80 to $130 that it just seems as a matter of degree 
unreasonable and not very useful. And it's not being priced 
into the investment decisions of most companies that we know.
    Mr. Rogers. Go ahead, sir.
    Mr. Gheit. I just want to make a comment. The oil markets 
are not free markets. Let's start with that. The reason that 
oil prices do not respond to supply and demand fundamentals is 
because supply and demand fundamentals are also dictated by 
government houses and politics. When Russia shuts off its 
resources, when Saudi Arabia and the rest of OPEC said, you 
can't come in here. So there are artificial supply constraints, 
if you will.
    On the demand side, as Roger said, OPEC and China and other 
countries subsidize oil prices, so therefore consumers do not 
feel the pressure that we are feeling here. So government 
policies obviously have a tremendous impact on why oil and gas 
supplies fundamentally do not respond to market rules.
    Mr. Rogers. And so you had a whole bunch of people pulling 
out of equities, you had a market that clearly is shown by 
government policy we were not going to increase supply, at 
least made an attractive market for these folks to jump into, 
rightly or wrongly, helped create the problem, didn't it?
    Mr. Gheit. But one more thing. For us to think there is one 
silver bullet, if you will, that's going to take care of all 
this problem, we're kidding ourselves.
    Mr. Rogers. I agree. So you agree that it has to be a whole 
series of things, and there's not a silver bullet; it is a 
bullet?
    Mr. Gheit. It has to be the complete course of fuel.
    Mr. Rogers. Including more domestic supply?
    Mr. Gheit. Everything should be on the table.
    Mr. Rogers. And I happen to agree with you 100 percent. And 
I just want to make sure we don't have unintended consequences. 
I know there's a lot of public pensions involved in this. And, 
Mr. Masters, I know you said that you could do it in less than 
a year. I mean, I know you're in the Virgin Islands. I assume 
you made that decision based on tax issues. I mean, that's an 
unintended consequence. We don't want you to be in the Virgin 
Islands. We would like you to be here. So government policy has 
that impact.
    What happens to that $260 billion that you say screws up 
the discovery point, and how do you get from $260 to $4 billion 
without some of these public pension plans really getting 
turned upside down within a year? That concerns me.
    Mr. Masters. Well, the way that happens is that, again, as 
I just described, these allocations in many cases are less than 
1 percent of the portfolio. You're talking about a portfolio, 
if you will, across the board of these institutional investors 
that's roughly $29 trillion. So $260 billion, while it sounds 
like a lot of money, and it is, it's a lot less than $29 
trillion.
    And so just the way the math works is let's say that you've 
got $15 trillion in equities, and that $260 billion goes to 
zero; let's say the price of commodities goes to zero. That $15 
trillion is going to go up probably by at least 10 percent. So 
you're up $1.5 trillion on your portfolio, you've lost $260 
billion on your commodity side, you're still ahead by $1.2 
trillion. That's not a bad trade.
    Mr. Rogers. But that doesn't have industry-specific 
consequences. I look at the airline industries as an example. 
That $260 billion is only a small fraction of the $29 trillion; 
however, it's having 1,000 percent impact on their ability to 
compete and survive. And it's not just them. It's trucking 
organizations, it's small midline and shortline haulers. And so 
that $260 billion may be a small part of the overall investment 
scheme, but it is having a tremendous impact, I would argue, on 
what advice and counsel you're giving people in the equities 
market, isn't it?
    Mr. Masters. Well, I think that having commodity prices 
come down, and the airline people can speak to this later, 
would be a great benefit to the truckers and to the airlines.
    Mr. Rogers. And to consumers.
    Mr. Masters. And definitely consumers. So you would have a 
much greater effect.
    And just to make a point, the likely reason that the equity 
market would go up in value was because investors would rightly 
understand that, hey, this is a good thing for the economy, 
this is going to help things move forward.
    Mr. Rogers. Thank you, Mr. Chairman.
    Mr. Stupak. Mr. Dingell for questions, please.
    Mr. Dingell. Mr. Chairman, thank you.
    Mr. Gheit, your testimony has been most helpful. I believe 
you said that we could end excess speculation in 30 days if we 
had the will to do so. Now, I would really like to know what is 
it that we should do to accomplish that purpose, please.
    Mr. Gheit. Well, the first thing we should do is to raise 
the margins requirement to 50 percent. That will slow the 
volume significantly. Two, you put a trading limit that will 
also curtail a trading volume, and then force all the financial 
players to fully disclose their position. That will also have 
an impact.
    So it is going to be step by step, but if we put this 
legislation and we give these people 30 days to get out of 
their position, that's plenty of time. After all, they are big 
boys, they made a lot of money. And as other people on the 
panel said, an impact on the rest of their holdings would be 
significantly greater than the downside from their oil 
holdings. But we definitely can get this thing done very 
quickly.
    Mr. Dingell. Now, I believe you have said then that we 
should attack margins; is that right?
    Mr. Gheit. The margin requirements.
    Mr. Dingell. Margin requirements. All right. That runs 
about 5 percent now?
    Mr. Gheit. Yes.
    Mr. Dingell. But there are loopholes that permit it to be 
done at lower or no margin whatsoever. Now, what should we 
raise that margin to, and how should we go about doing it?
    Mr. Gheit. Well, a margin on stocks is 50 percent. 
Commercial players, like airlines and the oil industry, should 
still keep the low margin requirement, which is 5 to 7 percent.
    Mr. Dingell. Because those are people who are honestly 
hedging?
    Mr. Gheit. Correct. They need that to protect against the 
commodity risk. But those who are coming here just to hold an 
electronic barrel in the hopes of getting the price higher, 
they are absolutely, in my view, no value. They don't create an 
economic value in the process. What they do, they make money 
themselves, but obviously that is at the detriment of the rest 
of the economy. It's basically the few make a lot of money, but 
a lot of people lose a lot of money.
    Mr. Dingell. Of course, that's true with the commodities 
markets anyway. That's a place where the little guy gets 
skinned, and the big guy does fine?
    Mr. Gheit. Yes, right.
    Mr. Dingell. Now, what should the margin go to? You're 
indicating 50 percent.
    Mr. Gheit. Fifty percent.
    Mr. Dingell. Fifty?
    Mr. Gheit. 5-0, correct.
    Mr. Dingell. Now, the other things, if you would come back 
again and address them, please, again, Mr. Gheit. You said 
there were other things. Is the margin requirement the only 
thing?
    Mr. Gheit. The margin requirement is the most critical, and 
then the volume limitation.
    Mr. Dingell. OK.
    Mr. Gheit. We should hold the financial players to a 
percentage of the physical market. If the physical market is 
trading whatever, a million contracts a day, we should 
establish a limit for the financials, no more than 10 percent 
of the physical market. You don't want the financial market to 
be bigger than the physical market basically.
    Mr. Dingell. All right. Now, I have a couple of other 
concerns which I find very difficult. First, the foreign board 
of trade loophole, that's been called the London loophole by my 
friend Senator Levin. This allows foreign boards of trade, such 
as ICE Futures, to trade futures in the United States, but 
avoid registering as a designated contract market. They get 
this loophole from the CFTC through a, quote, ``no action 
letter.'' Once exempted, the exchange is not subject to the 
requirements imposed on U.S. exchanges by CFTC.
    Now, there are a couple of others here. The Enron loophole. 
As a part of the Commodities Future Modernization Act of 2000, 
the Enron loophole created an exemption for large energy 
traders over $10 million in assets to trade futures on 
unregulated markets called exempt commercial markets. ICE has 
exploited this loophole, and so its markets grow rapidly. This 
is also, by the way, known as the Goldman Sachs--no, I'm sorry. 
We're going to come to Goldman Sachs.
    Then the swaps loophole, which is the Goldman Sachs 
loophole. Commercial operations like oil producers or farmers 
are exempted from speculation position limits if they have a 
bona fide price risk tied to the purchase or sale of a physical 
commodity. These speculative position limits are there to 
prevent excessive speculation. However, in 1991, CFTC began to 
classify swaps dealers on Wall Street as bona fide hedgers--I'm 
curious how they did that--and based on the argument that they 
have a price risk tied to financial investments in commodity 
index investments. Now, there are 15 investment banks and funds 
with CFTC exemptions under this as it has grown. Would you 
address these, Mr. Gheit?
    Mr. Gheit. Basically what I am suggesting is that we cannot 
close the door and leave the windows open because these people 
have a way to conduct their trading outside of the U.S. So 
unless and until we have a level playing field, it is not 
really going to bear fruit. So we have to apply the same rules 
that we have here in the U.S. to the ICE or any other market.
    Now, the regulators in the U.K. Claim that if they clamp 
down on traders on ICE, they are going to go to Dubai or other 
places. But again, my recommendation here is to require any 
company doing business in the U.S. to only do their hedging on 
exchanges that are sanctioned by U.S. laws; otherwise it's an 
illegal business, it's money laundering. Basically that's it.
    Mr. Dingell. Thank you.
    Other members of the panel, I want to express my thanks to 
each of you gentlemen for your assistance to us. Would you each 
give your comments on the questions that I have raised to Mr. 
Gheit, please? Do you agree, disagree, do you have other 
comments that you would like to lay before us, please?
    Mr. Diwan. Well, the problem is we don't have data to make 
clear judgments. We don't know how many of these index funds 
are using the loophole, and we don't know if they are above the 
limits that they are supposed to own. So if we put the limits, 
we don't know. There's a few large indexes with very big 
positions, and if we close the loophole on the limits, they'll 
come below that. Or if there is a lot of pension funds with 
small positions, then imposing a limit doesn't do much. We 
don't know that. We don't have the data.
    So I think it will be important to close all the loopholes, 
because then you have a level playing field, and we'll see what 
happens. So you go incrementally, change the margin calls, 
close the loopholes and see where we are.
    Mr. Dingell. Mr. Masters, I want to commend you for your 
comments and your help to the Committee. What are your thoughts 
on the matters we are discussing?
    Mr. Masters. Thank you, sir.
    In general I agree with the suggestions. The margin 
requirement, I think, doesn't work as well as position limits 
do.
    Mr. Dingell. You say it doesn't?
    Mr. Masters. I don't think it does. I think that--I think 
it certainly is, if it's applied to speculators.
    Mr. Dingell. Would it be helpful?
    Mr. Masters. I think it could be helpful depending on how 
it was written.
    Mr. Dingell. I'm not sure we're going to get a cure-all 
here, but I'm trying to figure what package we're going to get. 
So you agree that a margin requirement would be helpful, but 
not as helpful as I would like it to be. What others with 
regard to the three loopholes that we have discussed?
    Mr. Masters. You know, with the position limits, one of the 
interesting things about, for instance, crude oil right now is 
there really aren't any position limits, so you've got what's 
called accountability limits. You need some position limits. 
And the reason we suggested coming up with a committee of 
exclusively physical commodity hedgers and producers, 
consumers, is that we feel like that that group will do nothing 
to jeopardize their liquidity, but on the other hand they, 
better than anybody else, because the market is for them, will 
choose appropriate position limits.
    The exchanges right now are for profit entities. The 
investment banks are for profit entities. They both benefit 
from larger amounts of speculation. So those entities should be 
excluded from this panel. The panel should be exclusively 
physical commodity producers and the consumers. And I think if 
you do that, you'll do a lot in terms of making position limits 
really work and really get to what Roger was saying, get to 
everybody they need to get to in the sense of making them small 
enough.
    And for many of the small speculators, you will go back and 
put the large speculators back on a level playing field with 
the small speculators, because the small speculators still have 
to deal with position limits on many commodities. So this is on 
a commodity-by-commodity basis.
    And then with regard to our other solutions, looking at an 
overall level of speculation which could be dictated by that 
same panel would also allow markets to function for bona fide 
hedgers, but not be excessively speculative.
    Finally, my solution number three, that's a way of doing 
things relatively quickly. That could be phased in over some 
short amount of time. But clearly that would have the effect of 
greatly reducing index speculation, which we think is 
distorting the price of discovery mechanism.
    Mr. Dingell. Thank you.
    Mr. Krapels, I hope you don't feel I've been discourteous 
to you. If you please.
    Mr. Krapels. I generally concur with the observations that 
my fellow panelists have made. I worry about two things. One is 
the law of unintended consequences that if we write the 
regulations wrong, then we're going to see things that we had 
not anticipated.
    Mr. Dingell. That's an area of peculiar expertise to the 
Congress.
    Mr. Krapels. And it is available for free. So I worry about 
that.
    And I don't think you can make these changes as quickly as 
Mr. Masters suggests. I think you want to take your time. 
You're dealing with public pension funds, by and large, as the 
primary culprits in this story, so you want to give them time 
to unwind their positions.
    But generally having bigger margin requirements makes a ton 
of sense to me, position limits and much, much more disclosure.
    Mr. Dingell. Gentlemen, thank you.
    Mr. Chairman, you've been extraordinarily courteous to me. 
Thank you.
    Mr. Stupak. Thank you, Mr. Dingell.
    Let me just go a second round here. Just a couple of quick 
questions, if I may. I think we've established that the 
excessive speculation is probably 30 to 50 percent of the cost 
of a barrel of oil right now. And Mr. Gheit indicated that if 
we pass comprehensive legislation, maybe like 6330, H.R. 6330, 
we might be able to burst this bubble. And if we burst the 
bubble, there are concerns that it would have a devastating 
effect on the economy. Some people have expressed that 
interest.
    Now, Mr. Masters, you didn't seem to think so. You think 
that it would just shift, and the amount is so small right now 
because it's 1 percent, but if it moved to 5 percent, because 
we really don't know how big it is because we don't have the 
information, CFTC has not provided that information--if it goes 
to 5 percent, if it is around 5 percent, would that change your 
thought, and is there some devastating effects we have to be 
careful of?
    Mr. Masters. I think that to a certain extent what we're 
talking about here with speculation, the right terminology 
really isn't a bubble, it's really more like a tumor, and it 
grows and grows and grows. And in this case it's hurtful as it 
expands. So the time to act is before it gets any worse. And so 
when you discover a tumor, you take it out immediately. And so 
I think that if we were to let this continue to go on further 
and further, that there could be more unforeseen consequences 
on the economy.
    Mr. Stupak. Mr. Gheit, did you want to comment on that, or 
you don't think it would have much impact if we in 30 days 
brought down these prices 30 to 50 percent if we passed 
comprehensive legislation and have the CFTC close these swap 
loopholes?
    Mr. Gheit. You have to understand there are obviously 
winners and losers. The losers are going to be the winners of 
the last 4 or 5 years, and the winners are going to be the 
consumers that are paying for gasoline up to their noses, the 
farmers. These are the people that are hurting and hurting 
pretty badly. If oil prices are cut in half, that is not the 
end of the world. Actually it will make most industries--the 
airlines will have a lot more opportunities, then the 
manufacturers, and everybody.
    So I think there are going to be benefits that clearly 
outweigh the cost. And for the pension funds of all the people 
that invested very heavily, it's still--as Mr. Masters said, 
it's still a small percentage of the total portfolio. And by 
definition, if oil prices go down $30 or $40, the stock market 
is going to go up by thousands of points, and everybody will be 
happy. So at the end of the day I think putting an end to the 
speculative bubble, or tumor, as Mr. Masters put it very 
eloquently, I think we should have done that a year ago. It's 
not too late, but we should do it as soon as possible.
    Mr. Stupak. Well, let me ask this then. You've been 
mentioning pension funds, so I've been circling in on that. But 
one major investment bank told the committee that 12.5 percent 
of their commodity investments were held by sovereign wealth 
funds, yet the CFTC tells us they know of only one sovereign 
wealth fund investing in the futures market. Clearly there's a 
disconnect here with the information. Do you think it's 
important for the CFTC and Congress to have a clear view of the 
role of sovereign wealth funds in futures markets?
    Mr. Gheit. This is part of the recommendation. I said 
disclosure; the best thing is full disclosure. I mean, they 
have to break down exactly who the largest holders are, what 
their positions are, and how much money they are making. So 
before they make this outrageous forecast for oil prices, we 
should know exactly how much do they have to gain by it.
    Mr. Stupak. Let me ask everyone this question, if I may, 
and I'll end with this one. How much liquidity does the 
commodity market need to perform its price discovery and 
hedging function? How much liquidity is too much liquidity? Is 
the market drowning in liquidity when 70 percent of an open 
interest in oil is held by speculators? Kyle, I think it is 
chart number 2 in my testimony where you see that 70 percent of 
that open interest liquidity. What is the right percentage it 
should be?
    Mr. Gheit. Well, the right percentage should be really 
discussed with the physical hedgers. These are the people who 
need to know. Some of these trades are going to be done 
principle to principle, and all you need is just an 
intermediary. This intermediary should not dictate the price, 
should not take physical possession, if you will. All they 
have, like a broker--put the buyer and the seller, but do not 
get in the middle to profit from the transaction. So you know 
the airline, the oil companies and all these people can sit 
down and say how much liquidity in the system we need to have 
an efficient market. So I don't believe it's going to be double 
or triple the physical market. I would venture to say it's 
going to be less than 20 percent of the physical market.
    Mr. Stupak. Less than 20.
    Anybody else care to comment? Mr. Diwan.
    Mr. Diwan. Yes. I remember when I started working with Ed a 
few years ago that actually we had a very liquid market, and we 
had exactly the same problems. So I would be really careful 
here about saying that we do not need any of the financial on 
the market. I think it will be a tremendous unintended 
consequence to the market. What we need is to have position 
limits and everybody abides them no matter which window or 
which door they come into the market. Then everybody has a 
playing field, and we know what's going on. But banning certain 
types of players or limiting as a percentage of the market I 
don't think makes a lot of sense because then you will have a 
two-tiered market.
    Mr. Stupak. Well, the market always needs speculators, 
doesn't it? I mean, when oil was at a reasonable price, let's 
say $40 a barrel, $8 to $9 was probably the speculator's fee or 
the risk premium or whatever you want to call it. Now we're at 
$65 or $70.
    Mr. Diwan. Correct. But if you go to see the pension fund, 
they say we're not speculating, we're hedging the portfolio.
    Mr. Stupak. And what business is the pension fund hedging 
against?
    Mr. Diwan. Well, it's hedging against the declining dollar. 
They hold huge assets in dollars which are declining in value.
    Mr. Stupak. But isn't the exception supposed to be for a 
bona fide exception; not speculation or hedging on the cost of 
the dollar, but rather the airline industry or trucking 
industry who really needs that hedge?
    Mr. Diwan. Well, if you have a pension fund, and the value 
of the stocks you're owning are going down, you're not going to 
be very particularly impressed by the manager of your pension 
fund, and you want him to do something about it. And the one 
thing he discovered how to do over the last 2 years is to hedge 
part of his portfolio on other commodities which are rising as 
the dollar declines. Gold is one, oil is another one, et 
cetera, et cetera.
    Mr. Stupak. Sure.
    Mr. Diwan. My point is about the unintended consequences 
that Ed was talking about. If you reduce the market, you have 
other unintended consequences.
    Finally, about the liquidity issue. I don't know if you 
have 71 percent of speculator here in the market, it means it 
is more liquid. I can say it is probably less liquid, because a 
lot of the players are coming only on one side of the market. 
Actually what you have here is a lack of liquidity. You have a 
lot of buyers. You don't have a lot of sellers. And the 
question is how do you rebalance that, how do you make these 
pension funds be willing to play both sides of the curve, not 
only one side?
    So I don't think we're struggling through too much 
liquidity. I think we're struggling through too little 
liquidity.
    Mr. Stupak. Mr. Masters, Mr. Krapels, do you care to 
comment?
    Mr. Masters. Sure. So the issue with pension funds trying 
to hedge, I mean that whole issue, I mean pension funds are 
capital markets investors, and they are looking at the 
commodity. They are trying to look at the commodity markets as 
a place for buying and holding. The whole concepts, buy and 
hold, long term, we're investors, don't apply to the commodity 
futures markets. These are capital market concepts. They're not 
commodity futures concepts.
    Commodity futures expire, in some cases monthly. The reason 
they expire monthly is because they have a physical delivery 
functionality that allows physical delivery participants to 
theoretically take delivery. That's why they expire. So the way 
pension funds do this is they buy a futures contract, and then 
they sell when it gets ready to expire, and they exchange it 
for another contract. So effectively what it is is like a lay-
away in the commodity futures markets. They never actually take 
delivery.
    So there's other ways that they could hedge inflation, or 
there's other ways that they could make a bet against the 
dollar. But certainly if they're involved in the commodities 
futures markets, let's have them involved in a strategy. Give 
the money to a CTA, give the money to a CPO, but let's have 
them involved in a buying and selling strategy rather than a 
one-way, long-only allocation strategy. And if they do that, 
let's make sure that they and every other participant in the 
futures market abides by very strict position limits.
    Mr. Krapels. I would only add that futures markets are 
incredibly valuable parts of our economy. We do not want the 
oil futures markets to go away. They need more than 20 percent 
speculation to survive. They need multiples of the physical 
markets trading to survive.
    What we have here is a matter of degree. The markets in the 
last couple of years have just become excessively the home of 
the speculation that Mr. Masters has talked about. We do not 
want to regulate the futures market out of existence, we want 
to regulate it back to the point where it was in the 1990s, 
which was an excellent, excellent market for hedgers.
    Mr. Stupak. My time is up.
    Mr. Whitfield for questions.
    Mr. Whitfield. Thank you, Mr. Chairman.
    I was reading a newsletter recently from a gentleman 
covering the European market regarding supply and demand, and 
he made the comment that he was predicting that all production 
would be going down between 3 and 4 and 5 million barrels a 
day. And then I noticed that T. Boone Pickens testified in the 
Senate a couple of days ago, and he was talking about he thinks 
the oil production has peaked, and that it will be going down 
around 8 percent in the years to come on a yearly basis. And, 
of course, you all have testified this morning that if we adopt 
some regulatory changes relating to speculating in the futures 
market in oil, that we can have a significant reduction 
relatively soon.
    But overall we know that supply and demand is going to be 
the real answer and questions that we have to address. So I 
would ask you all, do you all agree with this peaking theory 
that I referred to; one, the fellow at the European Union 
saying he thinks it's going to be going down 4 to 5 million 
barrels a day, Boone Pickens saying 8 percent a year in 
production? Would you agree with that, Mr. Gheit?
    Mr. Gheit. One of the problems is that the higher oil 
prices, they provide no incentive whatsoever for oil-producing 
countries to open their resources.
    Mr. Whitfield. You say the higher?
    Mr. Gheit. Higher oil prices do not help supply at all.
    Mr. Whitfield. Why is that?
    Mr. Gheit. It's very simple: Because they have no incentive 
whatsoever to give access to the resources to oil companies. 
ExxonMobil is sitting on $45 billion in cash that is earning 3 
percent. They are not--this is one of the smartest companies, 
but they have no access to resources, OK. Russia is kicking out 
BP. Every time you open the newspaper, you see Russia has 
another problem with BP. Why? Russia has no incentive to 
increase production. Since their budget was based on $25 oil 5 
years ago, now it's $140, they have so much money, they don't 
know what to do with it.
    Mr. Whitfield. And is Russia still the number one producer 
in the world of oil?
    Mr. Gheit. Excuse me?
    Mr. Whitfield. Russia is the number one producer of oil in 
the world?
    Mr. Gheit. Yes. Russia is now the largest oil producer in 
the world.
    Mr. Whitfield. What about the rest of you, do you have any 
thoughts on this peaking issue?
    Mr. Diwan. I agree with Fadel here, that the problem is 
access to resources. The problem is its capacity of production, 
it's not about peak oil. There's plenty of molecules on the 
ground, and every time the prices increase, we have more oil in 
the ground because it's an economic concept, it's not a 
physical concept. There's plenty of oil. At different prices we 
have more oil. If it's $300 oil, we'll find a lot more oil. It 
just costs more to go get.
    So the issue here is really about capacity of production. 
This is an industry which has lived with low oil prices and, 
because of that, low returns on capital and has not invested 
over the last 20 years. And now we're in a situation which is a 
Catch-22. We do not have spare capacity, and it's unlikely that 
anybody will accept to build spare capacity just for the fun of 
it. We are asking producers to invest hundreds of billions of 
dollars to create a capacity that they will not choose to bring 
down the price of their own commodity. It's not going to 
happen.
    Mr. Whitfield. What percent of the oil reserves are held by 
governments today?
    Mr. Diwan. The reserves that are held by government that we 
do not have access to are 77 percent in our latest calculation 
for oil.
    Mr. Whitfield. Seventy-seven percent?
    Mr. Diwan. Yes.
    Mr. Whitfield. Is there anyone else?
    Dr. Krapels.
    Mr. Krapels. I think the problem of accessing the resource 
space is the number 1 problem. It shows a supply in elasticity 
to price. You can let the price go up, but the supply does not 
follow. However, I don't take the next step, which is, I think, 
what Boone Pickens has done, and to argue that you're going to 
see an 8 percent decline in worldwide oil production per year. 
That is not the case. Every responsible oil-forecasting 
organization I know has oil production going up over the next 
few years, not going down. So it's just a question of supply 
and demand are tight, but supply isn't falling off the cliff.
    Mr. Whitfield. Maybe he meant fields were going down, 
production fields were going down.
    Mr. Krapels. Yes. In certain areas that's going to happen.
    Mr. Whitfield. OK. Thank you very much.
    Mr. Stupak. Did you want to answer?
    Mr. Masters. Sure. I was just going to make one point. One 
of the reasons that financial investors have had such an impact 
on the price of oil here is because of the supply inelasticity 
in the oil market. And so having that supply inelasticity in 
combination with an enormous amount of investment flows coming 
into that commodities futures market has led to an explosion in 
prices. And so that's the real issue you've got. You've got 
both things that have allowed prices to really move.
    Mr. Stupak. Mr. Inslee for questions.
    Mr. Inslee. Thank you.
    We've talked about five actions closing three loopholes, 
including the Enron loophole, position limits, margin 
requirements. But some have argued that if we take what I 
consider fairly commonsense actions, that it would simply drive 
these dark markets offshore overseas. This would not solve the 
problem. What is the response to that? Why should the United 
States act even though we don't have total global hegemony over 
this regulatory climate?
    Mr. Krapels. In my opinion, there are only two places in 
the world where you can trade oil in this way, and that's the 
United States and the U.K. If those two countries adopted 
similar policies, there's no other place they can go.
    Mr. Inslee. Why do you say that?
    Mr. Krapels. Because the tradition of having liquid futures 
markets has not extended to other countries. People would not 
park billions of dollars in Dubai.
    Mr. Masters. I would just make a comment. When people say 
that, I think it's an empty threat, and the reason that is is 
because the physical delivery functionality that our markets 
offer is very important. That helps anybody that's doing 
business in the United States, its transacting, and their 
trading partners stay in the United States. We are the largest 
producer of food in the world. We are the largest consumer of 
energy in the world. So physical producers want to use, and 
consumers want to use, delivery terminals potentially in our 
markets. And having the physical people in our markets allows 
for better price discovery. If you take away the physical 
folks, and you just operate an exchange overseas, like you can 
with financial futures, it's a much different proposition. In 
fact, it will be you just get a casino in the sky, and it 
doesn't have any real bearing on what the actual price of crude 
oil or other physical commodities should be.
    Mr. Inslee. You have all portrayed an incredibly dramatic 
picture; I mean, if we're talking about 30 or 50 percent 
reductions in the price of oil, the economic ramifications that 
are obviously stunning. And all of us understand what's on the 
table here.
    I want to contrast that to if we have relatively small 
increases in domestic production. You've had parameters each of 
you have talked about somewhere in the 30 to 50 percent 
reduction price associated with excess speculation. If you had 
increased production, say, in the next 10 years, worldwide, of, 
say, 1 percent, which represents if everything optimistically 
was perfect drilling everywhere in the United States, from 
offshore to the Arctic to the National Mall and the South Lawn 
of the White House, you might get an increase of maybe 1 
percent of increased crude production in the worldwide market. 
How would that, by contrast, decrease the price of oil? Is it 
anywhere close, I guess is the question, of 30 to 50 percent 
reductions we're looking at in dealing with excess speculation?
    Mr. Diwan. Well, the question is how much demand is 
growing. And I could suggest that if it's growing at 1 percent, 
probably demand would be growing at least at the same level. I 
mean, prices will equilibrate.
    The issue here is really it's very important to understand 
that if you do not have spare capacity, you have a problem in 
this market, and this market basically is inherently bullish, 
because what you're creating is any problem happening anywhere 
in the world at any time means that you'll have less supply 
than what you expected. And every time you have less supply 
than what you expected, and no matter what your expectations 
are, it means that prices will go up.
    Mr. Krapels. If I can put a different take on the question, 
and it's a very good one, is there anything that gives you more 
bang for the buck in the short term than what we're discussing 
today in terms of relief for consumers? And the answer is, no, 
I think this is the biggest bang for the buck in the short 
term. It's where we have misgoverned our own commodity markets, 
and that's why I use the Pogo quote. Long term, though, we 
absolutely have to do things to reduce demand and to increase 
supply, and I think everybody understands that, but you do that 
at an $80 price level and not at $150 price level.
    Mr. Inslee. And by the way, I think if we really wanted to 
increase supply, we need alternatives to oil. We haven't talked 
about that much today. We've talked about a few more holes in 
the ground. But if you really want to decrease the demand for 
oil, provide Americans an electrified transportation system. 
Use the A123 battery company to drive our cars electrically. 
Use the Sapphire Energy Company which has found a way to 
develop ATSM-certified gasoline from algae.
    If you really want to decrease the price of oil, get an 
alternative to oil. And I can report to you that's going to 
happen here because the U.S. Government ultimately is going to 
drive those innovations. We're going to start work on that 
shortly. Thank you.
    Mr. Stupak. Thank you, Mr. Inslee.
    Mr. Barton for questions.
    Mr. Barton. Thank you, Mr. Chairman. I've got some 
questions, but I also have some comments.
    I have listened as we have talked about this issue, and I 
have to respond a little bit to what my good friend from 
Washington State just said. I could hypothesize that we could 
produce 1 million barrels a day out of Alaska that we're not 
doing, a half a million barrels a day off the coast of 
California that we're not doing, 1 million barrels a day out of 
the eastern Gulf of Mexico that we're not doing, probably 
another million to 2 million barrels a day off the Atlantic 
coast where we haven't even looked, 2 million barrels a day in 
shale oil that we're not developing, and 1 million to 2 million 
barrels a day to from coal-to-liquids that we're not doing.
    Now, if we were doing that right now, we would double the 
domestic oil production equivalent in the United States of 
America, and, given the tightness of the world oil markets, we 
would have a much different supply and demand.
    Now, we're not doing it, we're not doing it. I'm on a bill 
with Chairman Dingell on oil speculation. I'm on an independent 
Republican bill that the CFTC has basically implemented since 
we introduced it. I think speculation is a problem. And I agree 
with what Dr. Krapels said that in the short term it's the 
easiest thing to do, although it's not easy, but it is easier 
than physically going into the field and developing some of our 
domestic resource space.
    But to say that the only answer is purely to make it much 
more difficult to play in the futures market in the 
commodities, or specifically oil, is disingenuous because the 
futures market track reality in the world, and the reality in 
the world is we have a tightness in the demand-supply situation 
that speculators are taking advantage of, because, as one of 
you gentlemen just said, if you're watching the value of the 
dollar decline 1 percent a month or 2 percent a month, you 
can't put a lot of money in the stock market. You go into 
something that has the ability to be a hedge against inflation 
and the decline in the value of the dollar. And if there are no 
limits in the futures market, it's a rational decision for 
these hedge funds and these other funds to put a lot of money 
into the futures market. It's rational. People are rational 
with money.
    Now, my question is, can we physically--in the U.S. market 
can we discriminate between a physical player who is either 
selling a real barrel or buying a real barrel and a nonphysical 
player? Can you in an open society have different rules based 
on why people are in the market? Is that possible? Anybody?
    Mr. Gheit. Yes, it's possible, because they have different 
goals and objectives. A physical hedger, what you want to 
manage again is the commodity risk. They are in the business 
not to make money, they are in the business not to lose money. 
But the financial players are in the business for one thing 
only, and that's to make a lot of money in a short spurt of 
time.
    Mr. Barton. But everybody on the panel agrees that we can 
have different rules for different types of potential investors 
in the futures market.
    Mr. Krapels. And we've done so for decades.
    Mr. Masters. That's always been the case.
    Mr. Barton. OK. Now, do you agree or disagree on the 
suggestion that we could require a higher margin for a 
nonphysical investor in the futures market? Do you all agree 
with that?
    Mr. Krapels. Yes.
    Mr. Diwan. Yes.
    Mr. Gheit. Yes.
    Mr. Barton. Now, to go to the question that Mr. Inslee 
raised, I have been in reasonably close contact with the makers 
of the U.S. market in Chicago and in New York, more in New York 
than in Chicago. I'm told that if we tighten up, require more 
transparency, higher margins, position limits, eliminate 
exemptions, that a large number of the so-called speculators, 
the paper barrel people or the video barrel people, are just 
going to go to the ICE market or some other market.
    Now, two of you gentlemen seem to indicate they won't go 
there because they don't have the--those markets may not have 
the financial stability. But I think when the New York Merc guy 
testifies later, he'll show you that the ICE market has grown 
almost exponentially as compared to the New York market.
    So how can we regulate in the United States in a way that 
does some of the good things we want to do and have that roll 
over into the ICE market, in the Dubai market, and maybe even 
the Hong Kong market for that matter? How do we do that?
    Mr. Gheit. The two markets account for almost 90 percent of 
the trade. If we control both markets, we basically control 90 
percent of the whole market.
    Mr. Barton. Under the current system. But if we change the 
market condition in the United States, what's to say that we 
won't----
    Mr. Gheit. It has to be simultaneous. We change the rules 
in the U.S., and simultaneously we'll have to require a rule 
change on the ICE market. Or we can--as I said before in my 
recommendation is that any company doing business in the U.S. 
must play by the U.S. rules, period, whether it's on the ICE or 
in the NYMEX.
    Mr. Diwan. I think you need to regulate those two markets, 
and that takes care of that.
    There is a third market which is important, which is the 
over-the-counter market, which is a gray market that we don't 
know much about.
    Mr. Barton. We sit here in Washington and we think whatever 
we do rules the world, but we have a global--we certainly have 
a global market in oil. And I'm still not sure how we--if we do 
what we think is the right thing, how we get the rest of the 
world to follow suit? How do we get the British Parliament to 
put the same rules in place for the ICE exchange that while 
it's physically in Atlanta, it's based in London? And how do we 
make sure that Dubai or Kuwait or wherever don't create their 
own market because they can have lower margins and less 
transparency?
    Mr. Diwan. I think most of the financial players will only 
put money in a market which is regulated, stable, that you know 
what's happening. So I don't imagine that the liquidity would 
move offshore. I believe you actually do have to regulate those 
both exchanges in the same way, and then you close most of the 
issues here on the future exchange.
    The way I look at the oil market, it's like a huge iceberg, 
and we see only the tip, which is the future market. But there 
is also what's happening below the water level, which is the 
over-the-counter market that I don't think you can do much 
about, or at least I do not know how you would go about it.
    Mr. Barton. But everybody agrees that we can some way 
require comparability or conformity with the U.S. market 
regulations; that it's legally, constitutionally, realistically 
possible?
    Mr. Masters. Currently any futures contract that calls for 
delivery inside the United States, we're the largest consumer 
of energy in the world, is automatically subject to CFTC 
regulation. Any futures contract that cash settles against a 
U.S. contract with physical delivery provisions is also 
automatically subject to CFTC regulation unless specifically 
exempted. If not exempted, then no person inside the United 
States may lawfully trade that contract. So I don't think that 
there's anywhere in the world that wants to lose U.S. 
speculators or U.S. physical players.
    The 60 percent of the volume on the cash-settled WTI crude-
oil contracts on the International Continental Exchange, the 
ICE, is traded by U.S. entities. If the CFTC had not exempted 
the ICE from regulation, then those U.S. entities would not be 
able to trade that contract, and it would have been very 
difficult for that contract to ever get off the ground.
    Mr. Barton. Mr. Chairman, can I ask one more question? I 
know my time is expired.
    Mr. Stupak. You bet you.
    Mr. Barton. If we were to set a different margin 
requirement by law or by regulation in the U.S. market for 
nonphysical traders in the oil futures market, what's a 
ballpark figure on what that is? Because it's not an equity 
market like Mr. Masters has pointed out. This is an option to 
purchase or sell at a given price at a given time. So instead 
of 5 percent or 3 percent like it is today, what would that be? 
Do you want it to be as high as 50 percent, or do you want it 
to be 10 percent, 25 percent? Just a general ballpark figure 
for nonphysical players in the oil futures market in the United 
States.
    Mr. Gheit. I go for the whole thing. I go for 50 percent.
    Mr. Barton. Fifty percent. The same as stocks then.
    Mr. Krapels. I would get to a lower number more slowly. I 
would gradually increase the margins over a period of time and 
maybe get to a one-third requirement.
    Mr. Barton. Thirty-three percent.
    Anybody else? Does anybody vote to keep it the same? You 
all think it needs to go up?
    OK. Thank you, Mr. Chairman.
    Mr. Stupak. Thank you, Mr. Barton.
    Mr. Melancon for questions.
    Mr. Melancon. Thank you, Mr. Chairman.
    I just recently visited on a congressional trip with all 
oil ministers in the Middle East. And, of course, we were at 
first kind of taken aback when they said they would much rather 
see the price between $70 and $80 than where it is now. I grew 
up in the sugar industry, and my dad always said the only 
people that make money when sugar moves up or down are the 
brokers because there's a reason to sell, and I guess that's 
what we're dealing here.
    One of the things, Mr. Diwan, I was looking at, on your 
chart that you gave us with oil prices and structural trends, 
it showed that the price started moving up around January of 
'04, got up to about $80 apparently in the early part of '06, 
and then dropped out and then took off. Is there a point in 
here that you can point to that the CFTC quit regulating the 
ability of the people to hedge?
    Mr. Diwan. Not that I know of.
    Mr. Melancon. Is there someone?
    Mr. Diwan. I think the price movement is explained more by 
the physical here.
    Mr. Krapels. Do you mean in the last quadrant of the one 
that----
    Mr. Melancon. Yes. Looking at the graph that was there, we 
had movement upward, then we had a spike down, and then it took 
off.
    Mr. Diwan. The spike down was really because oil stocks 
were building very fast. And after that oil, basically OPEC cut 
some production to reduce supply to tighten stocks a little 
bit. This is what happened in 2006 when we saw prices declining 
to $52.
    Mr. Krapels. We saw it mostly as an increase in the 
positions of funds, frankly, that there was just a large 
increase in those funds' positions that drove the price up to 
the last $135.
    Mr. Melancon. And I guess that's what I was trying to find 
out is if that is a direct correlation. And that's why I was 
asking about the date when the exceptions were being made by 
the CFTC.
    Mr. Krapels. It's very hard to track that precisely.
    Mr. Melancon. When did ICE open up its doors and start 
trading here?
    Mr. Krapels. 2000.
    Mr. Melancon. 2000.
    Mr. Krapels. I think ICE started in 2000, and really took 
off after the Enron collapse.
    Mr. Melancon. And the Enron collapse was about----
    Mr. Krapels. About 2002.
    Mr. Melancon. 2002. Yes, that's about when the margins 
started actually. It looks like it really started moving on a 
steady climb around January of '04, a little bit before 
January, maybe midyear of '03.
    Do any of you all have the price for gasoline or fuels by 
countries or regions? I have people back home, of course they 
think they're the only ones impacted. And I pick up bits and 
pieces on the news. In Saudi Arabia, obviously they subsidize, 
Dubai, Abu Dhabi, the UAE. But in places in Europe and South 
America or wherever, do we know what the price is?
    Mr. Gheit. The Europeans are paying exactly double what 
we're paying. China is paying probably more than half what 
we're paying. The difference between what we pay and what the 
Europeans are paying are basically government taxes on fields 
in Europe. The difference between what we're paying and what 
the Chinese are paying are basically government subsidies. So 
it is government policies that really influence the price. Now, 
the over-the-counters, obviously they are totally subsidized. 
Their gasoline is cheaper than water, so they don't really come 
into the picture at all.
    Mr. Melancon. One of the questions that's always been out 
there, and I heard some--I think Mr. Barton had talked about if 
we were producing in all our offshore areas, we could probably 
be producing the additional millions of barrels of oil that we 
need. If in fact that did happen, what happens to us with the 
capacity to refine and process jet fuel, diesel fuel, gasoline? 
Do we still get mired? Do we have enough capacity to move it 
into fuels, or do we have some inverse action on the market?
    Mr. Gheit. It would definitely have an impact. Increased 
supply definitely will cool off prices. The prices will come 
down. Two ways: we can increase supply or reduce demand, or 
better, we could do both, and they will have the same impact. 
Prices will have to go lower.
    Mr. Melancon. Worldwide what's the capacity of refining?
    Mr. Gheit. Refining, about 80 million barrels.
    Mr. Melancon. And what's the daily production of oil?
    Mr. Gheit. Production is about 85 million.
    Mr. Melancon. So it produces about 5 million barrels a day 
more than we're processing for usage. And the reserves are 
about how much a percent of total?
    Mr. Gheit. The reserve?
    Mr. Melancon. Yes. Worldwide, do you know what the 
reserves, oil reserves, are?
    Mr. Gheit. Oil reserves are 1.4 trillion barrels.
    Mr. Melancon. No, excuse me, I didn't mean what's left in 
the ground or estimated. What do we have that's in excess of 
what's out there going through the process?
    Mr. Gheit. Basically most of the excess is in Russia, the 
Middle East and basically OPEC countries. And the numbers flow 
between 2 to 3 million barrels a day.
    Mr. Melancon. Thank you, Mr. Chairman.
    Thank you, gentlemen.
    Mr. Stupak. Thank you.
    Mr. Walden for questions, please.
    Mr. Walden. Thank you, Mr. Chairman.
    Are the processed reserves, I guess that which has been 
extracted from the ground and in the pipeline, if you will, or 
in storage, are they going up or going down for gasoline, for 
oil, for natural gas?
    Mr. Diwan. The short-term stock changes as the product are 
increasing, but the crude is decreasing.
    Mr. Walden. So if the processed product is increasing, then 
you would think that--is it increasing at a rate that keeps 
pace with demand, or is the rate of demand outstripping the 
rate of increase in the processed product?
    Mr. Diwan. The processed product in the United States, the 
average inventories are above their 5-year average. So we have 
a little bit more stock than we usually do at this time of the 
year. However, this market, the price discovery of this market 
is really crude led, it's not product led.
    Mr. Walden. Now, I think you indicated, and correct me if I 
got this wrong, that $35 of the price of a barrel of crude 
could be tagged the incoming money of the nonphysical traders? 
Is that what you all said or somebody said?
    Mr. Gheit. I would say more.
    Mr. Walden. More?
    Mr. Gheit. Much more than that.
    Mr. Walden. How much?
    Mr. Gheit. I would say the decline in the dollar probably 
had between $10 and $15 in the price spike, and everything 
above $65, the difference between that and the current price is 
pure speculation.
    Mr. Walden. So $10 to $15 is the price of the dollar, value 
of the dollar?
    Mr. Gheit. $10 to $15 tied to the currency. And the 
difference between $65 and $130 or $125 would be basically 
speculation.
    Mr. Walden. And do each of you agree with that analysis?
    Mr. Krapels. I think we each have our own thoughts on it. 
Fadel is probably at the low end of the range of--at the high 
end of the range in terms of the speculative impact. I had 
guessed somewhere in the 30s or 40s.
    Mr. Walden. Mr. Masters, do you have any?
    Mr. Masters. I think the answer is that nobody really 
knows. When I talk to refiners, that's what they tell me is 
that the price should be in the neighborhood of $65, $70.
    Mr. Walden. OK. There have been some rather senior members 
around this institution who have--individuals that have called 
for nationalizing our refinery system. Do any of you think 
that's a good way to--for the market or to reduce costs?
    Mr. Gheit. A very bad idea.
    Mr. Walden. Mr. Diwan?
    Mr. Diwan. I don't think we have a particular problem in 
refining right now.
    Mr. Walden. Mr. Masters.
    Mr. Masters. The interesting--I don't agree at all.
    Mr. Walden. OK. Neither do I.
    Mr. Masters. I would make one point. One of the interesting 
things that's happening with refineries is that on the one hand 
they've got, as I said, demand and demand. They have investor 
demand helping to drive up their input cost, which is what they 
have to buy crude oil. And on the other hand they're trying to 
sell gasoline, which is driven by consumer demand, which in the 
U.S. has gone down in price. So it's hard for them to go out 
and build new refineries when they've got a situation in which 
crack spreads are going down. It's in part because of investor 
activities.
    Mr. Whitfield. Mr. Krapels.
    Mr. Krapels. Refiners are not the problem. Trying to build 
a refinery in the United States today is practically 
impossible. So nationalizing it will only make that worse.
    Mr. Whitfield. All right. I'm glad to hear you all say 
that. I concur, but you are the experts here.
    There are some Members around this body that think that's 
the way to go. Everybody is trying to find an answer here. So 
if we were to move forward and require some sort of limitation 
on how much you can--nonphysical traders can--do and some more 
transparency, A, how long do you think that would have to be in 
effect before we saw a real change in the price of crude oil, 
and so, how much and how long?
    Mr. Gheit. Well, if we assume that speculation is playing a 
major role in the jump in oil prices, these people can switch 
their position very quickly from long to short, but other 
members of the panel said you might take a longer time. But the 
market would be very efficient very quickly, and it will come 
to an equilibrium where prices will go a lot faster than many 
people think. People are not going to wait to lose money; they 
will bail out as soon as possible.
    Cut your losses and bail out. And that's exactly what the 
market is going to do.
    Mr. Whitfield. Sort of like what is happening in the 
housing market?
    Mr. Gheit. I would say 30 to 60 days we will probably see 
an immediate impact.
    Mr. Diwan. Well, if you change your regulation, and the 
expectation is that you are going to have to change your 
behavior, you have an interest to do it as quickly as possible 
before everybody else. And probably they are doing it already, 
but that's the idea. But then you can allow more time to adjust 
if need be. But I think the bigger impact will be quite 
immediate.
    Mr. Whitfield. OK.
    Mr. Masters.
    Mr. Masters. Just to Roger's point, one of the interesting 
things I saw last week where commodity prices have come down, 
and on the wire some people had said that was because of the 
threat of potential congressional legislation. So when the news 
wires were saying people were already reacting to that, I think 
that's a pretty powerful statement.
    Mr. Krapels. I agree. While I would like people to give 
time to make these important adjustments, my guess is that 
there will be quite a stampede to liquidate positions quickly.
    Mr. Whitfield. OK. So if we did that piece, more 
transparency, different positioning requirements, and all, and 
if we passed legislation saying we're going to allow access to 
domestic supplies onshore and offshore, which do you think 
would have the most value in the marketplace to consumers?
    I realize one would be very quick, one would be long term, 
but both would send signals to a market that's a little 
dysfunctional right now, correct?
    Mr. Gheit.
    Mr. Gheit. Both are needed, but one is immediate and one 
longer term. But both are needed. There is no one better than 
the other.
    Mr. Whitfield. All right.
    Mr. Gheit. They are both needed, and we should start them 
now.
    Mr. Whitfield. So one better than the other, both are 
needed, one has an immediate impact, one has sort of a long----
    Mr. Gheit. In terms of energy security the latter is much 
more important.
    Mr. Whitfield. OK.
    Mr. Diwan, do you agree with that?
    Mr. Diwan. No. I don't know anybody who would buy or sell 
oil today, because we will have a new supply in 7 years on the 
market. I think they will wait to see what happens and they 
will see what happens to demand and the supply in the rest of 
the world, et cetera. I don't think that people will signal buy 
or sell on that--on that change.
    Mr. Whitfield. Mr. Masters.
    Mr. Masters. I would just go back to my example of the 
person losing weight. We have a chronic issue, which is energy 
security, that can be solved with legislation. We've also got 
an acute issue where we have a patient that's dying. We need to 
save the patient first, so----
    Mr. Whitfield. So maybe not a crash diet, but a long-term 
rebalancing of what we do?
    Mr. Masters. I think in this case that we're trying to save 
the patient first.
    Mr. Whitfield. Right.
    Mr. Masters. I think that we want to use the quickest means 
available to help save the patient. Then we can deal with the 
longer-term issue of diet and exercise.
    Mr. Whitfield. Right. So crash diet for immediate weight 
loss, change of--yes, Doctor?
    Mr. Krapels. I would hate to see the two actions linked. I 
think it would be nice to do them separately, because I think 
the first one, the one we're talking about here today, is 
actually fairly easy to do. I think releasing reserves for 
future production is a much more contentious and difficult 
issue.
    Mr. Whitfield. Contentious or not, is it the right thing to 
do for the country's energy security and for the price for 
consumers in America?
    Mr. Krapels. It is. If you can get the legislation passed, 
that would be great.
    Mr. Whitfield. Thank you.
    Mr. Stupak. Mr. Green, questions?
    Mr. Green. Thank you, Mr. Chairman, and I appreciate the 
second round.
    Mr. Gheit, your testimony calls for setting volume limits 
for commercial traders such as oil companies or refiners, that 
are related to their physical needs. Would you explain the 
purpose of this recommendation, because it seems like that is 
not the problem that this morning's talked about?
    Mr. Gheit. No, basically this was the basis for setting 
trading limits for the noncommercial.
    What I am saying, let's start with the physical traders 
first, the people who are going to own a barrel of oil, whether 
it is going to be an airline or refinery companies or whatever, 
and then set what is needed for the financial market in terms 
of volume.
    So the basis should be the physical market, and then we 
should study, we should examine how much more liquidity is 
needed to be provided by the financial market. And based on 
that--I don't want to put any trading limits before I know 
exactly what that oil industry need, what the airline industry 
need, what the chemical industry need--then of the collective 
volume, if you will, we set the volume of their financial 
market.
    Mr. Green. In this next two questions for everyone and--one 
of them is, on June 6th there was an $11 increase in the crude 
oil price. In terms of the fundamental factors of supply and 
demand, how do you explain that and what explanation for that 
kind of movement is there, for that $11 on that 1 day?
    Mr. Diwan. I think there were two events that day that were 
important. One was the discussion by the head of the European 
Central Bank to increase interest rates, so it has an immediate 
impact to lower the value of the dollar, increase the value of 
the Euro. So you had a lot of people who were selling, 
actually, oil because they felt the fundamentals were weak, who 
were cut short and had to cover.
    The other was the comment by an Israeli minister saying 
that an attack against Iran is unavoidable. And these two 
events have pushed oil prices much higher.
    Mr. Krapels. If we live in a world where an obscure 
statement by an Israeli politician can make the price of a 
vital commodity like oil go up by $11, then we're in deep 
trouble, and we need to do something about it.
    Mr. Masters. I don't think there was any case that was 
driven by speculation.
    Mr. Green. Well, let me give you an example. And I know 
yesterday Saudi Arabia had producing nations there and our 
Secretary was there. About 2 weeks ago Saudi Arabia mentioned 
that they were at an increased production of about 200,000 
barrels.
    And about a week ago there was a rig off the coast of 
Louisiana that BP had called the Thunder Horse, that had been 
hurt during Katrina and had to be hauled in. And it is actually 
producing 250,000 barrels a day, and that had no impact at all 
on the market.
    Mr. Diwan. We have been waiting for Thunder Horse for 3 
years or 4 years, so it has been in the news for 4 years.
    Mr. Green. Well, it is producing now, but wait until 
another hurricane. I guess that's the concern. Because, like 
you said, somebody can--an Israeli air official can say 
something.
    Some of us are so frustrated. We have almost 700 million 
barrels in the SPR. Some have said well, what if the President 
mentioned that we're going to start releasing, without a 
timetable, from the SPR. That would impact. And without a 
timetable, though, it could be tomorrow, it could be next week. 
What would that do to the speculators?
    Mr. Gheit. It would definitely cool off speculation. I 
cannot quantify it, but it is definitely going to cool off 
speculation.
    History has shown that when President Bush did it in the 
Gulf War, it had an immediate impact. When President Clinton--
had an immediate impact. It is a psychological impact on the 
market. Remember, it is a market that runs on speculation and 
expectation, not the physical, not the physical.
    For example, Petrogas made a discovery offshore Brazil, and 
all of a sudden oil prices dropped. Why? This field, if 
developed, will take 5 years before we will see a drop of oil 
on the market. But guess what, the market cooled off 
immediately.
    It is a knee-jerk reaction to something that is going to 
happen years from now. It is not physical market; it is all 
expectation.
    Mr. Diwan. If I can answer that, I can have exactly the 
converse scenario, which means if this President releases oil 
from the SPR right now, the market will believe that we are 
going to be attacking Iran later on, and oil prices will 
increase immediately.
    OK, so if you release oil by this President, without any 
reason, from the SPR, I can assure you oil prices will jump up.
    Mr. Gheit. Just in this market it moves up, good news or 
bad news. When rebels kidnap oil workers in Nigeria, oil prices 
go up.
    Mr. Green. Frankly, Congressman Melancon has constituents 
that are getting kidnapped in Nigeria in the offshore rigs.
    But--I understand it is volatile, but that was just some 
discussion from folks who actually come from the oil patch who 
said, what would we do if just the President made this 
determination that, OK, over the next months we are going to 
start releasing it; we're not going to tell you when. But what 
would happen? And I would hope it wouldn't signify that we're 
preparing to attack anybody.
    Thank you, Mr. Chairman.
    Mr. Stupak. Thank you, Mr. Green.
    Mr. Burgess for questions, please.
    Mr. Burgess. Thank you, Mr. Chairman.
    Mr. Masters, I want to thank you and commend you for 
putting many of the arguments in terms of medical terminology. 
It makes it much easier for me to understand the tumor versus 
the bubble: excise the tumor, treat the underlying obesity, but 
you have to take care of the heart attack now.
    On the issue of the longer term, the supply-demand, I 
think, Mr. Gheit, you mentioned it as well. Is it fair to say 
that market fundamentals include facts not just about our 
current supply, but expectations of future supply and demand? I 
think you referenced that as far as the Brazil field was 
concerned.
    Mr. Gheit. Yes.
    Mr. Burgess. Did we--I say ``we'' in the sense of the 
United States Congress, House of Representatives--invite 
speculation by failing to take measures that would result in 
increased domestic supply?
    Mr. Gheit. Yes.
    Mr. Burgess. And again, this needs to be a two-pronged 
approach, that of the position limit for the immediate effect, 
the immediate beneficial effect it would have, as well as all 
of the other methods that have been outlined as far as 
increasing domestic production. Is that correct?
    Mr. Gheit. Yes.
    Mr. Burgess. And is there any reason to proceed with only 
the position limits currently and ignore the increased supply 
activities that we'd know we will surely have to undertake 
within 8 to 10 years' time?
    Mr. Gheit. No, that is not going to get the results that we 
are hoping for. It has to be full court press. It has to be a 
combined near-term and long-term strategy. We just cannot stop 
and go. It has to be a long-term strategy that will be 
implemented over a long period of time.
    But immediately we have to do what's possible to burst this 
bubble.
    Mr. Burgess. Well--and I appreciate your saying that 
because I firmly believe that an all-hands-on-deck philosophy 
is really what--what is required here. And so often we seem to 
be fighting ourselves up here. This has been a refreshing 
exchange this morning, or this afternoon, and I really 
appreciate everyone's participation.
    You know there is another committee that meets just across 
the hall that tends to be perhaps a little more flamboyant in 
attracting the press coverage, and they brought in all the oil 
company executives. Is it safe to say that we've moved beyond 
the point where we vilify the oil company executives?
    Mr. Gheit. I've been in this business almost 30 years, and 
I can tell you, the oil companies get blamed for something that 
they have absolutely no control over. They are price takers. 
They don't have any--it's not a brand name; they are basically 
in the market every day whether oil prices are $10 or oil 
prices are $140. Yes, $140 or $130 oil creates this huge 
profit, and everybody is blaming the oil companies for creating 
this bubble, or the run-up in oil prices.
    But the fact of the matter is, believe it or not, the 
stocks of the large, integrated oil companies have been down 
for the year despite $140 oil. So shareholders of the large, 
integrated companies are not happy at all with $140 oil.
    Mr. Burgess. Well, does anybody on the panel disagree with 
that philosophically?
    Is there anyone on the panel who believes that creating a 
situation where we tax our domestic oil companies to a greater 
degree will result in more energy being available at a lower 
price to the consumer? Can anyone envision a scenario where 
that would work?
    We hear discussion of legislation that is going to be 
before this Congress before the end of year where we will 
increase the taxes on our domestic oil producers, the idea 
being that we will now be able--by doing that, we will be able 
to lower the price to the consumer and increase the amount of 
supply.
    Does anybody believe in a rational world that that will 
work?
    Mr. Gheit. That's totally, totally irrational.
    Mr. Burgess. OK. Well, I appreciate your candor.
    And, Mr. Chairman, we'll revisit that again at the 
appropriate time. It has been a long morning. In the interest 
of time, I'm going to yield back the balance of my time.
    Mr. Stupak. I thank the gentleman.
    Mr. Dingell for questions.
    Mr. Dingell. No, Mr. Chairman. I thank you for your 
courtesy.
    Mr. Stupak. Thank you, Mr. Chairman.
    Well, that concludes all questions of this panel and I want 
to thank each of you for coming on a very important testimony 
and it certainly has helped us out quite a bit. Thank you.
    Mr. Burgess. Mr. Chairman, if I may, if there are questions 
that come up as a result----
    Mr. Stupak. Put it in writing.
    Mr. Burgess. OK, thank you.
    Mr. Stupak. And as always, we'll submit them in writing if 
someone has further questions. We usually keep the record open 
for 30 days after a hearing to allow opportunity.
    I thank you all for your expertise. Thank you.
    Mr. Stupak. I will call our second panel of witnesses to 
come forward.
    On our second panel we have Mr. Doug Steenland, who is 
President and CEO of Northwest Airlines; Mr. Eugene Guilford, 
Jr., who is the Executive Director and CEO of the Independent 
Connecticut Petroleum Association; and for our third 
introduction, I will yield to my friend, Congressman Mike Ross 
of Arkansas, to introduce Mr. Williams.
    Mr. Ross, would you like to introduce Mr. Williams, please.
    Mr. Ross. Again, Mr. Chairman, thank you. I'm a member of 
the full committee, not this subcommittee, and I appreciate 
your selecting an Arkansan as one of our witnesses today. And 
if my projections are correct--I'm on the Energy and the Health 
Subcommittees, and I think sometime around 2029, I will get to 
chair one of those, and I will certainly return the favor to 
you at that time.
    I would like to thank my fellow Arkansan, Mr. Steve 
Williams, for coming before the Committee to testify today 
about his extensive experiences with rising diesel prices. Mr. 
Williams is the Chairman and CEO of Maverick USA, which 
operates the second largest company-owned flatbed truck fleet 
in the United States. In addition, he has served as both the 
Chairman of the Arkansas Trucking Association and the American 
Trucking Association. Steve is also on the Executive Committee 
of the American Transportation Research Institute and the 
Transportation Research Board of the National Academies of 
Science.
    Mr. Chairman, I think it is important that we have Steve on 
the panel today, because we have trucking businesses that are 
going out of business because of these high diesel prices; and 
we also all know that it directly relates to the recession 
we're in, because we're all paying more for products. Because 
if you think about it, just about everything you buy ends up on 
the shelf by way of a truck that's typically running on diesel.
    So, Mr. Chairman, thank you for your interest in this 
issue. Thank you for this hearing today. And thank you for 
including an Arkansan that has nationwide experience in the 
trucking industry as part of this panel. I look forward to 
Steve's and everyone else's testimony.
    Mr. Stupak. Thank you, Mr. Ross. And if you're going to be 
subcommittee chair in 2029, I think you'll have to take that up 
with Mr. Dingell; he will still be running the Committee then.
    It is the policy of this subcommittee to take all testimony 
under oath. Please be advised that witnesses have the right 
under the Rules of the House be advised by counsel during their 
testimony. Do any of you wish to be advised by counsel?
    The witnesses are indicating that they do not. Therefore, I 
ask you to please rise and raise your right hand and take the 
oath.
    [Witnesses sworn.]
    Mr. Stupak. Let the record reflect that the witnesses 
replied in the affirmative. You are now under oath.
    Mr. Steenland, we'll start with you, please, for an opening 
statement. We have 5 minutes set aside; if you have a longer 
statement, it will be submitted for inclusion in the hearing 
record.
    Mr. Steenland.

   STATEMENT OF DOUG STEENLAND, PRESIDENT AND CEO, NORTHWEST 
                            AIRLINES

    Mr. Steenland. Thank you, Chairman Stupak, Chairman 
Dingell, Ranking Member Barton. Thank you very much for the 
opportunity to appear here today. I do so wearing two hats, one 
as Chairman of the Air Transportation Association, the trade 
association of U.S. airlines, the other is as the President and 
CEO of Northwest.
    Having listened to the experts on the original panel, that 
was a very thoughtful discussion. As an industry we support 
their recommendations, and we would urge the Congress to adopt 
them expeditiously. Rather than to repeat what they've just 
gone through, I think it would be more helpful from the 
committee's perspective to focus on the real impact that this 
incredible increase in the price of oil has had on the airline 
industry.
    Specifically, oil is now 40 percent of the total cost of 
the airline industry. For U.S. carriers from 2007 to 2008 the 
oil bill has gone from $41 billion per year to $61 billion per 
year, a $20 billion increase. For Northwest alone, in 1 year 
our fuel costs have gone up by $2 billion. The U.S. airline 
industry this year is forecasting a loss well in excess of $10 
billion.
    In this instance, the challenge is not so much--is as much 
the speed with which the increase has occurred as the 
magnitude. If you look back over the years from 2005 to 2007, 
oil went from approximately $26 a barrel to $72 a barrel. While 
those price increases were difficult, given the time period 
over which they occurred, they were, by and large, manageable. 
In 2007, with oil in the $70 range, the airline industry was 
profitable, and we would love if 2008 came even close to 
looking like 2007 was like.
    However, when the price of oil over the course of 10 months 
goes up $70 a barrel and every dollar, in Northwest's instance, 
costs us $42 million a year of additional costs. When oil goes 
up almost $11 in 1 day, when you have volatility in any given 
day of, well in excess of $3, you are really living in an 
entirely different world.
    The consequences of this are dramatic. So far this year, 
eight airlines have shut down, two have filed for Chapter 11, 
and all of the major network carriers are in the process of 
significantly shrinking their capacity. In Northwest's case, we 
will be between 8.5 and 9.5 percent smaller in the fourth 
quarter of this year than where we were last year. Other 
airlines are shrinking in similar magnitude.
    Why is this happening? It is happening because we have no 
choice but to take these price increases and pass them through 
to our customers.
    We've been through significant restructurings. In 
Northwest's case, we have taken $2.5 billion a year out of our 
cost structure and through increasing our revenue; so, 
therefore, we need to pass these prices through. As they get 
passed through, the consumer is going to be traveling less, 
because as prices go up, just like with anything in society, 
demand will go down. And when demand comes down, we need to 
adjust the supply to reflect what that demand is.
    So, unfortunately, communities will lose service, the level 
of service will go down, inconvenience will increase, and 
adjustments in employment will have to take place. And given 
the impact, the incredible impact of air service on the 
economy, that is then going to ripple through and have a 
correlative effect on other businesses and other things that we 
do.
    For those reasons, we would urge that the Congress act 
quickly, agree on a bipartisan measure that can address the 
issues that got raised by the panel this morning. And we would 
hope that we would be able to see legislation passed by the 
Congress by the August recess.
    Thank you very much.
    Mr. Stupak. Thank you.
    [The prepared statement of Mr. Steenland follows:]

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    Mr. Stupak. Mr. Williams, your opening statement. I would 
ask you to pull that mike up there a little bit.

  STATEMENT OF STEVEN R. WILLIAMS, CHAIRMAN AND CEO, MAVERICK 
                           USA, INC.

    Mr. Williams. Mr. Chairman and members of the subcommittee, 
my wife and I started our company in 1980 with one truck. We 
employ nearly 2,000 people today and operate a little over 
1,500 tractors. And our company serves the steel, building 
materials, and flat glass industries.
    In 2007, despite revenues of 300 million, we lost money for 
the first time in our 27-year history of the company. Our fuel 
bill increased $12 million between '06 and '07, and we were not 
able to recover this increase due to the weak economy and, 
frankly, a loss of pricing power.
    The national average price of diesel, of diesel fuel, on 
June 16th was $4.62. If this price remains constant for the 
rest of the year, our company's fuel bill will increase by 49 
million this year, from 66 million to 115 million, a 72 percent 
increase.
    The fuel crisis is having a dramatic effect on the trucking 
community at large. Tom Albrecht, an analyst with Stephens 
Inc., wrote in June that these fuel prices could force as many 
as 14 to 16 percent of the trucking industry to cease 
operations. Not only will this further reduce capacity in the 
market, it will make the used truck market even worse, for, you 
see, there are few domestic buyers for used equipment, and over 
the last year we as a company have been forced to wholesale our 
tractors to Russia and to Vietnam.
    But the implications to the U.S. economy obviously are of 
much greater concern. Energy experts can certainly lend more to 
this debate than I on the impact that speculation is having on 
the energy markets. But, for example, Professor Greenberger 
testified on June the 3rd before the U.S. Senate Commerce 
Committee and said, ``By any objective assessment, the crude 
oil market is now overwhelmingly dominated by speculation.'' 
We've heard an awful lot about that already today, but at a 
minimum, energy trader statements continue to be, at a minimum, 
self-fulfilling prophesies.
    Additionally, oil prices simply do not reflect the 
fundamentals of supply and demand. Tim Evans, an energy futures 
analyst at Citigroup, wrote on June 5th that if demand growth 
is faltering and supply is rising, just as economics would 
predict should occur in the face of rising prices, just why are 
prices remaining so persistently strong,'' end of his quote.
    I would like to thank the subcommittee's interest in 
examining ways to regulate this activity. And to whatever 
degree commodity prices are affected by speculation in the 
market, we must eliminate this unnecessary burden on our 
economy and we must do so quickly. I would emphasize 
``quickly.''
    I believe that our efforts to deal with the current costs 
of fuel must be part of a comprehensive strategy, and the 
strategy must first focus on the factors that are driving the 
cost of diesel.
    Second, the strategy must include regulatory policies that 
will allow our industry to be better stewards of resources that 
we have, a strategy that could reduce our dependence on foreign 
oil and improve the quality of our environment.
    We need an overall strategy that can improve fuel 
efficiency and safety while serving the U.S. economy that will 
be twice its current size within the next 20 years. Trucks will 
continue to deliver most of our Nation's goods; however, in 
order to meet the demands of our society, 87 percent more 
trucks will be required than are currently on our highways. 
This will further increase congestion, air pollution, and will 
burn even more fuel.
    In order to meet this challenge, we must consider policies 
to limit vehicle speeds, create incentives for limiting--for 
adopting environmental and safety technologies, invest in 
highway system capacity to reduce highway congestion, and 
safely improve vehicle productivity.
    We must encourage the use of renewable fuels, but as a part 
of a sensible national fuel standard. We must assess the true 
value proposition of renewable fuels, such as corn ethanol and 
biodiesel. We must understand the implications of their 
productions and the conditions of their use. Increased domestic 
exploration and increased refining capacity must be encouraged 
when they can be expanded in an environmentally responsible 
fashion.
    I have voluntarily invested tens of millions of dollars in 
virtually all of the fuel-saving, safety-improving technologies 
that are available in the market today, but it is going to take 
much more than that. It requires a globally competitive 
regulatory change to enable the continued evolution of the 
trucking industry to safely meet our Nation's needs.
    I have authored and offer a comprehensive strategy to meet 
the challenges that we face. And this document has been--as a 
part of this attachment, this document details specific action 
items, and it is titled U.S. Freight Transportation 
Sustainability Initiative.
    I appreciate this opportunity, Mr. Chairman, to offer my 
insight into measures that this Nation should take to address 
the high cost of petroleum. Thank you.
    Mr. Stupak. Thank you, Mr. Williams.
    [The prepared statement of Mr. Williams follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Stupak. Mr. Guilford, your opening statement, please, 
sir.

 STATEMENT OF EUGENE A. GUILFORD, JR., EXECUTIVE DIRECTOR AND 
       CEO, INDEPENDENT CONNECTICUT PETROLEUM ASSOCIATION

    Mr. Guilford. Thank you, Mr. Chairman, members of the 
committee.
    In March of 2004 our association went to Connecticut First 
District Congressman John Larson with concerns about the 
behavior of the energy commodity markets, the enormous daily 
volatility we were seeing in those markets, and asked if our 
congressman couldn't work with other Members of Congress to 
initiate a Government Accountability Office study of the 
authorities of the Commodities Futures Trading Commission to 
determine if the CFTC had sufficient authority and resources to 
properly oversee all energy complex trading activities.
    Our members, on behalf of our heating oil consumers in our 
State, are physical traders. We offer to our consumers the 
opportunity to lock in their heating oil prices for the 
summer--for the winter, rather--so this is an extremely 
important issue to us and to our customers.
    When that study's results came back, we learned that the 
CFTC had multiple loopholes in its statutory authorities 
without reason, not the least of which we now know to be the 
Enron loophole, the swap trade loophole, and the foreign board 
of trade loophole, effectively blinding the CFTC to more than 
half of the daily activities in the daily complex.
    In short, we learned that the CFTC did not have sufficient 
authority and resources, and while Congress recently closed the 
Enron loophole, we know we have more to do.
    The evidence of the need of this inquiry here and elsewhere 
in Congress is clear. On Black Friday, June 6th, 2008, crude 
oil hit an all-time high of $139.12 a barrel. Heating oil and 
gasoline hit new highs of $3.98 and $3.55 a gallon 
respectively. The total crude oil traded on the NYMEX that day 
equaled over 1 billion barrels, or 12 days of world consumption 
and 214 days of U.S. consumption. Four billion barrels of 
heating oil were traded, equaling half of the total U.S. 
consumption of heating oil in 1 year.
    Wall Street's justification for sending this multibillion 
dollar energy bill to America pointed to: A, one Morgan Stanley 
analyst's view of crude oil going to $150 a barrel by the 4th 
of July after having declined $15 a barrel in the previous 
week; B, European central banks worrying about inflation and 
increasing interest rates driving down the value of the dollar, 
increasing the billions flowing from investment banks and hedge 
funds into commodities; and C, the Israeli Transportation 
Minister threatening Iran over its nuclear program.
    Not even when Hurricanes Katrina and Rita actually did 
damage to America's energy production did prices rise as much 
as on June 6th, 2008, and nothing that happened that Friday had 
any bearing on energy production. It was entirely speculation-
driven fear on the part of Wall Street.
    The average service station operator we represent had to 
spend $8,000 for a load of gasoline in 2002 and now, for that 
same load of gasoline, spends over $25,000. The average 2.5-
million-gallon heating oil distributor that had to capitalize 
just over $1 million for the heating season in 1998-99 for 
wholesale heating oil, will need to capitalize over $9 million 
in the coming heating season, more than three times the net 
value of the company itself. In 1 month, next January 2009, 
this average local heating oil retailer will sell 20 percent of 
its annual volume, requiring $2 million in credit, just to buy 
wholesale heating oil for the general public, in 1 month.
    Now, in a world of trillions and billions, that may not 
seem like a lot, but multiply that times 300 heating oil 
retailers needing $2 million each, and pretty soon that's real 
money. And we're a small State. Multiply that times 25 oil-heat 
States, and you a have tremendous amount of capital that's 
going to be needed just to get us through this coming season. 
And we face the same credit crunch as every other American when 
it comes to attempting to borrow these staggering sums just to 
be able to serve our customers.
    These crushing prices hurt not just the least well off of 
our customers, whose annual low-income energy assistance 
benefit paid for less than half of last year's energy needs and 
it will pay for less than a quarter of next year's energy needs 
based on where prices are headed, but these prices now drive 
the middle class to taking longer to pay their bills as they 
rely increasingly on using credit cards just to get by.
    More than a quarter of our customers were over 45 days late 
in paying their energy bills at the end of the recent heating 
season. In short, America was drowning in a sea of red ink 
trying to cope with energy costs, from airlines to trucking 
companies to large and small businesses, agricultural and 
everyday Americans.
    We advocate strong and immediate actions to close the 
foreign boards of trade and swap trader loopholes in current 
law. We advocate for strong and immediate actions to 
substantially reduce the role of noncommercial energy complex 
investors as they are now buying more paper contracts than 
physical energy. And where they cannot accept physical energy 
itself, their role in the energy market trading should be 
severely restrained.
    You will hear that such actions will reduce liquidity and 
potentially drive prices higher. We are all drowning in the 
liquidity pumped into this system from hedge funds, investment 
banks, index funds, and derivatives traders.
    We had no liquidity issues in 2002 in a market that 
operated with greater stability and certainty as the point of 
price discovery that it was meant to be with significantly less 
participation from noncommercial financial interests. This 
debate, to us, is about the liquidity we lack in being able to 
serve our customers, and our customers' lack of liquidity in 
being able to afford the energy they need to run their 
businesses, to use transportation, and to heat and cool their 
homes.
    Our members are taking strong advantage of alternative fuel 
opportunities that this Congress has provided them; more than 
30 percent are involved in biofuels. Our State has been the 
first in the Nation to create a fuel oil conservation fund and 
board specifically designed to reduce the amount of fuel oil 
that is used in our State by upgrading old, inefficient heating 
systems to new, high-efficiency heating systems by taking 
advantage of some of our industry's best technology. So we're 
trying the best we can on the demand side.
    Finally, this isn't just about oil and gasoline. The 
December 2008 NYMEX contract for natural gas has increased in 
value 83 percent since January, a harbinger of higher 
electricity and heating costs. In the coming months, just 
around the corner for natural gas users, prices have already 
started to rise for end-user consumers of natural gas. So there 
doesn't appear to be anywhere anyone can go in order to escape 
the reality of higher energy costs in America.
    Thank you. And I would be happy to answer any questions you 
might have.
    [The prepared statement of Mr. Guilford follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Stupak. Thank you. And thank you all for your 
testimony.
    Mr. Steenland, at the outset let me note, your testimony 
contains a number of helpful recommendations: reduce excessive 
speculation in energy market such as closing the Enron 
loophole, or the London loophole as some call it; closing the 
swaps; and sealing off some of the exemptions that have 
contributed to the rapid run-up in oil speculation.
    Is dealing with the impacts of market speculation the 
highest priority for the airline industry?
    Mr. Steenland. I think the highest priority is to tackle 
the overall price of fuel, given the fact that it is now 40 
percent of our total cost pie.
    And when we look at it, we think the solution is a 
multifaceted solution and that clearly addressing the financial 
speculation, I think, is the most immediate thing that the 
Congress can do.
    I think we would also recognize, as the first panel did, 
that there are longer-term issues that have to be addressed in 
the form of supply, in the form of conservation. We ourselves 
are investing $6 billion in terms of a new fleet that will be 
more cost effective, but when you think about the kind of 
impact on the price of crude that the remedies for financial 
speculation were talked about, whether it is $30 or $40 a 
barrel or whether it is $60 or $70 a barrel, and the fact that 
those changes, those price impacts if they are true are likely 
to happen very, very quickly, that's what brings us to the 
point of recommending that the Congress act with alacrity and 
look to tackle on these reforms promptly, hopefully prior to 
the August recess, so we can see some of the price rollbacks 
happening now. Because the impact of those price increases is 
truly devastating.
    Mr. Stupak. What percentage of the increase in your oil 
costs can you actually put on a ticket, pass on to the 
consumer? Do you pass it all on? Do you pass part of it on?
    Mr. Steenland. Clearly, we have not passed all of it on. 
Partly it is due to the speed with which this has occurred. If 
you just look at our first quarter, for example, our fuel bill 
for operating basically the same size airline went up by about 
$450 million. And our pretax profit. This year, we had a pretax 
loss versus the pretax profit. That gap was about--we 
deteriorated to the tune of about $250 million. Our energy 
costs went up $450 million. Our profitability swung by about 
$250 million.
    Mr. Stupak. So what would you say to the consumer out 
there? How much has their airline ticket gone up because of oil 
prices--20 percent? 30 percent? 40 percent?
    Mr. Steenland. It probably depends where you are. So some 
places, it probably has gone up 20 or 30 percent; others, it 
has not gone up very much at all.
    The unfortunate reality is that it hasn't gone up enough to 
offset the price increases that we have seen so far. So if you 
take the prices that are now in the market and you simply carry 
them forward, because we've been sort of chasing this price 
going up, and if you assume that these are the prices for the 
next 12 months, the next 24 months, the price of air travel is 
going to materially increase over what it is today.
    Mr. Stupak. What happens if it stays at $140 a barrel? Is 
there going to be an airline industry left?
    Mr. Steenland. Well, I think there will always be an 
airline industry, but I think the industry will be much smaller 
than what it is today simply because the number of consumers 
that can afford what air travel is going to be at those rates 
is clearly going to be less; and the industry is going to have 
to right-size itself to deal with the fewer number of people 
that will be traveling.
    Mr. Stupak. Thank you.
    Mr. Williams, with diesel at about $5 a gallon, how many 
firms have gone under? And what's the outlook for your 
industry?
    Mr. Williams. Well, the only time this has occurred prior, 
where there has been a significant loss in capacity, was in 
2001. But all the records would indicate that we're in 
uncharted waters here. The acceleration of failures is 
increasing. Again, the 10 to 15 percent would represent 150 to 
200,000 individual units, and the numbers are hard to get 
because--I think it is important for people to understand, when 
they think of the trucking industry--91 percent of what we 
would call ``the capacity that exists in the market'' is made 
up of carriers that have 20 trucks or less; the remaining 9 
percent maybe represents 60 percent of the overall capacity. So 
it's a very fragmented community.
    A lot of those people that have gone out of business, they 
don't send out press releases and say, we've quit. You will 
just find the truck in a yard, or you will find the truck on a 
used truck lot somewhere, so it takes a while for that data to 
come in.
    But it is going to get much worse as--there are an awful 
lot of mid-sized carriers that are--that have failed, but due 
to credit extensions and the fact that there is such a 
tremendous amount of used equipment sitting with no buyers in 
this market, that situation will get much worse before it gets 
better.
    Mr. Stupak. Let me ask you what I asked Mr. Steenland, on 
the--how much can you actually pass through to the customer? 
You said you haul steel. How much of that cost--do you pass the 
whole increased cost to the company you're hauling the steel 
for?
    Mr. Williams. In 2007, when our fuel prices increased and 
the economy was extremely soft, we were not able to pass that 
on, and therefore, we had--again, our first net loss.
    Mr. Stupak. First loss, yes.
    Mr. Williams. This year, things are better. We're actually 
holding our own. We are almost back to break even, which I 
never thought would look good. But it is simply a--the economy 
is not recovered in those segments that we serve; it is simply 
because of capacity that has gone out of the market. Therefore, 
we have our pricing power again.
    I think I can respond to that a little easier by saying, 
for example, the steel industry, whose prices of their steel 
maybe are up threefold this year and are doing quite well, 
still cannot move their product to market because of capacity.
    The building material side of the business, business is off 
30 percent compared to last year. And last year was a horrible 
year. They can't move what little shipments they have. They 
have trouble moving it.
    And certainly the flat glass industry is suffering from a 
lot of the same issues.
    So the impact and the supply/demand equation for us simply 
is being driven by a lot of capacity leaving the market. And 
those people that remain will be able to raise their prices to 
recover that fuel.
    Mr. Stupak. A lot of our constituents are saying, when I go 
to the store, things cost more, cost more because of that, the 
transportation cost. Is that a fair statement?
    Mr. Williams. We are and continue trying to pass our costs 
on, and it will vary from market segment to market segment 
depending on the capacity that is still in that marketplace.
    Customers--again, in '07 it was the same situation, but in 
'07, did not keep this as whole as they currently are. And you 
will see the price in the various products we haul will 
certainly have to increase as the cost of fuel continues to 
rise. There is no doubt about it.
    Mr. Stupak. Mr. Guilford, you recommend that Congress take 
a look at heating and oil futures contracts, and you suggest 
heating oil may skyrocket far in excess of supply and demand 
simply because diesel costs are hedged against the price of 
heating oil, even though diesel volumes far exceed heating oil 
volumes.
    Has your industry raised this with NYMEX or the Commodities 
Futures Trade Commission?
    Mr. Guilford. Yes. We've explored the idea of separating 
the heating oil and the diesel fuel contract, but we are not 
exactly certain what the consequences of that would be yet.
    Mr. Stupak. Were they receptive to this idea of splitting 
them?
    Mr. Guilford. Sure. I think that they are receptive to 
listening to the idea about whether or not the contract should 
be separated, but we all understand the responsibility to make 
sure we understand what the potential consequences of doing 
that would be before it's actually done.
    So it's important to us that we understand that first, and 
I think one of the examples of why it is important to continue 
that discussion is what happened on June the 6th. The heating 
oil contract went up $0.29 that day, the heating oil contract 
on the eve of one of the most severe heat waves in the 
northeastern United States. Clearly, it wasn't driven by 
demand--not a lot of people using heating during that period of 
time. So it seems to us reasonable that we would want to 
explore that.
    Mr. Stupak. Thank you.
    Mr. Whitfield for questions.
    Mr. Whitfield. Thank you, Mr. Chairman.
    Mr. Steenland, did I understand you to say that your jet 
fuel costs over the last year increased by $420 million in 1 
year?
    Mr. Steenland. If that were only true. We expect our 2008 
costs to be almost $2 billion more than our 2007 costs.
    Mr. Whitfield. This is fuel costs only?
    Mr. Steenland. This is fuel costs, right. And for the U.S. 
carriers we expect costs to be over $20 billion higher in '08 
versus '07.
    Mr. Whitfield. Well, obviously you can't operate very long 
with fuel costs that high, I would assume.
    But what steps can you take, as CEO, under the current 
market conditions to address this issue? What steps are 
available to you?
    Mr. Steenland. Well, the most immediate effect is to look 
to try to pass these costs through, onto the customer, and 
that's not always effective because customers--passengers don't 
always have to fly. And when the price of air travel gets a 
little too high, some elect to drive in lieu thereof, take 
alternative vacations. Business travelers may elect to stay 
home. So there is clearly an elasticity here.
    Other options are to look to recognize that demand is going 
to go down and fly less.
    Mr. Whitfield. So can you cancel routes on your own, or do 
you have to get some regulatory approval to do that?
    Mr. Steenland. You can do it on your own. And every major 
U.S. Airline has announced significant capacity reductions in 
the fourth quarter when you measure the size they are going to 
be this year versus the size they were going to be last year.
    Mr. Whitfield. Mr. Williams, in the trucking business, what 
percent of your business would be under contract and what would 
be what I would refer to as a ``spot market''?
    Mr. Williams. Oh, unlike the pre-deregulation market where 
it was more regulated, almost everyone still operates under 
what would be characterized as a contract----
    Mr. Whitfield. OK.
    Mr. Williams [continuing]. Market. But it is handled--the 
discipline functions more as a ``spot market,'' quite frankly.
    Mr. Whitfield. So under the terms of the contract, you 
cannot readily pass on those fuel costs to the shipper?
    Mr. Williams. No.
    There is traditionally a fuel surcharge mechanism that's a 
function of that, but unfortunately, the way the price of fuel 
has moved, it has never kept us whole. Prices continuing to 
increase were always behind and then the burden of cash flow, 
certainly for many of the operators, is a burden as well.
    Mr. Whitfield. You said your fuel costs increased by $12 
million last year?
    Mr. Williams. That was between '06 and '07. It actually has 
gone up--we're projecting it to go up $50 million this year.
    Mr. Whitfield. $50 million?
    Mr. Williams. $50 million.
    Mr. Whitfield. Well, I know that both of you do support the 
proposals to reform that the first panel had suggested, and we 
certainly are looking into that.
    I want to approach this from a little different 
perspective, Mr. Williams, and that relates to--I was reading 
an article that said that the U.S. has the stiffest diesel 
emission standards in the world, and that trucks meeting those 
standards get on an average of 3 miles per gallon.
    Now, is that accurate or is that misstated?
    Mr. Williams. I would say that's been misstated.
    Mr. Whitfield. OK.
    Mr. Williams. The facts are that as we have met the most 
recent APA mandates, I believe in '02, '07, we'll have a 2010 
coming. In the first two series of those, we actually lost fuel 
efficiency as we were achieving the goal of improving the 
exhaust emissions.
    We support that, and we have tried to invest in 
technologies and systems that would enable us to have an 
offset. We certainly want to continue to support that, but the 
reality is, we actually ended up running the same miles, burn 
more fuel to accomplish the cleaner environment.
    Mr. Whitfield. So you're----
    Mr. Williams. But the numbers more--my fleet average is 6.7 
miles per gallon.
    Mr. Whitfield. 6.7 miles, OK.
    Mr. Williams. So the 3 would be--there's actually, 
unfortunately, probably equipment that still remains in the 
fleet that would maybe operate at that level.
    Mr. Whitfield. Well, I think it is important that we talk 
about this, because we do all want to protect the environment. 
But we also know that, in doing that, it is raising our costs, 
and it is going to raise fuel costs.
    And I read this quote in an article comparing trucking in 
China and trucking in America. And it talks about in China a 
$23,000 diesel engine would meet Euro 2 requirements. The Euro 
requirements go up to 4. And in the U.S. the trucks that we buy 
are in the neighborhood of $47- to $50,000 per diesel engine, 
and yet we're getting like 6 miles to a gallon. I mean--yes, 6 
miles to a gallon.
    But I just appreciated your comments on that, because I 
didn't know what the actual facts were.
    Mr. Williams. Well, I think it's important that we're 
missing--it is interesting, listening to the previous panel's 
remarks and the fact that we have--it has taken $5 diesel and 
$4 gas for us to be talking about this. And yet there are so 
many things we have within our control regardless of the price 
that will allow our fleets to be much more efficient, but we 
have chosen to not accept the challenge of trying to make the 
regulatory changes that need to be made.
    But the U.S. has the most restricted truck size, weight 
policies, of any industrialized nation on this planet.
    Mr. Whitfield. Right.
    Mr. Williams. And it will be interesting to see if we're 
still enamored with doing the right thing if prices fortunately 
were to come down. Because I think quite frankly there is a 
motivation to do an awful lot of things we need to be doing 
regardless of the price, going to the point about emissions and 
overall sustainability of our industry; and I think that we 
need to spend a lot of time talking about those as well.
    Mr. Whitfield. It affects our competitiveness with 
countries like China and so forth. Thank you.
    Mr. Melancon [presiding]. Thank you, Mr. Whitfield.
    Chairman Dingell is coming. Do you have any questions?
    Mr. Dingell. Mr. Chairman, thank you. Mr. Steenland, 
welcome. You served the committee of the country well, and I am 
very grateful to you.
    Mr. Steenland, as I understand it, Northwest Airlines uses 
a futures market to hedge its fuel costs. However, I believe 
you are now encountering a market that has been thrown so far 
out of bounds by pure speculation and speculators that prices 
no longer reflect the true fundamentals of supply and demand.
    Is that statement correct?
    Mr. Steenland. We believe that that is true, Mr. Chairman.
    Mr. Dingell. What is the practical effect of that?
    Mr. Steenland. The practical effect, as we have seen, is an 
increase over the last 10 months in the price of oil, over $70 
a barrel, which puts oil in completely uncharted waters and 
threatens the integrity of the airline industry as we know it.
    Mr. Dingell. But in your view, the market no longer exists 
as a proper hedging tool for you and for the rest of industry 
because of the fact that it has gotten so distorted; is that 
correct?
    Mr. Steenland. Well, I think it is primarily the financial 
players that are in the market that are--whether it is the 
``video barrels'' or ``paper barrels,'' whatever you call them, 
that's clearly had the sort of the retro-rocket impact on the 
price of fuel.
    We hedge today where we can. It is not very attractive at 
these prices, but when you consider what the run-up is, we look 
to basically buy some insurance policy against prices going 
even higher. So we do that, and the market's available to do 
that, and it is an important piece of the energy process, but 
it is clearly the financial players that have had the impact 
that we've all testified to and talked about this morning.
    Mr. Dingell. On page 8 of your testimony you gave us some 
superb recommendations, but just to try to summarize, would 
raising market margin requirements on speculators have a 
positive effect on the market?
    Mr. Steenland. We believe it would.
    Mr. Dingell. To what degree and why?
    Mr. Steenland. Well, I think by taking some of the leverage 
out of the business so you're not just putting up 5 percent, 
but you're putting up 50 percent or 33 percent, depending upon 
the recommendations. That may mean that there will be less 
liquidity and less pressure coming in on the futures market, 
which clearly--as that price continues to move up, it affects 
the spot price that we have to pay.
    Mr. Dingell. Mr. Williams and Mr. Guilford, would you like 
to comment on that last question?
    Would raising margin requirements to speculators have a 
positive effect on the market?
    Mr. Guilford. Yes, we think that it would, although we have 
a question about, if you're operating a $5 billion hedge fund 
in Fairfield County and, for example, you have the ability to 
invest a million dollars at 9 o'clock in the morning to 
leverage $100 million worth of heating oil and you cash out 
that position at 4 o'clock in the afternoon and book $3.6 
million profit, whether increasing just the margin requirements 
is going to be sufficient. Because frankly, if you gave me that 
deal, I'd probably take it every day even if I had to put more 
money on the table.
    Mr. Dingell. Mr. Williams.
    Mr. Williams. I would have to defer to the previous panel 
to respond to that.
    But I think it is important to note in regards to the 
earlier comments related to hedging. The trucking industry 
operates on such narrow margins that the notion that there is 
significant hedging in our marketplace, I think would be wrong.
    Mr. Dingell. So you can't--what you're telling us is, you 
can't take advantage of the hedging market because of your 
margins?
    Mr. Williams. To whatever degree trucking is hedging, it is 
very minimal. And it has historically been that way, because we 
cannot--it is a risk to come to work every day.
    Mr. Dingell. I don't mean to cut you off, but I have many 
questions and little time.
    Starting with Mr. Steenland, would closing the London 
loophole, the swaps loophole, and the Enron loophole have a 
positive effect on the market?
    Mr. Steenland. We believe it would, by creating greater 
transparency and clear opportunities to regulate where 
appropriate.
    Mr. Dingell. Mr. Guilford?
    Mr. Guilford. Yes, sir.
    Mr. Dingell. How important is it, gentlemen, for the 
Congress to get their--the government to get its arms around 
the problem of excessive speculation in the energy markets?
    And you, Mr. Steenland, would this be a matter of high 
priority to the airline industry at this time?
    Mr. Steenland. Very high. And if you just think back to 
what our panelists said this morning, while they had 
differences of opinion, I think they ranged from $30 a barrel 
to $70 a barrel as to what they thought the impact would be of 
the series of recommendations that are on the table.
    Mr. Dingell. Thank you.
    Mr. Guilford.
    Mr. Guilford. To put it in context with the 8 billion 
gallons of heating oil used in this country each year--and we 
have seen an increase of $2 a gallon just in the last 12 
months--then it has cost consumers an additional $16 billion 
for our product. So----
    Mr. Dingell. So you're telling me it's a matter of urgent 
concern?
    Mr. Guilford. Yes, Mr. Chairman. Soon.
    TheChairman.  How about you, Mr. Williams?
    Mr. Williams. Urgent.
    Mr. Dingell. I'm sorry. I thought you answered.
    Mr. Williams. No. I'm saying it is urgent and it is 
extremely urgent. And I thought it was interesting that a lot 
of the questions related to the implications for the manager 
and for the funds themselves. And I can tell you, there are a 
whole bunch of people in America driving cars and driving 
trucks that are having difficulty getting to work today and I 
would say we need to move extremely fast.
    And that would be my opinion, sir.
    Mr. Dingell. I would love to ask you all this question, but 
I notice the clock has run out on me: what are the consequences 
if the Congress doesn't act on this matter? May I have 
unanimous consent for 1 more minute?
    Mr. Stupak [presiding]. Without objection.
    Mr. Dingell. Thank you, Mr. Chairman.
    Mr. Steenland.
    Mr. Steenland. I think the consequences, we'll all be 
spending more for oil than we otherwise need to.
    Mr. Dingell. Mr. Williams.
    Mr. Williams. I would agree. And there will be a tremendous 
loss of capacity within the commercial fleet, and those that 
remain will actually have a very difficult time meeting the 
shipping needs of the community.
    Mr. Dingell. Thank you.
    Mr. Guilford.
    Mr. Guilford. Well, it's oil, it's natural gas, it's 
gasoline, it's people's ability to get back and forth from 
work. It ripples throughout the entire economy.
    And, frankly, the $2.5 billion that Congress spent last 
year on low-income energy assistance is probably going to have 
to be more like $7 billion just to keep up, and that's just for 
low-income energy assistance.
    Mr. Dingell. Mr. Chairman, I thank you and my colleagues 
for your grace and kindness to me.
    I yield back the balance of my time.
    Mr. Stupak. Thank you, Mr. Dingell.
    Mr. Barton for questions, please.
    Mr. Barton. Thank you, Mr. Chairman.
    Mr. Steenland, I've been told that Southwest Airlines has 
had an advantage in the airline industry because several years 
ago they were prescient enough to hedge in the markets and get 
a fuel cost advantage, and that they've continued to maintain 
that advantage in this market.
    Is that a true statement?
    Mr. Steenland. Southwest made, in my judgment, one of the 
great bets of all time when it made its fuel wagers back in, I 
think it was the 2002	2003 time frame. And so they've enjoyed a 
significant advantage over the rest of us who did--either 
couldn't or did not make that former bet.
    Mr. Barton. Now, I understand that the first time Southwest 
did it, the rest of the industry didn't see a need to, it 
wasn't the fact that they couldn't. But this time around, in 
speaking with Gerard Arpey, who is the CEO of American 
Airlines, that is headquartered within shouting distance of my 
district, he indicated that American is doing some hedging, but 
they just don't have the financial ability to do as much as 
Southwest continues to do.
    Would you agree that generically Southwest just has--
because of their cash flow position and their profitability, 
has had a greater ability to hedge than some of the other 
airlines who have been in bankruptcy or close to bankruptcy?
    Mr. Steenland. Well, they clearly have a balance sheet 
advantage over the rest of the industry. Back in that 2002	2003 
time frame, that really allowed them to make that wager, where 
the rest of us really couldn't because we didn't have the 
balance sheet or the assets to provide counter-party risk.
    And so when one makes those kind of bets, sometimes you are 
right, sometimes you are wrong. You have a party on the other 
side who is making the counter.
    Mr. Barton. Right.
    Mr. Steenland. So being able to participate in hedging 
doesn't automatically mean that your fuel bill is going to be 
lower. But in this instance, Southwest clearly was the 
beneficiary of a very brave and, in hindsight, very smart move.
    Mr. Barton. Now, the last question on this subject before I 
go to the next subject. I always assumed that Southwest was 
playing in the futures market, but I was told this morning that 
they were actually buying options on the Chicago commodities 
market.
    Do you know if that's true or not?
    Mr. Steenland. I don't.
    There are any number of ways that one can participate in 
this, one can actually buy--buy options going forward. One can 
put in place collars so you have a protection against the 
runaway price on the top and, in return, you give up some 
potential upside if prices drop below a certain amount. So the 
cafeteria list of the ways in which one could hedge are an 
almost infinite list.
    And you can either--two ways of doing it are either by 
looking to actually buy the product going forward and locking 
in your price, or approaching it more like an insurance policy 
and looking to get protections against what otherwise might be 
a runaway price.
    Mr. Barton. Are you testifying on behalf of the airline 
industry or just for Northwest?
    Mr. Steenland. I'm wearing both hats.
    Mr. Barton. OK.
    Does the airline industry support the two-tiered system 
that we talked about in the first panel, where market 
participants who actually take physical possession and are 
willing to provide physical delivery would play under a 
different set of rules than nonphysical participants who were 
in it purely for the financial opportunity?
    Does the airline industry support that?
    Mr. Steenland. I don't think we've specifically addressed 
that, Congressman. If it would result in lower prices and 
talking out some of the speculative activity by people that are 
purely playing on the ``video barrel'' side, I believe we would 
support that.
    Mr. Barton. And aviation fuel that commercial airliners 
use, it is not gasoline, it's not diesel. It is a form of 
kerosene, is that----
    Mr. Steenland. That is correct.
    Mr. Barton. And so I guess it is theoretically possible we 
could do something on that specific fuel type that might be of 
some help to the airline industry.
    Mr. Steenland. It all ultimately comes out of the crude oil 
barrel. But we've actually been faced with a double whammy 
where the crack spread to take that crude and refine it into 
jet has also been at historic highs over the course of the last 
several months.
    So when people talk about oil at $130 a barrel, a lot of 
times you have to add $30 to then refine it into jet. And so 
we've been talking about $160 a barrel for jet fuel.
    Mr. Barton. Right now, if I were to go to a municipal 
airport in my congressional district where general aviation 
planes fuel up, what's the approximate price they would pay for 
a gallon of aviation fuel?
    Mr. Steenland. I think well north of $4.
    Mr. Barton. So it is higher? It's similar to gasoline but 
not as high as diesel?
    Mr. Steenland. I don't know where diesel is trading. And 
sometimes what comes out of the FBOs tends to be a little 
higher because it has taxes and stuff built in it, but it will 
be north of $4.
    Mr. Barton. OK.
    Mr. Williams, you own a trucking firm; is that correct?
    Mr. Williams. Yes, sir.
    Mr. Barton. Those in your industry that are going out of 
business--and we were told that there are approximately 1000 
trucking companies a month that are going out of business--is 
it principally because they don't have the capitalization to 
pay the higher fuel costs as they fuel their trucks in routine 
operations?
    Mr. Williams. Yes, sir, it's--again, there's a large 
segment of the community that is poorly capitalized and has 
been mostly cash flow operators for many years. And they have a 
great deal of difficulty in these markets.
    And then there are certainly much larger carriers that are 
public companies that are certainly well capitalized, but they 
also bear an awful--probably not as much----
    Mr. Barton. My time has expired.
    The companies that are managing to stay in business, they 
apparently are--I think you said in your opening statement, you 
are being able to pass through some of your increased fuel 
costs; is that correct? It is a better market than it was in 
that regard?
    Mr. Williams. Driven by a lack of capacity and competition 
within that marketplace, yes--not because of the good-
naturedness.
    Mr. Barton. Oh, I know, I understand that. And in the 
airline industry, because of the competitive pressure primarily 
the low-cost carriers like Southwest, you're not able to pass 
through the fuel costs, because they are unwilling to raise the 
price; is that correct?
    Mr. Steenland. That is clearly a reason.
    Another reason is excess capacity in the market; given 
that, it's just difficult to pass price, sir.
    Mr. Barton. Thank you, Mr. Chairman.
    Mr. Stupak. If I may comment on that, did Southwest 
increase their fares? I mean, they always advertise nothing 
more than $299; and aren't they now at $549, I think I read in 
USA Today?
    Mr. Steenland. Southwest has not been immune, and yes, they 
have been on occasion taking fare increases. But I think it 
would be fair to say that the level of fare increases and the 
frequency of them has been less than what the network carriers 
have been looking to try to get.
    Mr. Stupak. Thank you.
    Mr. Inslee for questions.
    Mr. Inslee. Mr. Barton noted a different kind of fuel in 
aircraft. I have to point with some pride to the first 
commercial flight using a nonoil-based fuel, using a biofuel, 
was in a plane built in my district, or next to my district, 
the Boeing 747 with Virgin Air, using a biofuel designed in my 
State by people at Imperium Energy. And we could have some good 
things happening there, and we will look forward to that.
    This is a fairly unusual situation, I think, where three 
major pillars of our economy that you represent here hard-
headed business people come and ask the government to do 
something in a market, in a capitalistic market, and I think 
that's kind of unusual.
    When I and others urged the Administration to intervene 
during the original Enron debacle, the Vice President sort of 
told us we didn't understand economics and sort of implicitly 
said we were a bunch of economist hippies who didn't understand 
how capital markets work.
    You are suggesting the government has to do something to 
allow the capital markets to really function. At its base 
level, could you just explain to us why, in this particular 
circumstance, you believe that that's necessary?
    Why should government have to do anything here that the 
markets just can't figure out themselves?
    Mr. Guilford. Congressman Inslee, our Congressman is John 
Larson from Connecticut. And he is fond of sending me clips 
from the Congressional Record where he gives floor statements 
where he is addressing these issues, where he refers to his 
``rock-rib Republican constituents'' who are talking to him 
about the problems with these markets. And he is talking about 
us. There are probably no greater defenders of the free-
enterprise system than we are.
    But where we see what should be free, open, transparent 
markets that are as free of manipulation as is humanly possible 
to create significantly, at least in our opinion, out of sync 
with reality, then we have no choice but to ask for Government 
to step in and bring order to what should be a marketplace that 
works as a point of price discovery, as opposed to what it has 
turned into.
    Mr. Steenland. If I could just add, the commodities market 
is a regulated market. There have been changes in it that have 
gone on over time. And when you see today where the financial 
side of the market is 13 times what the physical side is and 
then you see the volatility that exists in that market, I think 
it creates the necessity to have a discussion like we are 
having today to revisit whether the regulatory structure that 
is now in place is the appropriate one, and whether changes 
should be made to get us back into a mode that better reflects 
what supply and demand and more realistic prices should be.
    Mr. Inslee. So I assume you don't believe this is a fool's 
errand. I assume by your comments that you don't think this 
will simply drive these investments offshore and we will have 
no regulatory control of them.
    Why do you believe this will be successful and not believe 
that people will just flee to some foreign market beyond our 
control?
    Mr. Steenland. Well, I think the panelists this morning 
addressed that issue. And they are far more expert at this 
subject than I am. But when you see all the other folks who are 
experts in this come to the same conclusion, I think it 
certainly leads the airline industry to the view that these are 
appropriate and necessary steps to take very promptly.
    Mr. Inslee. Thank you.
    Mr. Stupak. Mr. Walden for questions.
    Mr. Walden. Thank you very much, Mr. Chairman.
    I want to talk about, Mr. Williams, about the issue with 
trucking, because it is now costing, what, about $1,400 to fill 
up a truck with diesel every time you go somewhere and haul 
goods?
    Mr. Williams. And I get to do that every day just about.
    Mr. Walden. And the trucks that you have that are surplus 
that you said you are selling overseas, I think you said into 
Vietnam and other countries, is part of that because of the new 
requirements on fuel and engines here in the United States, 
that they can't be reused here efficiently?
    Mr. Williams. No, sir. The market is just so poor here. I 
mean, there is a secondary market after we keep a truck for 42 
to 48 months, for example, and get a half a million miles on it 
that will typically go into a secondary market, where that 
market doesn't exist because those people are the people that 
have been pretty much run out of business and have not been 
able to survive.
    So a lot of the equipment we'll be stockpiling up, and we 
will have acres and acres of trucks parked in this country 
before it's over. And we are moving a lot of that equipment now 
overseas, which has not been done. But it's not because of any 
new mandates or anything such as that.
    Mr. Walden. Now, this committee, or the full committee, and 
the Energy and Air Quality Subcommittee of this committee are 
looking at the issue of carbon and carbon sequestration and 
cap-and-trade. Estimates are that could significantly increase 
the price of fuel, the price of home heating oil especially, 
the price of fuel oil for your jets, the price of diesel for 
your trucks, the price of gasoline. Some estimates and some 
have even suggested on this committee of a minimum additional 
50-cent-a-gallon increase as a price signal in the market. And 
whatever the price signal in the market is, it would have to be 
above today's fuel costs.
    I am curious--from each of you, what will those cost 
increases mean to your industry if where you're at today is 
debilitating?
    Mr. Williams. Could I?
    Mr. Walden. Yes, sure.
    Mr. Williams. I think it's one of the parts of this whole 
conversation that's a bit disturbing, in that to whatever 
degree the price of fuel is higher because of speculation, it's 
a limiting factor on us raising our taxes that we need to raise 
so that we can invest in infrastructure and offer some long-
term solutions for our citizens.
    So if, in fact, if $2 is going out, in the price of diesel, 
is going to the benefit of a speculator, I would prefer to see 
50 cents of that, in this example, going into our Highway Trust 
Fund, specifically being used for investments in highways and 
bridges to move this Nation's freight.
    Mr. Walden. Right, but I don't think the cap and trade 
proposal puts the money into roads and bridges necessarily.
    Mr. Williams. I would certainly not--I think from a mobile 
source, I think cap and trade is not a good methodology. I do 
support carbon taxes, a fuel tax system, as long as that money 
is specifically used on infrastructure investments.
    Mr. Walden. OK.
    Mr. Steenland, how is the airline industry going to be 
affected under these cap-and-trade proposals?
    Mr. Steenland. It depends on which one. A properly 
constructed cap-and-trade proposal, if it's global, if 
everybody's in it, might be a way to address the overall carbon 
issue.
    I think we need to take a step back or two, though, because 
some of the policies are based on projections of growth that 
might've been what the industry was going to grow when fuel was 
at $60 a barrel, but if fuel is going to be at $130, $140 a 
barrel, there is going to be retraction instead of growth. And 
that is going to make a contribution right then and there to 
carbon emissions.
    So some of the footprint upon which some of these policies 
are being based I think needs to be re-examined based upon some 
of the existing fuel assumptions that are out there.
    Mr. Walden. OK.
    Mr. Guilford, when you are heating with oil at home, what 
does another 50 cents a gallon do to the consumer?
    Mr. Guilford. You know, the devil is in the details, Mr. 
Walden, because we can document in our industry through 
research and work that has been done at the DOE's Brookhaven 
National Laboratory that, in the last 25 years, we've managed 
to have a significant reduction in the per-consumer per-gallon 
consumption of heating oil because of the introduction of new 
technologies that our industry has brought online.
    Mr. Walden. More fuel-efficient furnaces and all?
    Mr. Guilford. Exactly, exactly. For example, if you can 
take a 65-percent-efficient furnace and turn it into an 85-
percent-efficient furnace, you can cut a consumer's consumption 
from 1,000 to under 700 gallons.
    So, depending upon how such a thing were structured, we can 
document that we can already meet some of the cap-and-trade 
ideas that we have seen.
    If it ends up resulting in a significant increase in the 
price of our fuel, if it makes us uncompetitive, obviously that 
would be something that would be very detrimental to our 
customers.
    Mr. Walden. Because I have heard some estimates out there 
are upwards of a $6 trillion shift in the economy in higher 
taxes. And as I listen to the woes of each of your industries 
today and the impact I hear at home, whether I am at the 
grocery store in Hood River, Oregon, or out meeting with 
farmers in Pine Grove or somewhere, I am trying to figure out, 
when it comes to cap and trade, it means you are going to pay 
for something you've never paid for before, and that's carbon, 
and that's ultimately coming out of the consumer's pocket, 
right?
    Mr. Guilford. Yes.
    Mr. Williams. Exactly.
    Mr. Walden. Isn't that going to adversely affect people 
that you're trying to serve in your own companies?
    Mr. Guilford. Enormously. And on the heating side, the only 
solution that we have is to continue to become more and more 
and more efficient, which clearly we have proven we have been 
able to do over the last 25 years, but we would need another 
quantum leap in that ability.
    Mr. Steenland. I think it would be fair to say that the 
airline industry has literally invested tens of billions of 
dollars in new equipment. We, for example, are 25 percent more 
efficient than what we were back in 2000. So that has cost us 
billions of dollars, but in terms of, one, saving in fuel and, 
two, emitting less carbon, we have really taken a very positive 
step in that direction, as have our competitors.
    Mr. Walden. Right. No, I don't doubt that. It's just a 
matter of what's this added cost going to do to industries and 
individuals and consumers that already seem to be pretty maxed 
out?
    So thank you, Mr. Chairman.
    Mr. Stupak. Thank you.
    Mr. Green for questions.
    Mr. Green. Thank you, Mr. Chairman.
    Let me first say, having watched the airline industry and 
the trucking industry because of the district I come from, for 
a number of months what the impact of the high fuel costs on 
our economy, you're the first to get hit, simply the canary in 
the mine shaft so to speak, because it's going to reverberate 
in everything that's delivered by the trucks and everything 
else. So the rest of the economy needs to cushion itself, 
because those costs are going up.
    Mr. Steenland, in your testimony you mentioned that there 
are several factors affecting oil prices, and an energy policy 
that addresses our Nation's oil supply and consumption needs to 
help remedy oil prices.
    In your opinion, is our current energy policy going in the 
right direction in addressing our supply needs? And could 
increased energy supplies offset some of the unnecessary price 
increases due to the speculation in the markets?
    Mr. Steenland. I think as a longer-term solution, figuring 
out ways to, in an environmentally prudent way, to bring more 
supply online would be an appropriate plank in our overall 
energy policy, as well as looking at alternative fuels, looking 
at proper conservation methods.
    It needs to be a total package, and we need to address it 
in that total way.
    Mr. Green. I guess that's what I've heard from people; it's 
not a silver bullet. Sure, we need to deal with the 
speculators, we need to do alternatives, and hopefully, for 
example, the biofuel for the 747--in fact, we just opened a 
huge biofuel facility in Houston that is the largest refinery 
in the country that is nonedibles. Hopefully, those biofuels 
will be nonedible so we don't see the price of our food go up.
    Mr. Steenland. But I think that's a good example, where 
biofuels is really a multigenerational type of approach, 
whereas potentially the kind of things we're talking about 
today, we could see an impact in 30, 60 days. Some of these 
other events are longer-term.
    Mr. Green. Yes. But we need to do it all. We need 
alternatives and control of the current market, but also we 
need to produce more domestically so we can get that into the 
market.
    Mr. Steenland. We do.
    Mr. Green. In your opinion, should the ICE regulatory body, 
the Financial Services Authority, be called an equivalent 
regulatory body to the CFTC if they do not require position 
limits or other rules to prohibit excess speculation? Do you 
think the ICE's regulatory body, the Financial Services 
Authority, is anything equivalent to what we have with our 
CFTC?
    Mr. Steenland. I would defer to someone else to answer that 
question.
    Mr. Green. I'll wait until our next panel then.
    Mr. Williams--and, in fact, Mr. Chairman, I'd like to 
submit for the record, I have a Jet Fuel Reality chart, 
actually presented by Continental Airlines, that appropriately 
is from Houston, that shows the crack spread that has increased 
on a monthly basis for jet fuel. As the price of oil goes up--
and I was going to ask Mr. Williams, I haven't seen anything 
based on diesel fuel prices, because we know diesel has gone 
up.
    Does your association or anyone have any that can compare 
to, for example, in April of 2001, the price of a barrel of oil 
was $101. The crack spread for getting to jet fuel was $27.10. 
Whereas on June the 9th, a little over a month later, the price 
of oil per barrel was $134.40, but the crack spread went up to 
$31.20.
    Do you have any information on the diesel, how it's gone up 
based on any of the refining costs?
    Mr. Williams. No, sir. We can make that information 
available to you.
    Mr. Green. OK.
    I think just for the Committee's benefit in the long term, 
Mr. Chairman, I would like to submit that for the record.
    Mr. Stupak. That will be submitted, without objection.
    [The information appears at the conclusion of the hearing.]
    Mr. Stupak. The gentleman should know that EIA, Energy 
Information Agency, has provided that information on diesel. 
The crack spread is about 58 cents right now. It was about 47 
cents. That is the wholesale crack.
    Mr. Green. We are seeing that increase.
    Mr. Guilford, I know the cost of home heating oil has 
increased. Have you looked at--is the volatility in the natural 
gas market as much as it is in the oil market?
    Mr. Guilford. We haven't looked at it as closely as we do 
heating oil, because we certainly live in heating oil every 
day. But there seems to have been, with the closure of a 
loophole involving natural gas derivatives in 2004, somewhat 
less volatility. And I think that when the next panel meets, 
that Professor Greenberger can address that for you in some 
detail.
    Mr. Green. OK.
    Mr. Chairman, I appreciate that, because I think there has 
been less volatility in another hydrocarbon market that maybe 
we could look at and see how it comes.
    I want to thank you for this panel.
    Mr. Stupak. I thank the gentleman.
    Also, the EIA--I know you received a copy of the report--
they looked at the first 3 months of 2008 and compared it with 
the other first 3 months for the last 5 years. And in diesel, 
in particular, they have exported from this country 335,000 
barrels of diesel per day to keep the margins tight in this 
country. So there's plenty of supply, but what they're doing 
with it certainly affects the price.
    Mr. Melancon for questions?
    Mr. Melancon. Thank you, Mr. Chairman.
    Mr. Williams, my son graduated from high school with a 
young man that has been driving trucks with his dad for years. 
And I saw him this weekend, and he said, at the rate they're 
going, they're going to sell the trucks and he's going to look 
for a job. So I understand. And this is a good, hardworking 
kid. So I hate to see that happen, whether it's small 
operations or big operations.
    I don't really have a lot of questions in this sector, 
because most of the things I'm concerned about are the 
regulators. But for each one of you, Mr. Steenland, from your 
perspective, how long can Northwest or the industry continue 
before it becomes totally devastating, from a standpoint of 
being able to continue as a company or as an industry?
    Mr. Steenland. Sure. Well, for eight airlines, it's already 
too late. They are liquidated, and they'll never come back. Two 
airlines are now in Chapter 11. And other airlines, it's a 
function of what their total liquidity is.
    And basically, the industry is going to have to--it's a bit 
of a race, where we're looking to pass through these costs as 
quickly as we can. That gets to the speed with which the price 
has gone up. And as those costs get passed through, as we 
talked about before, demand shrinks. And so we need to take 
capacity out.
    And we need to reach that equilibrium point where customers 
are paying the level of airfare that clearly compensates us for 
our fuel bill and the industry is right-sized then to meet that 
demand.
    Mr. Melancon. Are you seeing reductions immediately in your 
passenger-carrying?
    Mr. Steenland. Certainly.
    Mr. Melancon. Do you know what percent that is by?
    Mr. Steenland. It's a function of--we can always put a 
passenger on the airplane, depending on the price that we're 
prepared to charge. So if you look at the usage on the 
airplane, it's still fairly high, but people are not paying 
what the true cost is of what it's costing us to provide the 
service.
    Mr. Melancon. Got you.
    Mr. Williams, any projections?
    Mr. Williams. I think well-capitalized carriers will 
continue to survive. But I think it's important to note that 
when they are wounded, as they are, they're unable to invest in 
a lot of the new technologies that will allow us to continue to 
meet our fundamental challenge, and that is to move much more 
freight in a much more congested environment while we improve 
highway safety. And that's the disservice that's actually going 
on here, as well. But we're wasting some time, as we need to 
get on about doing better things in a better way.
    But even if we lose a big chunk of the market, the part 
that we have to understand is that this capacity leaves a lot 
faster than it will ever come back. And when this economy 
returns, which I'm very hopeful that it will soon, there is 
going to be a significant problem on how we get goods to 
market, whether it's strawberries or coil steel. And that's a 
very real probability.
    Mr. Melancon. I see the railroads are advertising, trying 
to kind of do a comparison. Have you seen a decrease in the 
amount of freight that you're hauling?
    Mr. Williams. Certainly, the building material industry is 
tied directly to the housing crisis that we're facing. The 
steel industry is very robust, but that is principally driven 
by the dollar proposition by exporting more steel and importing 
less steel into this country. The glass side of the business is 
actually quite good, but that is principally to industry 
consolidation within that segment and exports to Canada.
    So, collectively, demand is up for us currently, but it's, 
again, because of really a lack of capacity within the market. 
So we have some historic pricing power. So, I mean, that makes 
us feel good.
    But it's the overall impact of the cost of transportation 
to the economy that I think needs to be our greatest concern. 
Because it is painful for my employees. I've closed three 
terminals; I actually announced that this last week. We're 
laying some people off in those areas. We have people that 
we're losing that have had to drive too far to come to work. 
And it's a real burden on the men and women and their families 
in this country.
    Mr. Melancon. Thank you.
    Thank you, Mr. Chairman.
    Mr. Stupak. Thank you.
    Mr. Ross for questions.
    Mr. Ross. Thank you, Mr. Chairman.
    For Mr. Williams, you refer in your testimony to Congress 
supporting globally competitive regulatory changes. What types 
of changes are you referring to?
    Mr. Williams. Specifically, I commented earlier about size 
and weight regulations. We're the weakest link in the chain. 
It's a global supply chain, and the United States has found 
itself in the precarious position of being the weakest link. We 
have the most restrictive size and weight regulations in this 
country. And so there is an opportunity there for us to 
increase our competitiveness by bringing ourselves up to 
international standards. And I think that should be a goal of 
ours in the years ahead.
    I think the part that's interesting about that, and I 
alluded to this earlier, is that, will we have the appetite for 
doing that, though, when fuel maybe comes back down to maybe a 
more market-driven price, assuming that speculation is 
contributing to that price of oil? And that comes back to where 
we're doing a lot of soul-searching within our own 
organization, and certainly we have within the industry, 
about--is this all about the money or is this all about doing 
the right thing for the environment as well?
    So I think that truck size and weight regulations is a good 
example of how, for example, depending on the type of more 
productive vehicle that's in use--and most of this equipment is 
in use all over this country, and certainly in every other 
country--ranges anywhere from 11 to 35 percent more productive.
    And, for example, in my own organization, if I simply slow 
down, idle my equipment less, and were to take advantage of one 
of these particular adjustments that I'm talking about that we 
have regulatory power to change, I could reduce my fuel 
consumption by 37 percent. And that's without any new 
technology. And to give you an idea what that would mean to me 
in a marketplace that I lost money in last year, that would 
save me $50 million in fuel.
    So I think sensible, long-term strategies on bringing 
ourselves more into line with what's going on with the rest of 
the world would have significant effects, both for the 
environment, for highway safety, and certainly would reduce our 
dependence on foreign oil. But that's going to take a 
constructive change.
    Mr. Ross. It would seem to me that--and I mentioned earlier 
I think these high fuel prices, gas, diesel, apparently next 
it's going to be natural gas, we'll experience that in the 
winter, have a direct relationship to this economic recession 
we're in. So I think a lot of people are wondering, how long 
are we looking at prices the way we are now?
    And it affects everyone. I represent a lot of farmers. 
Diesel prices have really affected them, because that's how 
they irrigate and get their produce to market. Just since this 
meeting started, I talked to an electrical contractor who has a 
diesel pickup, and he requires a pickup because of the nature 
of his work. He said it cost him $150 to get to work today. 
Now, granted he drove quite a ways to get to work today, but 
it's unconscionable.
    I had a small trucker call me recently; he just has three 
trucks. And he says he bids on a job, and he has to be 
competitive with his bid, and then overnight the price of 
diesel goes up, and sometimes it goes up from when he starts 
the job several times before he finishes the job, and there 
goes his profit. And what was going to be a small profit ended 
up, in a situation where he was losing money. And that's a 
small trucking firm. Obviously, you're much larger than that.
    I guess where I'm going with this is, isn't it true that, 
whether it be the airline business--and I'd like to get an 
answer, too, from the airline industry--whether it's the 
airline business or trucking business, you are absorbing some 
of the increases right now, I would guess, hoping the economy 
turns around and hanging onto your market share. But at what 
point do you have to start passing all this along, and what 
does that do to an already-struggling economy?
    And I'd like to get an answer from both of you on that, if 
I may.
    Mr. Steenland. We are a very high fixed-cost business. So, 
we own or lease our airplanes. We can't just simply turn them 
on and turn them off. We have 29,000 employees that we want to 
keep gainfully employed. We have long-term rentals at airports. 
So we're paying all those costs whether we're flying or not. 
And so we're flying the airline, as everyone else is.
    And the challenge is that we haven't yet been able to 
simply pass through the costs. Because, if we truly just simply 
posted prices out there that fully reflected what the price of 
jet fuel is, a number of people would say, ``I'm not 
traveling.'' And an airplane seat is a perishable seat. So when 
it takes off today and the flight leaves Minneapolis and it's 
going to LA, if there's not someone paying for that seat, it's 
gone. It's not something we can put in inventory and sell the 
next day or the next day after that.
    And so it puts tremendous pricing pressure on the business. 
And it ultimately requires the right equilibrium between those 
people that are prepared to pay the pass-through costs and what 
the size and capacity of the industry is.
    And at today's prices, the industry is losing money. The 
U.S. airline industry will lose over $10 billion this year. And 
so, if this is, in fact, what the price of fuel is going 
forward for the longer term, airfares inevitably are going to 
have to go up.
    Mr. Ross. How much higher would airfares be today if all of 
the increased cost in fuel was being passed on to your 
customers?
    And, by the way, thanks for getting me here this morning.
    Mr. Steenland. Thank you.
    I'd say 20 percent.
    Mr. Ross. So, to truly reflect today's energy prices, 
you're saying airline tickets would be 20 percent higher. I 
guess, at some point, if prices on energy don't come down, they 
will be. Right now, I'm sure it's trying to charge what the 
market will allow and, also, I'm sure, trying to protect or 
grow your market share factors into it.
    If I could get a response to that from Mr. Williams, as 
well, because I sense that some of the smaller guys out there 
with two or three trucks are becoming less and less competitive 
and, as a result, are going to have less competition wherever 
this thing settles out. And what does that do to the economy?
    Mr. Williams. I think we're going to see a lot of the 
changes that we saw post-1980, when the industry was 
deregulated. This is a point in time where there's going to be 
a significant change in the makeup, I believe, because of the 
burden that most of the carrying community can't continue to 
bear.
    The gentleman that may be losing his job driving a truck 
that he owned might actually migrate to a company such as mine 
and drive a truck for me. But that doesn't limit the pain and 
anguish that his loss of equity in that piece of equipment, in 
the nest egg that maybe he or his father had generated over 
their entire lifetimes. And so there is going to be a lot of 
pain in the transition, I guess would be my point.
    But I think an interesting addition to that would be the 
comment that we're in the process of pricing our truck order, 
when we will buy about 500 additional trucks next year, or 
they'll be replacements, those trucks are extremely more 
expensive and the most dramatic increase in price that I have 
seen in any year-to-year in all the 30 years that I've been in 
business. And I'm talking about in excess of 20 percent 
increase. And that's driven indirectly by the price of oil 
driving the price of steel, driving the price of tires and all 
the components that are within that truck, not to mention all 
the technology that we voluntarily purchase.
    So, significant increases, and they're coming back to roost 
even on our own doorstep.
    Mr. Ross. Mr. Chairman, I see I'm well over my time. And 
thank you for being so generous in indulging me.
    Mr. Stupak. I thank the gentleman.
    Well, that concludes our questions of this panel.
    Let me just mention, a number of organizations have already 
endorsed our legislation, H.R. 6330. I know, Mr. Steenland, 
your organization has, Teamsters have, others. You may want to 
look at--give us your comments, not just 6330, but there are a 
number of pieces of legislation that are pending before 
Congress, and we're trying to take a look at them. Your 
testimony today has been most helpful, but it also would be 
helpful to have your input on some of this other legislation, 
whether it is 6330, my bill, the PUMP Act, or any other pieces 
of legislation, it would be helpful to us as we try to move 
something on this legislation.
    But thank you for being here, and thank you for your 
testimony.
    I now would like to call our third-panel witness to come 
forward.
    On our third panel we have the Honorable Walter Lukken, who 
is the acting Chairman and Commissioner of the U.S. Commodity 
Futures Trading Commission.
    Mr. Commissioner, as you know, it's the policy of this 
subcommittee to take all testimony under oath. Please be 
advised that you have the right, under the rules of the House, 
to be advised by counsel during your testimony.
    Do you wish to be represented by counsel?
    Mr. Lukken. No, thanks.
    Mr. Stupak. OK. Witness indicates he does not. Therefore, I 
ask you to rise and take the oath, please.
    [Witness sworn.]
    Mr. Stupak. Let the record reflect the witness replied in 
the affirmative.
    You are now under oath.
    We will ask for your opening statement. You may submit a 
longer statement for the record. But if you would begin, 
please. Thank you.

 STATEMENT OF WALTER LUKKEN, ACTING CHAIRMAN AND COMMISSIONER, 
           U.S. COMMODITY FUTURES TRADING COMMISSION

    Mr. Lukken. Thank you, Mr. Chairman and other distinguished 
members. And thank you for inviting me to testify before this 
committee on the role of speculators in the futures markets.
    During the last few years, the futures markets have changed 
dramatically in size and complexity, experiencing 500 percent 
growth in both volume and products listed. Today's exchanges 
are technology-driven corporations that trade electronically 24 
hours a day all around the globe. Approximately $5 trillion of 
notional transactions flow through U.S. exchanges and 
clearinghouses every day.
    This description alone would make the oversight of these 
markets a challenge for regulators, but add to it the subprime 
crisis, record energy and agricultural commodity prices, the 
influx of financial funds into the futures markets, and 
historic low staffing levels at the CFTC, and it is clear that 
these are challenging times at this agency.
    Recent substantial increases in the price of crude oil have 
put considerable strain on U.S. households. These are matters 
of intense focus at the Commission due to the key role that the 
futures markets play in the price discovery process.
    The CFTC recognizes that these markets and their 
participants have evolved significantly in the last several 
years. Concerns have been raised recently regarding the role of 
speculators and index traders in the commodity futures markets. 
As prices have escalated, the CFTC has pursued an active agenda 
to ensure that commodity futures markets are operating free of 
distortion.
    These initiatives fall into five broad categories: one, 
increasing information and transparency; two, ensuring proper 
market controls; three, continuing aggressive enforcement 
efforts; four, improving oversight coordination; and five, 
seeking increased funding.
    The proper oversight of markets require transparency. 
Market regulators must receive the necessary information to 
conduct surveillance of market activity, study long-term 
financial trends, and evaluate policy changes as circumstances 
evolve.
    The backbone of the CFTC's market surveillance program is 
the large trader reporting system. All large traders must file 
daily with the CFTC their futures and options positions in the 
markets. This information enables the CFTC's surveillance 
economists to oversee all traders of size to ensure that no one 
is attempting to manipulate the futures markets.
    As markets have become electronic and global, the CFTC has 
been working to expand its trade data collection to accommodate 
these trends. On May 29th, the CFTC announced an agreement with 
the U.K. Financial Services Authority to greatly expand on the 
trader data already received from ICE Futures Europe on its 
linked crude oil contract that settles off the NYMEX benchmark, 
including receiving equivalent daily large trader information 
for all months traded. This cross-border information-sharing is 
unprecedented among global regulators.
    The CFTC has also taken action to improve the transparency 
of index traders and swap dealers in the energy markets. In 
May, the CFTC announced that it would use its special call 
authorities to gather more detailed information from swap 
dealers on the amount of index trading in the markets and to 
examine whether index traders are properly classified for 
regulatory and reporting purposes.
    These information requests have been sent, and the CFTC 
expects in the coming weeks to begin receiving more detailed 
information on index funds and other transactions that are 
being conducted through swap dealers. After analyzing this 
data, the CFTC will provide a report to Congress by September 
15th regarding the scope of commodity index trading in the 
futures markets and recommendations for improved practices and 
controls, should they be required.
    Last fall, the Commission worked with Congress to enact 
legislation as part of the Farm Bill requiring exempt 
commercial markets that traded linked energy contracts to 
provide the CFTC with large trader reports, and it posed 
position and accountability limits on such products. Congress 
and this agency believed that these authorities were necessary 
to protect the energy marketplace.
    As noted earlier, linkages between contracts are not purely 
a domestic occurrence but also happen across international 
borders. Most energy and agricultural commodities are traded in 
a global marketplace, and the U.S. futures markets have been 
facing the challenges of cross-border trading and regulation 
for many years.
    For more than a decade, the CFTC has utilized its mutual 
recognition process for foreign exchanges that allows U.S. 
institutions access to those markets by striking a balance 
between the need for U.S. regulators to ensure proper oversight 
of our markets and the acknowledgment that the increased 
globalization of international markets requires cooperation and 
coordination between governments.
    With this balance in mind, last week the CFTC announced 
modifications to its foreign board of trade process. After 
consultation with the British FSA, the CFTC revised the access 
letter to ICE Futures Europe to require the implementation of 
position and accountability limits on its linked crude oil 
contract. The CFTC will also require other foreign exchanges 
that seek such access to provide the CFTC with large trader 
reports and to impose position and accountability limits for 
any products linked to U.S. futures contracts. This combination 
of enhanced information and additional controls will help the 
CFTC in its surveillance of its regulated domestic exchanges, 
while preserving the benefits of its mutual recognition 
program.
    During these turbulent market conditions, the environment 
is right for those wanting to illegally manipulate the markets. 
In late May, the Commission took the extraordinary step of 
disclosing that, since December 2007, its division of 
enforcement has been launching a nationwide crude oil 
investigation into practices surrounding the purchase, 
transportation, storage, and trading of crude oil and its 
derivatives contracts. Strong enforcement is imperative during 
this time.
    Given the CFTC's size and the enormity of the global 
marketplace, the CFTC must also engage others in Government as 
we seek to meet our important mission. Two weeks ago, the CFTC 
announced the formation of an interagency task force to 
evaluate developments in the commodity markets, which includes 
the staff from the CFTC, the Federal Reserve, the Department of 
Treasury, the SEC, the Department of Energy, and the Department 
of Agriculture. I have also invited the FTC and FERC to 
participate as well, given their expertise in these energy 
matters. The task force is intended to bring together the best 
and brightest minds in Government to aid public and regulatory 
understanding of these markets.
    If it sounds busy, it is, especially given that the agency 
staffing levels are near record-low numbers. Since the CFTC 
opened its doors 33 years ago, volumes on U.S. futures 
exchanges have increased 8,000 percent. That is compared to a 
12 percent decrease in staffing levels at the agency.
    As the agency embarks on our new authorities and 
initiatives in order to respond to changing market conditions, 
it is imperative that these be met with adequate resources. The 
CFTC is in the midst of implementing its new Farm Bill 
authorities, which will require many programmatic changes as 
well as hard work from an already-strained staff. Additionally, 
the agency staff is racing to implement the many recent 
initiatives I have just outlined in my testimony. Recall, as 
well, that our employees are full-time regulators, charged with 
overseeing these markets each and every day. Without proper 
funding, the agency will not be able to sustain this pace much 
longer.
    In summary, the Commission shares this committee's concern 
for the current conditions in energy markets and for the 
effects of high crude oil prices on consumers, workers, and 
businesses. These are difficult economic times, and the 
Commission recognizes the need to respond accordingly to ensure 
that the futures markets are working properly for all 
Americans.
    Thank you for allowing me to testify, and I welcome any 
questions you may have.
    [The prepared statement of Mr. Lukken follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Stupak. Thank you. And thank you for your testimony.
    This is our second hearing, and we are already talking 
about a third hearing. The changes in the Farm Bill--we're 
going to make sure the oversight role of this committee is 
done, especially when it comes to energy. And, as I think 
you'll see this week, there will be other pieces of legislation 
on the floor to try to take away speculation.
    Let me ask you this, if you may, because our last hearing 
was on December 12th, and apparently the CFTC has reversed its 
position, in that you will now, even though you didn't do it in 
December, but now you indicated that you will require the same 
position limits and accountability levels which apply to U.S. 
markets to apply to ICE Futures in the U.K.
    Is that correct?
    Mr. Lukken. That is correct.
    Mr. Stupak. OK. Is the CFTC going to require the positions 
taken on both exchanges be added together when the exchange 
assesses compliance? For example, can a trader hold a maximum 
limit on both exchanges, or will they be able to double that 
limit by trading on two different places?
    Mr. Lukken. Each exchange would set its own limits.
    Mr. Stupak. So it's not the aggregate; each exchange could 
have its own limits, right?
    Mr. Lukken. That is correct.
    Mr. Stupak. OK. Are there, what, 18 different exchanges?
    Mr. Lukken. Trading crude oil? West Texas----
    Mr. Stupak. Right.
    Mr. Lukken. There's two currently. There's the London 
market, and there is the NYMEX market.
    Mr. Stupak. OK. What about Dubai? Are they going to be 
trading on Dubai?
    Mr. Lukken. Dubai does not list West Texas--the Dubai 
Mercantile Exchange, which has an access letter with the CFTC, 
has not listed the West Texas Intermediate contract. There is 
the Dubai Gold and Commodity Exchange, which has no 
relationship to the CFTC. There's no access letter that we've 
granted them. They do have a West Texas contract. It's about 
12,000 contracts volume in June.
    Mr. Stupak. And you expect that to go up, do you not, since 
there has recently been some action on NYMEX being allowed to 
trade on Dubai?
    Mr. Lukken. Well, again, if the Dubai Mercantile Exchange 
would have large trader reporting and the imposition of 
position limits, that exchange that has the access letter with 
us would be subject to position limits.
    Mr. Stupak. OK. So every exchange I have, whatever position 
limit that is, that's what I can trade up to; that position, 
correct?
    Mr. Lukken. That's correct.
    Mr. Stupak. OK. Turn to tab 14 in the book there right 
there in front of you. That's our exhibit book. This is a chart 
which shows that 64 percent of the trading for the West Texas 
crude oil contract on ICE Futures Exchange originates in the 
U.S. during 2007.
    So my question is, if a foreign board of trade consistently 
has a majority of its trade originating in the United States, 
why shouldn't that foreign board of trade be subject to CFTC 
regulation and register as a designated contract market?
    Mr. Lukken. Actually, these figures, I'll have to--ICE can 
talk about these figures as well, but these also include, as 
U.S. trades, trades that are happening both U.S. and overseas. 
So, actually, if you just look at those that originate here in 
the U.S. and you break it down by size, it's about 45 percent 
of the market.
    But having said that, even at 45 percent, I think your 
question holds valid, which is, why should we not try to impose 
U.S. regulatory structure on these markets? I think, for us, we 
recognize that these are global markets, that the ICE exchange 
has been in existence for 25 years, regulated by the FSA, and 
that we have to recognize that there are certain things we can 
condition, information and controls that are important----
    Mr. Stupak. Why can't you hold these exchanges to the same 
rules and regulations that you do NYMEX? Again, tab 14, you say 
45 percent, I'm looking at volume from all terminals, volumes 
from U.S. terminal, percentage from U.S. terminal, 64.1 
percent. Why wouldn't they come under the same regulation? 
Sixty-four percent of the trades are here in the United States.
    Mr. Lukken. Again, this is something the Commission looked 
at in 2006 and held public hearings on this, went out in public 
record, trying to get comments about this. And our recognition 
process allows us to recognize foreign regulators as the home-
country regulator but then condition these on important----
    Mr. Stupak. I agree. But the question was, why shouldn't 
foreign board of trades be subject to CFTC regulation and 
register as a designated contract market?
    I know all the reasons why you made these changes. But why 
shouldn't they be the same, especially when 64 percent of the 
trades are occurring here in the United States?
    Mr. Lukken. Well, certainly Congress could make the choice 
to get rid of our program, but that's not going to stop trades 
from happening overseas.
    Mr. Stupak. No, it won't stop trades, but won't it bring 
transparency? We'll know who's trading, how many contracts 
they're holding, what the price is. Isn't that what we're 
trying do here?
    Mr. Lukken. Well, that's correct. And our program has 
allowed us to see the transparency on these markets. We see not 
only U.S. participants on ICE, but we also see the two-thirds 
of those participants, according to open interest, of the 
foreign participants. So we're seeing not only U.S. 
participation----
    Mr. Stupak. But if you're seeing all that, why did you have 
to put out the special call then for information?
    Mr. Lukken. That's for swaps.
    Mr. Stupak. I know that's for swaps, so you don't see the 
swaps. In the testimony earlier today, most of them showed that 
swaps is a major problem here.
    Mr. Lukken. Right, and that is something that the agency, 
about a month ago, asked for more data about swaps. Typically, 
swaps are aggregators in our markets. They bring multiple 
positions to the markets. They have clients, such as--Morgan 
Stanley, I think, openly talks about having the airline 
industry as their client. Southwest was mentioned, as well.
    These businesses bring all this to the futures markets, 
where they manage their risk. And so that's typically, we just 
look to what the swap dealers are bringing. We don't look 
beyond to who their clients are. But that's the information 
we're going to get. Come September 15th, we hope to provide 
Congress with more information about what swap dealers are 
doing in these markets.
    Mr. Stupak. You know, I'm looking at a June 18th Bloomberg 
article quoted that the CFTC's head of enforcement, Mr. Gregory 
Mocek, is saying that, ``At this time, we have no evidence that 
speculation in ICE in Western Texas Intermediate crude 
contracts are manipulating the markets.'' Secretary Bodman 
basically said the same thing. Secretary Paulson has pretty 
much said the same thing too.
    But do you think it's reasonable for the head of your 
enforcement to be making such claims during an open 
investigation when you put out a special call trying to get the 
information? It sounds like you already predetermined before 
you got the information that there is no speculation or 
manipulation going on.
    Mr. Lukken. Well, manipulation is a different term, and I'd 
like to clarify. Our act defines manipulation as somebody 
intentionally trying to come into the market to their own 
advantage, collaboratively with a group, to benefit for profit. 
And we've seen this in cases, famous cases that this committee 
is well aware of, including Amaranth and those types of cases.
    I think what's being discussed currently is that there may 
be so much financial money coming into the markets that it may 
be artificially creating a bubble. That is something different, 
typically, than what we look at. So we can never rule out 
definitively that manipulation is not happening, because that's 
what we do, we police the markets, just as policemen police for 
crime. They can't prevent it all. But when they do, they go 
after it aggressively.
    And that's what I think our enforcement director was 
saying, is we have not seen that ICE is causing a part of this 
bubble that's going up. But we can't ever rule out that 
manipulation is not occurring anywhere.
    Mr. Stupak. But having been a police officer, you do get a 
sense that something is going on, and you start digging a 
little bit.
    So let me ask you this. Excessive speculation is prohibited 
by the Commodities Exchange Act. However, a certain amount of 
speculation in the markets is necessary to provide liquidity.
    What concerns me is the increasing level of speculative 
money purchasing oil futures contracts. So what would you 
consider excessive speculation?
    Mr. Lukken. Well, it's something--as you mentioned, I think 
your chart had 70 percent. Those are figures, a lot of that 
growth is the swap dealers, trying to figure out what the swap 
dealers are doing. So that's what we need more information on, 
greater detailed information.
    We've sent out our special calls to get that, to find out 
how much of that business--a lot of it may be commercial. And, 
in fact, I think I've passed out a chart to the committee 
members, swap dealers are currently flat the market or 
virtually flat the market. They have as many short positions, 
meaning they would benefit from the prices going down, as they 
do long positions.
    So you would think, if all this index money was overtaking 
these markets, that you would see more on the long side. But 
right now--and this has been studied for a long period of 
time--swap dealers have actually had as many short positions as 
long positions in the market.
    Mr. Stupak. Sure. There is your chart there, the one you 
passed out to the committee today. We just had a chance to take 
a look at it.
    But isn't this argument really, sort of, flawed? I mean, 
the law of supply and demand is still in effect, and new demand 
in any market forces prices higher to attract new sellers. So 
there's a parallel shift up in price every time an index buyer 
buys or holds. So a new entrance and the exit point is higher 
than if there were no large index buyer in the market. So every 
time you roll one of these over and take a new one, the price 
is higher.
    As you can see, nearby future prices, look at that, they 
shot right up on there. Sure, it stays pretty much the same; 
you want to say it's flat. But look at what it has done to the 
price, because it's a new contract. Every time it says short 
and long, it's a new contract; therefore, the price has to go 
up, because the flow of money into this market, which is 
unreasonable, that led to excess speculation.
    Wouldn't you agree?
    Mr. Lukken. Well, as you mentioned, there is a short for 
every long. So there is somebody that will lose for every 
winner. So that's important to remember. And----
    Mr. Stupak. As long as those prices continue to go, we 
continue to drive the floor up each time we make one of those.
    Mr. Lukken. Right.
    Mr. Stupak. No matter where it occurs.
    Mr. Lukken. Yes, well, I think what this chart--we can't 
make any hard and fast conclusions with this chart, but it does 
indicate that it's worth the effort that we're going through to 
get the information from these swap dealers, to use this 
interagency task force to look at this. We have DOE and FERC 
and FTC and others looking at this information with us, so that 
we can make sound, informed decisions.
    Mr. Stupak. Well, I agree with you, but I think your chart 
disproves what you're trying to say. And as I said earlier, 
Secretary Paulson, after you issued your special call, 3 days 
later he says, and I quote, ``My position, and I've looked at 
this very carefully, is I don't believe financial investors are 
responsible for any significant degree of this price movement. 
This is supply and demand. Financial investors are on both 
sides of the market. They are long, they are short. They don't 
set trends. They follow trends.''
    A fair reading seems to me that the Secretary has 
apparently rushed to judgment. And I don't know if your 
interagency task force you've been talking about or your 
special call is going to change the Secretary's mind. Sounds 
like he has made up his mind before we ever even had any 
information come forth.
    Mr. Lukken. Well, as an independent regulatory agency, we 
have to keep an open mind and evolve with circumstances. And 
that's why we're trying to get the better information. I think 
everybody has agreed that more information is needed on these 
swap dealers, and that's what we're going to do.
    Mr. Stupak. Very good.
    Mr. Whitfield for questions, please.
    Mr. Whitfield. Chairman Lukken, thank you very much for 
being with us today.
    And, obviously, we all come to this from different 
viewpoints. As Members of Congress, we're primarily focused on 
what can we do to get these prices down and help our economy 
and help people who are trying to meet all their financial 
obligations and so forth. And from your perspective, you're 
enforcing laws and regulations as they relate to trading in the 
commodity futures market.
    And I know Chairman Stupak had mentioned Secretary 
Bodman's--he had made a comment that he didn't feel like 
speculators were affecting the price. And your chief economist, 
I guess, Jeffrey Harris, in the Senate last month said that 
there was no evidence that position changes by speculators 
precede price changes for crude oil futures contracts. And 
without getting into the argument, the first panel all felt 
like, yes, it's having a dramatic impact.
    What specific authority do you have today to penalize 
someone or take some action if it's determined that there is 
excessive speculation?
    Mr. Lukken. Well, excessive speculation is not defined in 
our act. It talks about it's something that the CFTC should 
look for and ensure that unwarranted price changes are not 
occurring, and artificial prices. And it asks us to set 
speculative limits in order to do that.
    We do have a core principle in our act that requires 
exchanges to set position limits, as well as accountability 
levels, for those contracts. And they do that, and have been 
doing that since 2000, since our act was modernized.
    So excessive speculation is, like I said, an undefined 
term. But we do have controls in place, mainly through the 
information----
    Mr. Whitfield. Let me just interject for a moment. Even 
though it's not defined, with the dramatic increase of oil 
futures market, I'm supposing that within the industry there 
has been some discussion about what is excessive speculation, 
correct?
    Mr. Lukken. Yes, sir.
    Mr. Whitfield. And what did you all determine? Did you come 
up with any conclusion of what excessive speculation is as it 
relates specifically to this problem of oil futures?
    Mr. Lukken. Again, we have not defined excessive 
speculation, but we certainly have been taking action over the 
last year to try to address some of the concerns around 
speculators, including closing the Enron loophole as part of 
the Farm Bill, looking into swap dealers as part of our recent 
special call----
    Mr. Whitfield. You listed a number of initiatives that you 
had taken. And so you can do most of these by regulation, or do 
some of them require legislation?
    Mr. Lukken. Well, the Enron loophole required legislation 
in the Farm Bill. So we're implementing that according to a 
timetable set out by Congress.
    The swap dealer information, we're trying to see what that 
information may bear on what the situation is. But we may or 
may not have to require certain legislative changes; I don't 
know yet.
    Mr. Whitfield. What about margin requirements?
    Mr. Lukken. The CFTC does not have specific margin 
authority except for in emergency situations. It's set by 
exchanges.
    I would like to address the margin question. Margin in the 
futures market is different than in the stock markets. It is 
not a downpayment on a good, such as in the securities market. 
It's meant to cover a 1-day price change. And it's been 
successfully doing that to prevent systemic risk in the futures 
markets for 150 years.
    Mr. Whitfield. So you would oppose changing the margin 
requirements?
    Mr. Lukken. I think it would not result in what everybody's 
looking for, which is lower prices. I think it may drive 
businesses elsewhere, to London and to the over-the-counter 
markets. That should be a concern.
    And I'd also mention, if people are concerned about index 
traders, those people are normally holding a dollar of asset 
for the positions they are putting up. So they could meet those 
margin calls. And I'm not sure it would get them out of the 
market, if that's what the concern of Congress was.
    Mr. Whitfield. Now, in the farm bill, what else did it do 
to assist you, other than addressing the Enron issue?
    Mr. Lukken. Well, we also had increased penalty authorities 
for manipulation, which is very helpful. This puts us in line 
with FERC, to ensure that it's enough of a punishment for 
people trying to manipulate the markets.
    We also received some greater retail fraud authority for 
foreign currency fraud, which was helpful.
    So there are a few provisions in there that helped give us 
greater tools at the agency.
    Mr. Whitfield. OK.
    Well, thank you very much.
    Mr. Stupak. Mr. Melancon for questions.
    Mr. Melancon. Thank you, Mr. Chairman.
    Mr. Lukken, when was it that the CFTC started looking into 
the swap issue? How long ago was that?
    Mr. Lukken. Well, obviously, we always have the ability, 
and have over time during surveillance of our markets, to be 
able to ask for swap dealer information using our 1805 
authority. And that occurs quite frequently.
    As a structural issue of trying to get information as a 
class, this is something we've started thinking about as prices 
have been escalating, as concerns have been raised in the 
public about this, that we probably need to find out more 
information about the underlying transactions.
    Mr. Melancon. So a month ago, 3 months ago, 6 months ago, a 
year ago?
    Mr. Lukken. Yes, these are things that, yes, we've been 
debating internally, sure.
    Mr. Melancon. About when? About 6 months ago? A year ago?
    Mr. Lukken. Yes, certainly.
    Mr. Melancon. Now, did the Congress ask you to look into 
this, or did you on your own over at the CFTC take the 
initiative?
    Mr. Lukken. This is something CFTC did on its own.
    Mr. Melancon. OK. And you're setting a date for September, 
yet the prices are escalating at a rate that September is going 
to be too late, if I read it correctly. I know government 
doesn't work that fast, but is there any way to expedite the 
work you're doing?
    Mr. Lukken. Well, we said by September 15th, so if we can 
get it and make recommendations before then, we certainly will.
    Mr. Melancon. I have never seen an agency beat a deadline.
    Mr. Lukken. Well, we'll give it our best.
    Mr. Melancon. Yes. Who exactly is ICE? I mean, I know 
they're a brokerage firm. I know they're based out of England. 
I know they have an office in Atlanta. But who are they? Who 
are the principals?
    Mr. Lukken. The principals?
    Mr. Melancon. Yes, who set ICE up? Is it an American 
company involved in this that didn't like the way that things 
were regulated by----
    Mr. Lukken. The holding company I think is based in 
Atlanta, but they bought a British company several years back.
    Mr. Melancon. So who is ``they'' in Atlanta?
    Mr. Lukken. I think by British law it has to be an 
independent board. This is something that I think your next 
panel could talk about.
    Mr. Melancon. Yes, but who is ``they'' in Atlanta? Who are 
the ``they'' that set up the ICE?
    Mr. Lukken. I don't know the exact individuals. I think 
their CEO is Jeffrey Sprecher. But they are the ones that 
bought the IPE in London.
    Mr. Melancon. So they were investors that put this 
together? Is that basically how it got started in Atlanta? And 
how long ago was that? Two years ago? Three?
    Mr. Lukken. I think it was in the early 2000s that ICE came 
into formation.
    Mr. Melancon. So when the CFTC made some changes to the way 
they do business and the way swaps and derivatives are handled, 
who came and asked the board for that? Who specifically came 
and said, ``We need to make these changes because''?
    Mr. Lukken. Well, the policy regarding swaps has been a 
policy since 1991, so that predates myself. But the swaps 
exemption has been in place since that time.
    Foreign boards of trade, again, this is something that we 
dealt with in a public hearing and, in the Federal Register, 
put these issues out for comment.
    So some of these things pre-date the Commission.
    Mr. Melancon. So when did the changes take place?
    Mr. Lukken. Which changes?
    Mr. Melancon. The changes in the way we regulate the 
market, the commodity market? I mean, I know over 2 years ago 
it was brought to my attention. And so I'm just wondering when 
we started this--I guess, when did we start this allowing for 
the escalation by changing the rules of how we ran the market?
    Mr. Lukken. Right. Well, ICE Europe, which was the former 
IPE, had been in existence and trading in the United States 
since the CFTC granted it an access letter in 1999. 2006 is 
when I think our surveillance economists became concerned that, 
because they were linking to NYMEX, that they could potentially 
move the markets. And that's when we conditioned it on 
information-sharing between the London exchange and the New 
York--or the CFTC was getting this information about the large 
traders in those markets.
    Since that period of time, we've worked to improve the 
information we get, and most recently imposing position limits. 
And so we feel that we've harmonized those positions and the 
policies of what's happening here in the United States to make 
the equivalent of what they're doing in Britain.
    Mr. Melancon. So ICE only deals with energy, only deals 
with oil? Or do they have other commodities?
    Mr. Lukken. I think they are primarily in the energy 
business, yes.
    Mr. Melancon. OK. But if I were a commodity market, NYMEX, 
CBOT, wouldn't I want to trade in all commodities?
    Mr. Lukken. Well, actually, let me correct myself. They 
also own a fully regulated exchange, the NYBOT, the New York 
Board of Trade, which they have subsequently changed to ICE 
U.S. But they trade coffee, sugar, cocoa, other commodities, 
fully regulated commodities in the United States.
    Mr. Melancon. I came from the sugar industry. I haven't 
seen the price going up on there. What's the deal with them? 
They don't want to speculate on that?
    Mr. Lukken. I don't know.
    Mr. Melancon. We'd like to see some speculation in the 
sugar business.
    I think my time has just about run out.
    But I would encourage you to expedite the report if you 
would, please, sir. As you're aware, at $4 a gallon, it is 
getting tougher and tougher to explain to constituents exactly 
what the problems are out there.
    Thank you, Mr. Chairman.
    Thank you, Mr. Lukken.
    Mr. Stupak. Thank you, Mr. Melancon.
    Mr. Barton for questions please.
    Mr. Barton. Thank you, Mr. Chairman.
    First, I want to commend you for protecting some of the 
actions the CFTC has taken in the last several weeks. They 
mirror, if not exactly at least closely, the bill 6130 that I 
put in, along with a number of other members on the Republican 
side of this committee. So we're glad to see some actions 
beginning to be taken.
    My first question goes to the heart of why you're here. 
Assuming that there is a problem in the markets in terms of 
speculation in the oil futures market, and it would seem to me 
we have to address the underlying supply and demand 
fundamentals, or no matter what we do on speculation, it isn't 
going to make much difference if we don't get more supply or 
less demand or a combination of both fundamentally in the world 
market.
    But having said that, I do think there is something we can 
do on speculation. My biggest concern beyond what to do is how 
to make it congruent with the foreign markets. Our first panel 
seemed pretty satisfied that if we did it in the United States, 
that Europe would follow our lead, and I guess Asia, also.
    Do you share that belief that it's easy to make whatever we 
do, get the international markets to conform?
    Mr. Lukken. Well, I think that's the worry, is there may be 
some retribution from foreign markets against U.S. exchanges 
trying to get access to foreign markets. So that's something I 
think we have to be mindful of. I think you still have to 
ensure that the information you're going to get is needed and 
necessary. And I think, as we've conditioned our access 
letters, that's what we've tried to get, is the large trader 
reports and impose position limits on these types of contracts. 
And that's going to be extraordinarily helpful.
    But to require all these exchanges all around the world to 
come to register in the United States, it's going to be 
difficult and will require all our exchanges to go register all 
around the world with different regulatory authorities. So this 
ability to recognize each other around the world with good 
conditions, solid conditions, to ensure you're getting the 
right regulatory authority to police those markets, to see the 
entirety of it, is extremely useful.
    And like I said, if we got rid of our program tomorrow, the 
London market would not go away. We would just stop seeing it. 
That's the problem. We want to make sure that we see it. And 
the leverage we have is through this access letter.
    Mr. Barton. Well, let's bring--one of the recommendations 
of Mr. Masters I believe was to raise the margin requirement. 
Right now, we let the commodities markets set their own margin 
requirements. We don't have a requirement like we have in the 
equity market that if you buy a stock, you've got to put up 50 
percent of the value of the stock the day you buy it, or I 
think within 3 days or maybe 5 days.
    Let's assume that, either by statute or by regulation, we 
raise the margin to 25 percent of a commodity of an oil futures 
contract. Would ICE go along with that? I would think they 
would say, well, if they're at 25, we're going to be at 10, or 
we want to get our business--we want to get their business. So, 
I mean, that's one example where it's going to be very 
difficult I would think.
    Mr. Lukken. I think that's right. I think that's very 
right.
    Mr. Barton. What about the transparency requirements on 
position limits? If we set more transparency requirements or if 
we end some of these exemptions and require real enforcement on 
limits, what would the ICE market do about that?
    Mr. Lukken. I think transparency, this is something we will 
get their data. We are going to put it in our commitment of 
trader data in the future, so the public will be able to see 
what's going on in ICE and commercial and noncommercial 
categories. So that's going to be helpful. And ICE has agreed 
to do that in the future along with the position limits and 
accountability limits.
    Mr. Barton. So we had one example on a natural gas company. 
When we cracked down in the United States on them, they just 
took their business, didn't change their position limits or 
anything, they just took it overseas.
    Mr. Lukken. I think you have to be mindful of that, that's 
a possibility. But still on principle, you want to make sure 
the markets are being properly regulated. And so that's what 
we're trying to do, find that balance of get the information 
you need to properly surveil the markets but also not drive it 
into darker markets or elsewhere. That would be the worst 
scenario that we could probably hope for.
    Mr. Barton. Do you agree that, because of the stability of 
the financial market in both the United States and in Great 
Britain, that there's not much concern about a third market 
being created outside of that framework overseas and that 
people just aren't going to put their money in Dubai or Hong 
Kong or someplace like that?
    Mr. Lukken. I think futures markets, they don't move very 
often, so London and New York are probably the two markets. But 
they could. There's a big over-the-counter market that could 
exist elsewhere outside the U.S.'s surveillance. So that may 
happen as well. But no, I think there are financial centers 
around the world that would try to use this to their advantage: 
Tokyo and Hong Kong and others.
    Mr. Barton. And my last question, Mr. Chairman.
    Do you agree that it's possible to have different rules for 
physical participants in the market, i.e., they actually sell 
the product or they actually want to take ownership of it; and 
different rules for nonphysical, they're in it purely for 
financial purposes without the expectation of receiving or 
providing the product?
    Mr. Lukken. Yes, and we do under current law. I mean, 
speculators are required to have certain limits on what they 
can do. So the question is, again, how do you ensure that you 
have enough speculators to bring proper liquidity, define 
prices, discover those prices, but not dry them out. So the 
commercials have difficulty either finding a seller for every 
buyer or a buyer for every seller. But also liquidity drives 
down prices for commercials as well as the bid and spread 
becomes higher. So that's useful, too. So we want to preserve 
that but ensure the controls are in place to ensure that nobody 
is artificially driving up prices.
    Mr. Barton. Thank you, Mr. Chairman.
    Mr. Melancon [presiding]. Thank you, Mr. Barton.
    Mr. Green for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    And again, welcome Mr. Lukken.
    The CFTC staff has issued no-action letters or foreign-
board-of-trade exemptions which allow foreign boards of trade 
to operate in the U.S. without requiring these markets to 
register at the designated contract markets with the CFTC. How 
did these no-action letters come into existence, and was this 
process formally approved by the commission itself?
    Mr. Lukken. This came into existence about 1996. Our act 
currently prohibits us from regulating foreign boards of trade. 
So it's difficult for us to put conditions on foreign boards of 
trade. So this access letter, the no-action letter that you 
have referenced, allowed us to have U.S. institutions that were 
seeking access with foreign exchanges to have access to those 
foreign exchanges under certain conditions. The CFTC staff does 
a thorough review of the regulatory systems of these different 
countries, as well as the exchanges itself before issuing these 
letters and then allows these institutions to trade foreign 
products.
    Mr. Green. Do you agree with Dr. Greenberger's written 
testimony when he states that the no-action letter process 
never contemplated that an exchange owned by or affiliated with 
a U.S. entity would escape the CFTC regulation imposed on 
traditional exchanges?
    Mr. Lukken. Well, this is when it was started in '96 and 
then I think formalized in 1999. Yes, there weren't any linked 
products at that time. However, in 2006, when this started, 
when the products did become linked, again, the CFTC held a 
public hearing, put out for public comment the changes that 
they were seeking, and we started asking for additional 
information from these markets.
    Mr. Green. Do you know how many foreign exchanges have 
placed terminals within the U.S. pursuant to that no-action 
letter?
    Mr. Lukken. I think it's around 20.
    Mr. Green. Did the commission disclose its 2007 
investigation and the practice surrounding the purchase and 
transportation of storage and trading of crude oil contracts?
    Mr. Lukken. Yes, it did.
    Mr. Green. What effect, if any, would this public 
announcement have made on this investigation of the contract 
market?
    Mr. Lukken. Well, we felt, obviously, we never want to 
hinder an investigation either claiming charges against 
innocent parties until proven guilty, but because of and 
recognizing that there were concerns about manipulation in 
these markets, we took the extraordinary step of disclosing 
that we've been investigating this since 2007.
    Mr. Green. Do you agree that oil has been transformed from 
a commodity into a financial asset where its prices are 
influenced by those investing in oil futures who are seeking a 
hedge against the weak dollar?
    Mr. Lukken. Certainly our economists that look at this see 
the correlations between the dollar and commodity prices.
    Mr. Green. Do you feel, as a matter of our economic policy, 
our government should allow commodities essential to the 
economy, such as oil, to be treated as a speculative asset for 
investors with hundreds of billions to allocate or should it be 
regulated in a way to ensure that its price is dictated 
exclusively by supply and demand?
    Mr. Lukken. Our mission is to ensure that it's influenced 
by supply and demand, and that speculative interests are not 
artificially driving prices.
    Mr. Green. On June 10th, CFTC announced that, in light of 
the rising crude oil price, it would convene an interagency 
task force, including the Treasury and Energy Department. This 
task force will look at the impact of the index traders and 
speculators. I know it's only a few weeks later, but has the 
task force met yet?
    Mr. Lukken. We have met. We've tried to assign some of the 
things to different agencies. We will continue to meet. And 
hopefully, some of its findings can be a part of this report on 
September 15th.
    Mr. Green. And you're still continuing to receive data on 
commodity index investments from the investment banks and funds 
pursuant to the special call for data issued on May 29?
    Mr. Lukken. Are we receiving the data?
    Mr. Green. Yes.
    Mr. Lukken. I think we'll start receiving the data some 
time towards mid-July. We've sent out the request but have not 
gotten back the data yet.
    Mr. Green. I appreciate your time. Thank you for appearing 
today.
    Thank you, Mr. Chairman.
    Mr. Melancon. Thank you, Mr. Green.
    Mr. Walden.
    Mr. Walden. Thank you, Mr. Chairman.
    Mr. Lukken, thank you for being here today.
    Does the CFTC have the authority, do you have all the 
authority you need to go after somebody if they're on ICE or 
one of the other exchanges and adversely affecting our market?
    Mr. Lukken. Well, if they're trading on ICE, and I would 
assume they're U.S. participants, we would certainly--that's an 
illegal act, and we can go after those U.S. participants for 
that, certainly.
    Mr. Walden. So do you need any additional authority from 
us, from the Congress?
    Mr. Lukken. For policing those, I think what's being 
considered is trying to codify some of the things that we've 
talked about. I think that would be helpful. And we're trying 
to think through whether we have the legal ability to go after 
all this. We certainly will advise this committee if we feel 
we're missing something.
    Mr. Walden. And when would that advice come to this 
committee?
    Mr. Lukken. As quickly as possible if we feel we need 
something.
    But right now, part of this is we have the ultimate 
authority, which is to pull the no-action letter. So we can 
ensure--work with exchanges, work with the FSA, to get people 
out of positions. We can sue participants that are trying to 
manipulate the markets. So we have quite a few tools in this 
area.
    Mr. Walden. There are a lot of folks, some of them who 
testified today, believe that market manipulation, not just 
speculation, is going on and could account for some say as much 
as $25, $35, $60 a barrel. What's your estimate?
    Mr. Lukken. Well, I think certainly manipulation, illegal 
manipulation, somebody who is trying to control the market by 
holding a position, that, in our experience, has been a short-
term effect. I mean, it's somebody able to hold a position at 
the expiration of a contract. And we've seen this very famously 
in Hunt Silver Crisis and with Amaranth, working off of two 
marketplaces to do that. But typically they can't hold those 
positions very long.
    I think what people are concerned about is more of a 
structural effect, too much financial money. And that's 
something we're trying to get our arms around with this swap 
dealer special call authority. But as far as trying to 
estimate, it's difficult for me to know.
    Mr. Walden. OK, and then you've heard the talk today about 
putting in different margin requirements. What's your 
recommendation to us with regard to margin requirements, 
especially in some of these trades?
    Mr. Lukken. Well, I think margin is a pretty imprecise tool 
to try to go after the activity you're trying to go after. 
There are other ways to get it through transparency, in the 
controls I've talked about. But margin would raise the cost on 
some of these businesses significantly, could potentially move 
them to other markets like London or underground. Without--and 
I think the other concern for us is that these are meant, 
margin is meant to protect the clearinghouse. We want to make 
sure that that is a targeted protection. And if we start toying 
around with margin when prices are too high or too low, I'm not 
sure what sort of precedent that would set. But I think there 
are other ways to get at the type of controls that you're 
after.
    Mr. Walden. And tell us about the OTC, the over-the-counter 
market and your regulatory authority toward that, those sorts 
of trades. Do you have much authority there?
    Mr. Lukken. Well, right now, if there's a participant in 
our markets and we see an anomaly in their trading, we're able 
to reach through into over-the-counter market to get that data 
on a case-by-case basis and determine whether they're trying to 
use the over-the-counter market in conjunction with the futures 
markets to manipulate the price of a given commodity. So the 
over-the-counter market is a very large market. It's not 
necessarily a price discovery market like the futures markets 
have been and some even exempt commercial markets like ICE have 
become. So we try to only go into the over-the-counter market 
on a need-to-know basis and see what's going on, and it's been 
effective.
    Mr. Walden. OK.
    When it comes to these giant investment firms coming into 
the market, we read about the CalPERS, the California, I assume 
it's Public Employer Retirement System, coming in and weighing 
in with what, 4.5 percent or something of their wealth. What 
impact are you seeing as a result of that in the market, and 
where do these funds go in today's economy, but into the 
commodities?
    Mr. Lukken. Well, I think everybody can agree that there's 
been an influx of financial money from pensions and endowments. 
They typically go through swap dealers, which we've talked 
about. Swap dealers are bringing a lot of business into the 
futures markets, including a lot of commercial businesses. So 
I'm not sure. I think, under the sort of portfolio 
diversification theory, commodities help improve the returns 
for these commodity pension, these pension organizations. I'm 
not sure there--I'm sure there are other assets they could go 
back to if Congress felt that they were somehow artificially 
driving up prices.
    Mr. Walden. Now, some of the most vocal opponents of your 
organization and this administration have called for closing 
the so-called Enron loophole. That was done to a large extent 
in the Farm Bill, and some of those local advocates didn't 
bother to vote for the Farm Bill, which closed that loophole. 
Tell me, though, from your standpoint, the closing of that 
loophole, did that get done properly? Is there more work to get 
done there? Are there additional authorities that you need?
    Mr. Lukken. I think it is going to be a very effective tool 
for us because our concern, as you know, our act requires us to 
protect the price discovery process wherever that may occur. So 
it may occur in a futures market, but it may occur in the over-
the-counter market on these electronic exchanges. And so that's 
where we drew the line and said, that's when the public 
interest arises and we need additional authorities, is when 
price discovery begins to occur. And so I think that has been a 
very effective way to think about this, is that we're going to 
protect the fully regulated marketplace, and these swap 
electronic marketplaces have become price discovery vehicles, 
and we're hopeful to get those authorities in place as quickly 
as possible.
    Mr. Walden. All right.
    Thank you, Mr. Chairman. Thank you.
    Mr. Stupak [presiding]. Mr. Burgess for questions.
    Mr. Burgess. Thank you Mr. Chairman.
    Mr. Lukken, I assume you were here when the first panel 
testified this morning.
    Mr. Lukken. I was.
    Mr. Burgess. Mr. Masters talked about his four-step plan to 
immediately bring the price of crude down to its marginal cost 
of $60 to $70; it could happen within a period of hours, 
minutes, days. Well, step one was, establish limits that apply 
to every market participant. And you heard testimony from other 
individuals on that first panel that this was probably where 
the most bang for the buck occurred in these four proposals, 
and this was the step of establishing position limits. Do you 
have currently the authority to do what is outlined by Mr. 
Masters in step one in his testimony?
    Mr. Lukken. Putting position limits on speculators?
    Mr. Burgess. Yes.
    Mr. Lukken. Currently, I think our act requires exchanges 
to put position limits on it. But I think through emergency 
authority, we could put position limits on any type of 
participant.
    Mr. Burgess. Well, again, the testimony we heard this 
morning was pretty powerful; that using this type of authority 
within a very brief period of time, we could bring the cost of 
crude oil to well under $100 a barrel. We see how the economy 
is suffering. We see how other commodity prices are affected. 
We heard the testimony from the truckers, the airline industry 
and on. Wouldn't that kind of classify as an emergency to take 
this step?
    Mr. Lukken. Well, I think the big--we currently have 
controls and position limits on speculators, accountability 
levels outside the spot month for speculators. I think what was 
in that chart, the 70 percent chart that was shown, are the 
swap dealers, those people who are aggregating lots of clients 
and putting them into the futures markets, the net risk of 
those positions.
    We're going to try to get better information from them, but 
we can't put limits on or think about limits until we get 
better data and information from those types of participants.
    Again, we want to also make sure that if they're purposeful 
evading limits, that's something I think we should go after. 
But it could be that a lot of these are below limits or 
commercial participants coming to the markets. So we just need 
better data before making any hard and fast decisions about 
that.
    Mr. Burgess. OK.
    Well, we had a hearing--and it probably wasn't as involved 
as this morning's has been--last December. How much more time? 
How much more data? What could we reasonably expect as a time 
line from the CFTC before you feel that you have the data you 
need to invoke those emergency provisions to bring the price of 
crude oil down by 50 percent?
    Mr. Lukken. Well, certainly these are complex books that 
we're going through from swap dealers to try to unravel. These 
are not futures contracts. They are tailored contracts between 
customers and the swap dealers. So we're trying to put them in 
equivalent terms to the futures market, these billion dollar 
books of these organizations. So, again, we're a small staff 
trying to do this while we, at the same time, regulate the 
markets. So we're doing it as fast as we can to get to Congress 
the information they need to make decisions.
    Mr. Burgess. And I appreciate the conditions under which 
you work. It's just we hear people talk about opening the 
Strategic Petroleum Reserve, the President has executive 
authority to do that in times of emergency and that maybe this 
is one of those times. And I would just submit, if you have 
that authority under emergency provisions, that the step taken 
of limiting the spot market might be, or the speculators on the 
spot market may be a less drastic step than drawing down the 
Strategic Petroleum Reserve. We probably have a great reserve 
of speculators, but if we got into trouble after drawing down 
the Strategic Petroleum Reserve, we have nowhere else to go but 
ANWR, and we've heard it takes 10 years to get that oil.
    Now, on the issue of just your ability to do your job, how 
do we stand currently with--you said you needed, what was the 
figure, you needed an additional $150 million this year? Did I 
see that in your testimony?
    Mr. Lukken. No, actually an extra $30 million.
    Mr. Burgess. $30 million, OK. We'll give you $150.
    But realistically what is the practical effect of the fact 
that we're just now starting our appropriations work in 
Congress, and no one will tell you with a straight face that 
we're going to finish any appropriations bill by September 
30th, and anything that happens will be done after the next 
President is sworn in?
    We're asking you to move with all due dispatch on this, and 
yet, at the same time, we're probably not going to fund you any 
additional money for at least 6 or 7 months and maybe even 
longer than that. Is that going to be a problem?
    Mr. Lukken. A huge problem, sure. This is something that 
we've been straining under the pressure to oversee the markets, 
all the initiatives that we're going through, the Farm Bill 
with its authorities to go through, just the growth in the 
market itself requires us to get more staffing. So, yes, this 
is something I know we're not going to be able to bring up to 
speed with staffing immediately, but we have to be thinking, 
and as a steward of this agency, its long-term health to ensure 
that it has the proper staffing to do its job so that it can 
report to Congress with certainty that it's overseeing these 
markets.
    Mr. Burgess. I appreciate your attention to the long-term 
details.
    Can you, and I don't have much time left or any time left, 
but can you in very simple terms, simple declaratory sentences, 
give us the difference between the Enron loophole, the London 
loophole, and the swaps dealers loophole?
    Mr. Lukken. Well, the Enron loophole, as it's called, was 
meant to, over time, exempt commercial markets developed, which 
are ways of putting swap positions onto an electronic format. 
These positions became more and more price discovery vehicles, 
and we needed authorities to go along with that.
    What's occurring in London and what we've announced with 
the FSA in London, these are fully regulated markets. And so we 
were trying to work with the British authorities to get the 
proper information from them and to harmonize the information 
and the position accountability and position limits on those 
markets. So that's what we've already taken steps to address, 
and I think those will be helpful in the future.
    As far as the swap, the swaps exemption, that is something 
that's been in place, again, since 1991 as a policy. It's 
something, when the CFTC was reauthorized in 1986, the 
legislative history from Congress urged us strongly to consider 
exempting these types of transactions out of using hedge 
exemptions. So this is something, I wasn't around at the time, 
but I'm sure the commission took Congress's words to bear and 
decided to do this. So this is something we're readdressing. 
We're trying to get better information to understand whether 
this still makes sense, and if it doesn't, we'll make proper 
recommendations.
    Mr. Burgess. Let me ask you a question just on technical 
grounds as to what the language that's called the Enron 
loophole, that was actually passed in the Commodity Futures 
Modernization Act by the House of Representatives in October of 
2002 and then picked up and put into a large appropriations 
bill. Did the language change between the time the House voted 
on its bill in October of 2002 and the time that the omnibus 
bill was passed later in December?
    Mr. Lukken. Section 8 did not--or Section 2(h) did not 
change at all.
    Mr. Burgess. Did it change from May of 2002 when this 
committee marked up that legislation to the time it was voted 
on on the House Floor? Was the language the same from what this 
committee submitted for Mr. Ewing's bill to the House floor to 
be voted on in October?
    Mr. Lukken. I believe it was the same.
    Mr. Burgess. So this was not language that was just thought 
up at the last moment?
    Mr. Lukken. No. This was I believe put into the bill, and I 
think it went through both this committee, the Ag Committee and 
the Banking Committee at the time, and then came to the House 
floor with a statement of administrative policy in support of 
it.
    Mr. Burgess. So this would have been language that was 
voted on by Mr. Stupak and Mr. Dingell and Mr. Inslee, who all 
voted aye, but Mr. Green was not present at the time?
    Mr. Lukken. In October of 2000.
    Mr. Burgess. Yes, in October of 2000.
    I yield back my time, Mr. Chairman.
    Mr. Stupak. You don't have anything to yield. You're way 
over.
    Mr. Inslee for questions.
    Mr. Inslee. Thank you.
    There are five things that our previous witnesses have 
talked about: closing the three loopholes, the three Horsemen 
of the Apocalypse, I guess, the ICE, the swap, the Enron; 
measures to increase margin requirements is a fourth action; 
and a fifth, measures to restrict the positions that traders 
will have in a particular market. So there are five actions to 
be considered. I would like you to address each one of those 
actions. Tell me which ones would require some international 
action to have some significant effect, or which could be done 
just by the United States and still have at least considerable 
effect? And which ones would require congressional actions as 
opposed to you being able to take regulatory action with or 
without, forgetting that wisdom, but whether or not you have 
the authority to do it? Could you address each of those five?
    Mr. Lukken. I think the first one, the exempt commercial 
market issue, was passed as part of the Farm Bill. And so we're 
addressing trying to within, I think we have 180 days to try to 
get out a rule on that and try to address the issue regarding 
what is called the Enron loophole.
    The second issue dealing with foreign boards of trade, as 
stated, we are now getting the equivalent of large trader 
reports from the foreign board of trade that have links to the 
United States, both in London. So that will be helpful, as well 
as putting position limits on them, so we can do that 
administratively. But certainly I know that's been floating 
around; a codification of this would be helpful in my view.
    Third, dealing with swaps, this is an issue that we've 
asked for additional information about a month ago to get 
better information from swaps to understand what type of 
transactions are coming onto our markets as a result of swap 
dealers. We hope to get that information. And by the way, that 
also includes sovereign wealth funds coming through swap 
dealers and to find out the type of information coming through 
those swap dealers. And hope to make recommendations to 
Congress by September 15th.
    Margin, we do have authority, emergency authority to raise 
margins on exchanges. And I do believe we also have similar 
authority to raise or to implement position limits on exchanges 
as well.
    Mr. Inslee. So all five of those actions, it sounds like 
you could take, you mentioned one of them, that it would be 
helpful to have statutory authority in the ICE situation, but 
all five of them, you think you would have authority to take 
action now, then, even without specific statutory authority?
    Mr. Lukken. And we have on the first three. We are taking 
administrative action on the first three.
    Mr. Inslee. And do you have intentions on margins or 
positions?
    Mr. Lukken. Well, again, as far as the margin, in the 
futures market, it's meant to protect the clearinghouse to 
cover a 1-day price move in the futures markets. I think there 
are concerns that raising margins could drive this business 
elsewhere, and it would be difficult to get it back. There's no 
reason that the benchmark has to be in New York. It could be 
elsewhere in the world. And I think it would be terrible if we 
lost the oversight of those markets to other places.
    Right now it's in New York, and we get all the information, 
and we get the information from London as well. So we're seeing 
the entirety of the crude oil regulated marketplace.
    Mr. Inslee. Isn't that, on margin, isn't that argument that 
it will drive people offshore really the same in equities and 
stocks? I mean, we have margin requirements here, and we have a 
pretty vibrant capital market here. Isn't it pretty much the 
same? We have attractions to be in this market for a variety of 
reasons, because of the stability of our economy, the relative 
stability of our political system. Margin requirements haven't 
destroyed our capital markets here, have they?
    Mr. Lukken. No, but certainly regulation has been a concern 
in our capital markets, that excessive regulation is driving 
business elsewhere. And that's the Bloomberg-Schumer report 
that business was going to London and we need to reexamine our 
capital markets regulation----
    Mr. Inslee. Well, you're not suggesting reducing margin 
requirements in the equities markets because we're losing all 
this business?
    Mr. Lukken. Absolutely not. I'm just saying that we have to 
be mindful that regulation does have an effect on the 
competitiveness.
    Mr. Inslee. Well, if we're mindful that we may be able to 
reduce oil prices by 30 to 50 percent just by increasing margin 
requirements, wouldn't that be a pretty good trade-off?
    Mr. Lukken. Well, I'm not certain that that would be the 
effect of raising margins.
    Mr. Inslee. Well, even if it's half a percent it would 
probably outgun the loss of any potential loss of a capital 
market overseas; wouldn't it?
    Mr. Lukken. Well, I think there are other measures, through 
transparency and other controls, that would be more effective 
than raising margin.
    Mr. Inslee. And what would those be?
    Mr. Lukken. Well, certainly, trying to get better data to 
the public about what's happening overseas and what's happening 
in the swap markets, trying to bring greater transparency to 
those marketplaces, and ensuring that none of these markets 
people are evading position limits in order to speculate had 
they come directly to the marketplace.
    Mr. Inslee. Well, just as one Congressman, I hope you look 
at the Titanic effect of even small changes in the price of oil 
relative to the relative small effect on losing a trading 
position here or there to overseas swapping markets. The big 
savings is in oil prices.
    Thank you.
    Mr. Stupak. Thank you, Mr. Inslee.
    Mr. Dingell for questions please.
    Mr. Dingell. I am curious, what is a hedger?
    Mr. Lukken. A hedger?
    Mr. Dingell. Yes.
    Mr. Lukken. In our terms, it's somebody who has price risk 
to the underlying commodity.
    Mr. Dingell. OK. Now, what other categories or persons are 
there in the futures markets?
    Mr. Lukken. What other categories do we break down?
    Mr. Dingell. Yes. You got hedgers are in there, and then 
you got other folks who are investors, or what are they, or are 
they speculators?
    Mr. Lukken. Well, we currently break down in our commitment 
of trader reports commercials and noncommercials. So in the 
commercial category, we have both what you would say a physical 
hedger, somebody who is physically in the market, such as 
airline companies or refineries.
    Mr. Dingell. The airline company is a hedger; right?
    Mr. Lukken. Pardon?
    Mr. Dingell. The airline company is a hedger; right?
    Mr. Lukken. Yes.
    Mr. Dingell. And that's because they've got a legitimate 
interest in the commodity that they're interested in; right?
    Mr. Lukken. Yes, sir.
    Mr. Dingell. Now, does a speculator have that?
    Mr. Lukken. Speculators do not.
    Mr. Dingell. OK. Now, what is a commercial and what is a 
noncommercial. What are the differences between them?
    Mr. Lukken. Well, commercials, typically people who have, 
again, an interest in the price, the underlying price risk.
    Mr. Dingell. An interest in the price, but do they ever 
receive the commodity?
    Mr. Lukken. Well, certain commercials certainly do.
    Mr. Dingell. Some do and some don't?
    Mr. Lukken. Yes.
    Mr. Dingell. Now, what is the guy who never receives the 
commodity? What is he? Is he a speculator?
    Mr. Lukken. Typically speculators never receive the 
commodity. That's correct.
    Mr. Dingell. OK. Now, is there anybody else who doesn't 
receive the commodity?
    Mr. Lukken. A lot of the swap dealers that we've been 
talking about also do not receive the commodity?
    Mr. Dingell. So a swap dealer doesn't receive. Now, what's 
the difference between a swap dealer and a speculator?
    Mr. Lukken. Well----
    Mr. Dingell. Neither one of them receives a commodity, do 
they?
    Mr. Lukken. No, but a swap dealer does bring a variety of 
different positions to the market.
    Mr. Dingell. He doesn't ever receive the commodity, does 
he?
    Mr. Lukken. But many of his clients do.
    Mr. Dingell. Pardon?
    Mr. Lukken. Many of his clients do.
    Mr. Dingell. His clients do?
    Mr. Lukken. Correct.
    Mr. Dingell. What clients do?
    Mr. Lukken. Well----
    Mr. Dingell. What is the swap dealer that you're talking 
about? Would it be Goldman Sachs?
    Mr. Lukken. Goldman Sachs, Morgan Stanley, JP Morgan. But 
they represent clients; like United Airlines is a client of 
Morgan Stanley, and they manage all of their risk management 
for fuel oil delivery.
    Mr. Dingell. OK. Now, they represent also CalPERS?
    Mr. Lukken. They certainly do.
    Mr. Dingell. And they represent the big asset funds?
    Mr. Lukken. They do.
    Mr. Dingell. But they never receive any oil, do they, in 
these commodities exchange?
    Mr. Lukken. Not the pension funds or endowments.
    Mr. Dingell. No. So what is the effect of all these folks 
being in there and not ever receiving oil? Are they raising 
costs or lowering costs or making the market liquid? What are 
they doing?
    Mr. Lukken. Well, that's something that we're trying to 
find out with our special call that we----
    Mr. Dingell. Do you know, it used to be that you had a form 
that you circulated every month. It went to everybody in the 
futures business, right? Do you remember it?
    Mr. Lukken. Commitment of Trader Report.
    Mr. Dingell. Yes. And as they received these forms, they 
wrote in the corner that they were a hedger or that they were a 
speculator, right? They checked a little box, right?
    Mr. Lukken. Correct.
    Mr. Dingell. You don't have them check that anymore, do 
you?
    Mr. Lukken. I think they still do, but we have classified 
swap dealers.
    Mr. Dingell. Can you tell me that they are and they do?
    Mr. Lukken. They currently still check a box whether 
they're commercially hedging.
    Mr. Dingell. They do?
    Mr. Lukken. Correct.
    Mr. Dingell. So does one of these commercial swaps guys, 
which box does he check, speculator or hedger?
    Mr. Lukken. Well, our policy since 1991 has been that swap 
dealers are commercial businesses trying to hedge their 
underlying asset exposure that they're dealing with commercial 
business.
    Mr. Dingell. Now, how does CalPERS hedge their underlying 
exposure? They're a speculator aren't they?
    Mr. Lukken. Well, they come to swap dealers and----
    Mr. Dingell. No, no, no. They're a speculator, aren't they? 
Isn't CalPERS a hedger?
    Mr. Lukken. CalPERS?
    Mr. Dingell. They receive the oil. You told me that 
somebody who doesn't receive the oil is a hedger, right--or 
rather is a speculator?
    Mr. Lukken. You could probably term them a speculator, 
sure.
    Mr. Dingell. So they're speculators. Now, it's interesting 
to note that Goldman Sachs doesn't receive a nickle's worth of 
oil, do they?
    Mr. Lukken. No, they don't.
    Mr. Dingell. No, they don't. They just--so what I'm trying 
to understand is, how many speculators are in the market, and 
how many hedgers are in the market?
    Mr. Lukken. Actually, to clarify, I understand that Goldman 
Sachs does have the ability to receive and make delivery on 
foreign oil.
    Mr. Dingell. We've gone beyond that. How many speculators 
are in the market, and how many hedgers are in the market, and 
how do you know the difference?
    Mr. Lukken. I think, under current, about 36 percent of the 
oil market is traditional speculators. We have about 32 percent 
swap dealers in the market, and the rest is commercial 
participants.
    Mr. Dingell. Now, how much is this speculating affecting 
the market?
    Mr. Lukken. Well, that's----
    Mr. Dingell. There are a lot of speculators in there. How 
much are the speculators affecting the market?
    Mr. Lukken. Well, certainly we are looking at supply and 
demand, and there are strong fundamentals in place here.
    Mr. Dingell. I'm just a poor Polish lawyer up here, and I'm 
just sitting here asking a very smart fellow to tell me what's 
going on there. How do these speculators affect the market?
    Mr. Lukken. Well, they bring information to the market and 
oftentimes very valuable information.
    Mr. Dingell. But are they raising the market price? Are 
they lowering the market price? What are they doing?
    Mr. Lukken. Well, about half the time, they're on the short 
side of the market, benefitting when it goes down, and the 
other half are on the----
    Mr. Dingell. Are you telling me this is cancelling out?
    Mr. Lukken. Well, a lot of their positions are.
    Mr. Dingell. Do you know that?
    Mr. Lukken. Yes, we do.
    Mr. Dingell. Now, how much in the way of these futures 
contracts are there for oil, and how much oil is there moving 
through the market? Do they cancel each other out? In other 
words, do you have the same number of barrels of oil moving 
through the market that you have contracts for the movement of 
the oil?
    Mr. Lukken. No, the futures markets are larger than the 
physical markets.
    Mr. Dingell. That's right. They're enormously larger. So 
are these enormously larger volumes of swaps and other things 
that you got going on there and speculations and so forth, are 
they affecting the market? Because here you've got, what is it, 
it's about 13 times as much as you've got in the way of oil, or 
rather in the way of contracts that you've got in the way of 
oil; is that right, 13 times? How many billion barrels is 
moving through the swap mechanism--or rather through the 
contracts mechanism, and how much is moving through the 
pipeline? What's the difference? It's about 13 times, isn't it?
    Mr. Lukken. Well, these are risk management markets. A 
futures contract is not affecting the underlying supply.
    Mr. Dingell. We're not talking about risk management. I'll 
get to that when I'm ready. We're talking now about 
speculating. Speculation is not a risk management tool. It is a 
tool whereby you make money or lose your shirt, is that right?
    Mr. Lukken. That's correct.
    Mr. Dingell. OK. So what is the relationship? You've got 
how many million barrels of oil are moving through the 
pipeline, and how many million barrels are moving through the 
contracts? Just tell me. You're in charge of this important 
agency that is here to tell us about these things. I'm waiting 
to hear the answer.
    Mr. Lukken. I think it's about 13 times the physical.
    Mr. Dingell. Thirteen times. So we got here a situation 
where you got an elephant, which is the speculation, and you 
got the oil which is moving, which is a flea on the back of 
that elephant. The flea wants to go somewhere, but he can only 
go on the elephant. And the elephant can go anywhere he wants, 
but the flea has got to go along. Now, tell me how it is that 
this market situation works for the benefit of the consuming 
public, and how does it work for the benefit of those 
goodhearted folk up there in New York who are running this 
wonderful speculative enterprise? Who comes out ahead and who 
gets skinned? And how does the consumer come out of this when 
all these wonderful folks with billions of dollars in backing 
and exemption from you goodhearted folks at CFTC, how is the 
ordinary citizen, and how is oil price, and how is the well-
being of this country going to prosper? If you look, when you 
gave that Goldman Sachs exemption, you had one number, a very 
small number, of contracts moving on the speculative part and 
you had a lot that were moving on the part of the market which 
related to the question of actually managing supply and 
managing price versus supply. How have those numbers changed?
    Mr. Lukken. They've increased.
    Mr. Dingell. They've increased. How have they increased?
    Mr. Lukken. Well, I think over the last 3 years, in 
particular, we've seen an increase in speculative trading from 
about 34 percent to 36 percent----
    Mr. Dingell. Well, the very----
    Mr. Lukken [continuing]. On the swap dealer side.
    Mr. Dingell [continuing]. Capable staff has helped us both. 
Tell me if you agree. And I'll refer to Exhibit Number 2 that 
was prepared for us. In January of 2000, speculators, 37 
percent; physical hedgers, 63 percent. Today, speculators, 71 
percent; physical hedgers, 29 percent. That's 2008 versus 
January 2000. What can you tell me? How does this impact upon 
market prices? Do you have any idea? In 25 words or less, tell 
me what you know that this is doing to the marketplace?
    Mr. Lukken. Well, the CFTC obviously----
    Mr. Dingell. Pardon?
    Mr. Lukken [continuing]. Wants to keep in front of these 
trends, and we have asked for additional information from swap 
dealers.
    Mr. Dingell. Beloved friend, you are down there regulating 
a market. You are from the CFTC I am told. And the CFTC is 
supposed to regulate this market. By curious circumstance, I 
was in the House when a Member of Congress from Iowa forced 
through something it created, your entity. And he was going to 
see to it that the farmers, who then were the people who were 
being screwed, and the consumers, who were then the people 
being screwed, were going to be protected against these folks 
in the futures market. Now we find that these goodhearted folk 
in the futures market have figured out how not just to screw 
the farmers and the consumers in the city, but they figured out 
how to screw both the farmers and the consumers in the city on 
a whole new product, and that's oil. Now, what have you done to 
look at this to see what the cost is? Don't tell me you've got 
a study. These price increases have been going on. You've had 
better than a year in which you folks have been sitting idly by 
twiddling your thumbs watching to see what was going on, or at 
least you so tell me. But what have you found during that? What 
can you tell me about how these numbers that we are now 
discussing are affecting prices and why prices are moving? I'm 
listening.
    Mr. Barton. Mr. Chairman, I hate to interrupt, but our 
distinguished chairman has already doubled his time, and we 
have one more panel. I would hope this would be his last 
question.
    Mr. Dingell. I'm over my time, but it is a wonderful 
question.
    Mr. Barton. It is a wonderful question, but we have three 
more witnesses on a fourth panel.
    Mr. Dingell. I will write you a letter.
    I ask you, Mr. Chairman, that I have permission to have 
that letter inserted in the record. I'm sure that the CFTC will 
be delighted to give us a response, perhaps even a factual one.
    Mr. Lukken. I look forward to it.
    Mr. Stupak. Mr. Barton, did you want to go another round of 
questions?
    Mr. Barton. No, no. I appreciate the opportunity, but I 
would like to hear from the fourth panel.
    Mr. Stupak. All right.
    Well, I have many more questions, but I guess we're going 
to have to go with the next panel.
    Just one question if I may. We've had testimony that 
there's about 12.5 percent of the sovereign funds may hold as 
much as 12 percent. But yet, in talking with CFTC, it may be 
only, in your letter you sent to us, it was only one that you 
knew of. How can you get such a big discrepancy when there is 
as much as 12.5 percent of these sovereign wealth fund clients 
but you can only find one?
    Mr. Lukken. What we reported was directly those sovereign 
wealth funds on our markets directly using the futures markets. 
I think what we will try to find out in getting more data from 
swap dealers is whether some of the sovereign wealth funds are 
coming through swap dealers indirectly out of the futures 
markets.
    Mr. Stupak. Very good, very good.
    I said I would only take one more. I've got many more. 
We'll put them in writing, and we'll send it up to you.
    I think we're going to move on to our next panel.
    Thank you for your time here today, Mr. Lukken.
    Let me call up our fourth and final panel to come forward 
today. We appreciate them being here and their patience today 
as we move forward on this very interesting issue.
    The first is Mr. James Newsome, Ph.D., who is chief 
executive officer and president of the New York Mercantile 
Exchange; Mr. Robert Reid, who is chairman of the ICE Futures 
Europe for the International Exchange, Incorporated; and Mr. 
Michael Greenberger, J.D., who is professor of law and Director 
of the Center for Health and Homeland Security at the 
University of Maryland.
    It's a policy of this subcommittee to take all testimony 
under oath. Please be advised that witnesses have the right 
under Rules of the House to be advised by counsel during their 
testimony.
    Do any of you wish to be advised by counsel during your 
testimony?
    Everyone is shaking their heads no. I take it as no then.
    I'm going to ask you to please rise and raise your right 
hand to take the oath.
    [Witnesses sworn.]
    Mr. Stupak. Let the record reflect the witnesses replied in 
the affirmative. They are now under oath. We will now begin 
with opening statements.
    I'll start with you Dr. Newsome. If you would begin please, 
5 minutes. If you have a longer statement, it will be included 
as part of the record.
    You may begin, sir.

STATEMENT OF JAMES NEWSOME, PH.D., CHIEF EXECUTIVE OFFICER AND 
  PRESIDENT, NEW YORK MERCANTILE EXCHANGE, NEW YORK, NEW YORK

    Dr. Newsome. Thank you, Mr. Chairman.
    NYMEX is fully regulated as a derivative clearing 
organization and as a designated contract market, which is the 
highest and most comprehensive level of regulatory oversight 
for a trading facility. I want to express our appreciation to 
you and the Committee for holding this hearing.
    The ever-increasing cost of energy touches all aspects of 
our daily lives. Today it is quite possibly the most important 
issue facing global and domestic economies as well as U.S. 
consumers. The Commodity Futures Modernization Act of 2000 
ushered in a period of phenomenal growth in derivatives 
markets. The CFMA has proven to be the gold standard of U.S. 
financial policy.
    For the most part, the value and success of the CFMA holds 
true today. However, neither the Congress nor the CFTC had a 
crystal ball, and it was impossible to determine how some 
markets would develop. In at least two instances, markets have 
developed differently than anyone could have anticipated at the 
time.
    First, that an OTC natural gas contract trading on an 
unregulated exempt commercial market could mirror an exchange 
regulated contract and that the two could become closely 
linked. Ultimately the OTC contract began to serve a price 
discovery function. Market participants could and did easily 
move positions from the regulated exchange to the ECM to avoid 
regulatory requirements, such as position limits.
    This situation was investigated by the Senate Permanent 
Subcommittee on Investigations chaired by Senator Carl Levin 
with full cooperation from NYMEX and was addressed effectively 
in an amendment to the recently adopted Farm Bill.
    Second, foreign boards of trade began offering futures 
contracts with U.S. delivery points to U.S. customers pursuant 
to CFTC no-actionletters. Historically, foreign exchanges were 
permitted to offer direct access to their markets to U.S. 
customers based upon a determination by CFTC staff that the 
foreign regulatory regime governing the foreign board of trade 
was deemed comparable to that of the CFTC.
    This approach worked effectively until a foreign board of 
trade listed the look-alike of the NYMEX West Texas 
Intermediate Crude Oil Futures contract without the level of 
transparency and market surveillance controls, such as position 
limits, that are required on U.S. markets. It was never 
anticipated that the no-action process would be utilized in 
this manner.
    For 2 years now, NYMEX has argued that foreign board of 
trades offering linked products should be required by the CFTC 
to provide the same level and quality of data and at the same 
frequency that U.S. exchanges provide to the CFTC.
    In addition, we believe that no-action letters for foreign 
boards of trade offering contracts with U.S. delivery points 
should be conditioned to impose position limits and/or 
accountability levels.
    And we appreciate the announcement made last week by the 
CFTC to do just that.
    Much has been said recently regarding the role of 
speculators and energy markets. Speculative activity on U.S. 
regulated futures exchanges is managed by position limits. For 
the NYMEX WTI Crude Oil Contract, the position limit during the 
last 2 days of the expiring delivery month is 3,000 contracts. 
Breaching that position can result in disciplinary action being 
taken by the exchange.
    Many believe the speculators, particularly index funds and 
other large institutional investors in our markets, are 
responsible for the high price of crude oil. Data from NYMEX 
confirms that noncommercials are relatively balanced between 
long and short open positions for NYMEX crude oil futures. 
Thus, noncommercials are simply not and cannot be providing 
disproportionate pressure on the buy or long side of the crude 
oil market.
    In fact, since October 2007, swaps dealers in our crude oil 
markets have been holding overall net short positions. Thus any 
price impact attributable to swaps dealers would be to lower 
prices, not to rise them.
    Questions are being raised as to whether hedge exemptions 
for swaps dealers are being used by index funds and other 
institutional investors as a means of circumventing speculative 
position limits. The full extent of participation by swaps 
dealers, as well as what, if any, influence they are having on 
current market prices and volatility, cannot be determined 
without accurate data.
    NYMEX believes that more precise data are needed to better 
assess the amount and impact of this type of trading. And NYMEX 
supports the further delineation of data in the CFTC large 
trader report.
    In addition, we continue to believe that market 
fundamentals are the most important factor in the current 
market. Uncertainty in a jittery, very tight global crude 
market regarding geopolitical uncertainty, refinery sabotage, 
and shutdowns, decreasing production by non-OPEC producers and 
increasing global demand, as well as devaluation of the U.S. 
dollar, are clearly having an impact on the assessment of crude 
oil market fundamentals. One may view such factors as 
contributing to uncertainty or risk premium to the usual 
analysis or typical analysis of supply and demand data.
    Mr. Chairman, while we may not be in total agreement on 
some of the issues discussed here today, we are in complete 
agreement that transparency is fundamental to a competitive 
marketplace. For 2 years, we have supported full transparency 
for U.S.-based energy contracts traded on foreign boards of 
trade and by controlling speculators by instituting speculative 
limits on those foreign boards of trade. And finally, we remain 
fully supportive of further delineation of information from 
swaps dealers and funds in the CFTC large trader reports.
    Thank you, sir.
    [The prepared statement of Dr. Newsome follows:]

                   Statement of James Newsome, Ph.D.

     The Commodity Futures Modernization Act of 2000 
significantly enhanced the competitiveness of U.S. markets by 
allowing them to adapt readily to changing market demand, and, 
for the most part, the value and success of the CFMA holds true 
today.
     However, it was impossible to know then what we 
know now about how some markets would develop.
     Complete transparency is fundamental for 
competitive markets.
     The same level of transparency and position size 
controls present on regulated U.S. futures markets should be 
the standard for foreign markets offering products with U.S. 
delivery points and for OTC contracts that serve a price 
discovery function.
     Additionally, a case has been made for 
disaggregation and delineation of positions held by swap 
dealers. This will provide important information to determine 
whether speculative position limits are being avoided by index 
funds and other institution investors and whether their 
activity is influencing market prices.
     Many factors are contributing to high energy 
prices. NYMEX continues to believe that market fundamentals are 
a significant factor that must not be discounted in this 
debate.
     Increasing margins to dampen speculative activity 
will not change the fundamentals and will inevitably drive 
business away from the highly regulated, transparent market. 
This will do more harm than good.

                               Testimony

    Mr. Chairman and Members of the Committee, my name is Jim 
Newsome and I am the President and Chief Executive Officer of 
the New York Mercantile Exchange, Inc. (NYMEX or Exchange). 
NYMEX is the world's largest forum for trading and clearing 
physical-commodity based futures contracts, including energy 
and metals products, and has been in the business for more than 
135 years. NYMEX is a federally chartered marketplace, fully 
regulated by the Commodity Futures Trading Commission (CFTC or 
Commission) both as a ``derivatives clearing organization'' 
(DCO) and as a ``designated contract market'' (DCM), which is 
the highest and most comprehensive level of regulatory 
oversight to which a derivatives trading facility may be 
subject under current law and regulation.
    On behalf of the Exchange, its Board of Directors and 
shareholders, I want to express our appreciation to the 
Committee for holding this hearing and addressing the issue of 
``Energy Speculation: Is Greater Regulation Necessary to Stop 
Price Manipulation?'' The ever increasing cost of energy 
touches all aspects of our daily lives and today is quite 
possibly the most important issue facing global and domestic 
economies as well as U.S. consumers. Highlighting the urgency 
of the matter, no fewer than seven bills have been introduced 
in the House and Senate over the last few weeks on this very 
topic. We applaud the Committee's decision to thoroughly 
evaluate the many facets of this topic by inviting a diverse 
group of panelists who can provide a broad array of opinions to 
the discussion.

                               BACKGROUND

    The Commodity Futures Modernization Act of 2000 (CFMA) was 
the premier legislative vehicle that transformed the regulation 
of derivatives markets in two important ways. The CFMA: 1) 
established flexible core principles to allow regulated 
exchanges to compete effectively with the growing over-the-
counter (OTC) markets and foreign markets and; 2) provided 
legal certainty to financial and energy swaps. The CFMA, as 
anticipated, ushered in a period of phenomenal growth in the 
derivatives markets and has proven to be the gold standard of 
U.S. financial policy. As Acting Chairman and then Chairman of 
the CFTC from 2001-2004, I was involved in the implementation 
phase of this landmark piece of legislation.
    The CFMA significantly enhanced the competitiveness of U.S. 
markets by allowing them to adapt readily to changing market 
demand, and, for the most part, the value and success of the 
CFMA holds true today. However, no one had a crystal ball back 
then and it was impossible to know then what we know now about 
how some markets would develop. In at least two instances, 
markets have developed differently than anyone could have 
anticipated at the time.
    First, an OTC natural gas contract began trading on an 
unregulated exempt commercial market (ECM) that mirrored the 
regulated exchange-traded natural gas futures contract and the 
two contracts became intricately linked. Over time, the volume 
on the ECM contract grew substantially, and an arbitrage market 
developed between the two markets. Ultimately, the OTC contract 
began to serve a price discovery function. Thus, ECMs began to 
function more like a traditional exchange and market 
participants easily moved positions from the regulated exchange 
to the ECM to avoid regulatory requirements such as position 
limits, a strategy that contributed to the collapse of 
Amaranth. This scenario was investigated by the Senate 
Permanent Committee on Investigations chaired by Senator Carl 
Levin. (NYMEX cooperated in this investigation.) Ultimately, 
this situation was addressed effectively in an amendment to the 
recently adopted Farm Bill.
    Second, non-U.S. exchanges (also referred to as foreign 
boards of trade (FBOT)), which were permitted by CFTC staff to 
offer their products to U.S. customers pursuant to CFTC no-
action letters, began listing futures contracts with U.S. 
delivery points among their product slates. Historically, under 
the FBOT CFTC staff no-action process, such exchanges were 
permitted to offer direct electronic access to their markets to 
U.S. customers based on a determination by CFTC staff that the 
foreign regulatory regime governing the the FBOT was 
``comparable'' to that of the CFTC.
    Essentially, there is a system of mutual recognition among 
regulators around the world as a means to facilitate access to 
global markets. This approach worked effectively up until a 
FBOT listed the look-alike of the NYMEX West Texas Intermediate 
(WTI) Crude Oil Futures contract without the level of 
transparency and market surveillance controls such as positions 
limits that are provided by U.S. markets under direct CFTC 
regulation. It was not anticipated that the no-action process 
would be used in this manner, which has effectively diminished 
the transparency to the CFTC of approximately one-third of the 
WTI crude oil market, and permitted an easy avenue to 
circumvent position limits designed to prevent excessive 
speculation.

                FOREIGN BOARDS OF TRADE AND TRANSPARENCY

    NYMEX has advocated for greater transparency of futures 
activity linked to U.S. exchanges occurring on markets 
regulated by foreign regulators for two years. Complete 
transparency to the CFTC should be a fundamental requirement 
for markets that are linked. In this connection, we have argued 
that FBOTs offering these linked products should be required by 
the CFTC to provide the same level and quality of data and at 
the same frequency that U.S. exchanges provide to the CFTC on a 
daily basis.
    In addition, we believe that no action letters for FBOTs 
offering contracts with U.S. delivery points should be 
conditioned to impose position limits and/or accountability 
levels. This would be a positive step and would provide an 
effective mechanism to restrict speculative activity in those 
markets. This is particularly important when the contract 
trading on the FBOT is the WTI crude oil contract, which is a 
benchmark for crude oil pricing, and which can have a 
substantial impact on U.S. consumers and the U.S, economy. 
Indeed, we would support the imposition of position limits even 
for listed contracts that are financially settled. We applaud 
the CFTC's recently issued press release that advised that the 
CFTC is now imposing position limits on ICE Futures Europe as a 
condition of the no-action relief.
    In this regard, approximately one year ago, a new futures 
exchange, the Dubai Mercantile Exchange (DME), commenced 
operations in Dubai. NYMEX is a founder and has an ownership 
share in this venture and provides clearing services for the 
new exchange. The core or flagship crude oil futures contract 
is an Oman Sour Crude Oil futures contract. The DME initiative 
provides competition and greater transparency to crude oil 
trading in a critically important energy region. Although the 
DME does not yet list a WTI financial futures contract, the DME 
has received a no action letter from the CFTC staff for this 
contract and NYMEX received an amendment to its Clearing Order 
allowing our exchange to clear positions. The DME is currently 
finalizing a launch date for that contract. It is our 
understanding that, when a launch date is finalized on the DME 
WTI contract, DME will implement hard position limits that are 
comparable to NYMEX's own limits on our WTI crude oil futures 
contract. Also, as part of the NYMEX Clearing Order, large 
trader reporting to both the CFTC and NYMEX is required.
    In a more recent initiative, NYMEX has entered into an 
alliance with a London-based clearinghouse, LCH.Clearnet 
Limited (LCH), under which LCH will provide clearing services 
for two new product slates to be launched later this summer 
either by NYMEX or by a NYMEX affiliate. These new product 
slates are intended to provide greater competition to other 
energy trading facilities that are active in this energy space. 
One product slate, focusing upon natural gas and electricity 
contracts, will be listed by a division of NYMEX in the exempt 
commercial market tier. Applicable products in this category 
will comply fully with the requirements for significant price 
discovery contracts contained in the recently implemented CEA 
Reauthorization Farm Bill. The other product slate, focusing 
upon crude and crude products, will be listed for trading by a 
NYMEX affiliate based in London that will be regulated by the 
U.K. Financial Services Authority. While that affiliate will 
follow the path of other exchanges regulated by other 
regulators and will be applying for CFTC no-action relief, this 
affiliate will provide large trader reporting to the CFTC and 
also will impose hard position limits on any listed contracts 
with U.S. delivery points.

                              SPECULATION

    Speculative activity on futures exchanges is managed by 
position limits. As stated in the CFTC's rules, position limits 
and accountability levels are required ``to diminish potential 
problems arising from excessively large speculative 
positions.'' These limits effectively restrict the size of a 
position that market participants can carry at one time and are 
set at a level that greatly restricts the opportunity to engage 
in possible manipulative activity on NYMEX. For the NYMEX WTI 
crude oil contract, the position limit during the last three 
days of the expiring delivery month is 3000 contracts. 
Breaching the position limit can result in disciplinary action 
being taken by the Exchange.
    Many believe that speculators, particularly index funds and 
other large institutional investors in our markets are 
responsible for the high price of crude oil. However, data 
analysis conducted by our Research Department confirms that the 
percentage of open interest in NYMEX Crude Oil futures held by 
non-commercial participants relative to commercial participants 
actually decreased over the last year even at the same time 
that prices were increasing. In addition, non-commercials are 
relatively balanced between long (buy) and short (sell) open 
positions for NYMEX crude oil futures. Thus, non-commercial 
participants are not providing disproportionate pressure on the 
long ( buy) side of the crude oil futures market. We also 
reviewed the percentage of open interest in the NYMEX Crude Oil 
futures contract held by non-commercial longs and shorts 
relative to that held by commercial longs and shorts from 2006 
to the present. Commercial longs and shorts consistently have 
comprised between 60 and 70% of all open interest.
    We have seen various representations made relative to 
participation by speculators in our markets that directly 
contradict our data. One such representation claims that 70% of 
our crude oil market is made up of speculators. That analysis 
incorrectly assumes that all swap dealers are non-commercials 
and that all of their customers who would be on the opposite 
side of any energy swaps that they might execute would also all 
be non-commercials. We know that this is simply not the case. 
However, this confusion clearly highlights the need for the 
CFTC large trader data to delineate for energy futures the 
degree of participation by non-commercials in the same manner 
that such data are now being delineated for agricultural 
contracts.
    NYMEX also maintains a program that allows for certain 
market participants to apply for targeted exemptions from the 
position limits in place on expiring contracts. However, such 
hedge exemptions are granted on a case-by-case basis following 
adequate demonstration of bona fide hedging activity involving 
the underlying physical cash commodity or involving related 
swap agreements. A company is not given an open-ended 
exemption, and the exemption does not allow unlimited 
positions. Instead, the extent of the hedge exemption is no 
more than what can be clearly documented in the company's 
active exposure (as defined by the CFTC) to the risk of price 
changes in the applicable product. In a number of instances, 
hedge applications are either reduced in number or are denied 
because of staff's overriding focus on maintaining the overall 
integrity of our markets.
    A vast amount of attention is focused on speculative 
activity and what, if any, influence speculators are having on 
current market prices and volatility. In order to determine 
accurately whether speculative activity is influencing the 
market, the data must be complete and accurate. Recently, a 
potential gap was identified in the large trader data compiled 
by the CFTC in its Commitment of Trader's Report. Specifically, 
questions are being raised as to whether hedge exemptions for 
swap dealers are being used as a means of circumventing 
speculative position limits.
    At this time, due to the manner in which the data are 
reported, it is not clear whether this is true or not. In 
response to these queries, the CFTC announced its intent to 
develop a proposal that would routinely require more detailed 
information from index traders and swaps dealers in the futures 
markets, and to review whether classification of these types of 
traders can be improved for regulatory and reporting purposes. 
NYMEX believes that it will be useful to the development of 
thoughtful public policy for the CFTC to obtain more precise 
data so as to better assess the amount and impact of this type 
of trading in the markets.

                          MARKET FUNDAMENTALS

    NYMEX strongly believes that greater transparency is needed 
and that data on participation of swap dealers and index funds 
must be improved in order to effectively monitor these markets 
and accurately assess what is or is not influencing the price. 
In addition, we continue to believe that market fundamentals 
are the most important factor in the current market. Currently, 
uncertainty in the global crude market regarding geopolitical 
issues, refinery shutdowns and increasing global demand, as 
well as devaluation of the U.S. dollar, are clearly having an 
impact on the assessment of market fundamentals. One may view 
such factors as contributing an uncertainty or risk premium to 
the usual analysis of supply and demand data. Indeed, such 
factors now may fairly be viewed as part of the new 
fundamentals of these commodities.
    Other demand and supply fundamentals in the oil markets are 
factors in high oil prices. For example, global demand is 
exceeding supply by one million barrels per day. As a result, a 
market with highly inelastic demand will need to equilibrate 
through a substantive rise in price. The upward pressure has 
been there and, according to these projections, will continue 
to be there. If the major oil companies truly believed that 
current levels are artificially high and do not properly 
reflect market fundamentals, one would expect them to sell in 
order to lock in the current high prices. Such selling of 
course then would have the effect of providing downward 
pressure on prices. However, such a response by the big oil 
companies has not been observed to date.

                                MARGINS

    In futures markets, margins function as financial 
performance bonds and are employed to manage financial risk and 
to ensure financial integrity. A futures margin deposit has the 
economic function of ensuring the smooth and efficient 
functioning of futures markets and the financial integrity of 
transactions cleared by a futures clearinghouse. Margin levels 
are routinely adjusted in response to market volatility. Some 
have suggested that the answer to higher crude oil prices is to 
impose substantially greater margins on energy futures markets 
regulated by the CFTC. The theory is that higher margin levels 
will dampen speculative activity, and that less speculative 
liquidity will lower prices.
    We believe that this approach is misguided. As noted above, 
the appropriate tool for controlling speculation is position 
limits. In addition, adjusting margin levels significantly 
upward will not change the underlying market fundamentals. 
Furthermore, given the reality of global competition in energy 
derivatives, increasing crude oil margins on futures markets 
regulated by the CFTC inevitably will force trading volume away 
from regulated and transparent U.S. exchanges into the unlit 
corners of unregulated OTC venues and also onto less regulated 
and more opaque overseas markets.

                               CONCLUSION

    Complete transparency is fundamental for competitive 
markets. The same level of transparency and position size 
controls present on regulated U.S. futures markets should be 
the standard for foreign markets offering products with U.S. 
delivery points and for OTC contracts that serve a price 
discovery function. Additionally, a case has been made for 
disaggregation and delineation of positions held by swap 
dealers. This will provide important information to determine 
whether speculative position limits are being avoided by index 
funds and other institution investors and whether their 
activity is influencing market prices.
    Many factors are contributing to high energy prices. NYMEX 
continues to believe that market fundamentals are a significant 
factor that must not be discounted in this debate. Increasing 
margins to dampen speculative activity will not change the 
fundamentals and will inevitably drive business away from the 
highly regulated, transparent market. This will do more harm 
than good.
    I thank you for the opportunity to share the viewpoint of 
the New York Mercantile Exchange with you today. I will be 
happy to answer any questions that any Members of the Committee 
may have.
                              ----------                              

    Mr. Stupak. Thank you, Dr. Newsome.
    Mr. Reid, would you care to make an opening statement 
please?

  STATEMENT OF SIR ROBERT REID, CHAIRMAN, ICE FUTURES EUROPE, 
       INTERCONTINENTAL EXCHANGE, INC., ATLANTA, GEORGIA

    Mr. Reid. Chairman, I am Sir Bob Reid, Chairman of ICE 
Futures Europe and the Intercontinental Exchange. I very much 
appreciate the opportunity to appear before your hearing today 
to provide our views on the issue of whether greater regulation 
is necessary to stop price manipulation.
    Our primary objective in ICE Futures Europe is to conduct 
an orderly market, which is clear rules and procedures, which 
is financially secure, which is transparent, presenting prices 
and transactions in a comprehensible way, and which is free 
from abuse. The achievement of this objective is by effective 
and intelligent supervision. Intimate knowledge of the 
participants and the business they are transacting is key. This 
positive approach that supervision has built the reputation of 
the Exchange and is an attraction for its participants.
    Let me stress there can be no substitute for active 
management. While we respect the limits set by the regulators, 
we do not see their observance as a substitute for continuous 
surveillance. There have been allegations recently that the 
regulatory system in London is lax. There has been a massive 
flow of market data from the Exchange to regulators in London 
and Washington since the launch of our WTI contract in early 
2006. And the continuous interaction between our Exchange and 
regulators on both sides of the Atlantic reflect regulatory 
regimes which are active and alert and have a detailed 
conversance with our business.
    It's important to note that as recently as last week the 
Director of Enforcement of the CFTC publicly stated that the 
commissioners see no evidence of manipulation in our markets. 
With that said, let me make it quite clear that we have and 
always will be receptive to the concerns of the regulators. 
This sets the background against which I shall address your 
question whether greater regulation is necessary to stop price 
manipulation.
    Let me first of all describe the participants in our 
market. The participants are similar to those in the United 
States market. Membership in the London Exchange involves full 
diligence, appropriate money laundering checks, and possession 
of all the necessary licenses. The commercial participants in 
our markets seek risk management and stabilizing of their 
future costs. The financial participants provide the liquidity 
necessary to make the market efficient. Together, these two 
sets of market participants bring their views about what the 
present and future, and let me stress the word ``future,'' what 
the future price of a commodity might be.
    There has been much negative comment about the role of the 
financial participants, characterizing them as speculators. 
This negative comment is misplaced. Financial participants are 
a valuable source of liquidity to the market. This liquidity 
allows the commercial participants to hedge their energy costs 
more efficiently and stabilize their prices to the end 
consumer. Furthermore, studies have shown that financial 
participants are on both sides of the market and in many 
instances dampen price volatility, which can be helpful in 
times of rising prices. Without the ability to hedge, the 
commercial participants would have to factor the risk into 
their pricing to the end consumer, to the end consumer's 
financial disadvantage.
    Returning to the question, the account information flows 
between regulators are robust, and we've agreed to improve them 
as market dynamics have changed and the domestic regulator has 
requested additional information on the imposition of a 
position accountability regime. However, it's important to note 
that the outcome of these steps and many of the other suggested 
legislative steps under consideration are unlikely to change 
the market dynamics that are driving the price of oil.
    As the Chairman of the Exchange, my role is, however, 
confined to the operation of the mechanism which provides price 
discovery. Our discharging of this duty is as important to the 
consumer as it is to the oil producer.
    I thank you.
    [The prepared statement of Mr. Reid follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Stupak.  Thank you, Mr. Reid.
    Professor Greenberger, your opening statement, please, sir.

   STATEMENT OF MICHAEL GREENBERGER, J.D., PROFESSOR OF LAW, 
 DIRECTOR, CENTER FOR HEALTH AND HOMELAND SECURITY, UNIVERSITY 
                OF MARYLAND, BALTIMORE, MARYLAND

    Mr. Greenberger. Good afternoon. I want to start by saying 
that section 8(a)(9) of the Commodity Exchange Act gives the 
Commission what has been called its most potent tool. It 
provides that whenever the Commission has reason to believe 
that an emergency exists, it may take such actions, including 
but not limited to, the setting of temporary emergency margin 
levels on any futures contract and the fixing of limits, 
speculation limits, that may apply to a market position.
    What is an emergency under the Commodity Exchange Act? It 
means in addition to threatened or actual market manipulations 
or corners, any act the United States or a foreign government 
takes affecting a commodity or any other major market 
disturbance which prevents the market, which prevents the 
market from accurately reflecting the forces of supply-demand. 
I think everything you heard this morning talks about a 
situation that is an emergency that the market does not 
accurately reflect the forces of supply-demand.
    Now you might well ask yourselves why, after a day like 
June 6th, when oil skyrocketed $11 in one day, there wasn't an 
emergency with temporary margins and position limits set by the 
Commission. And the answer to that I think is quite simple. 
They have the information from Mr. Newsome. They don't have the 
information from ICE, so they don't know what is happening on 
ICE.
    Now, the Senate Permanent Investigating Subcommittee has 
shown in two different reports specific examples of ICE being 
used especially in the Amaranth case, to manipulate up the 
price in that case of natural gas. Now Mr. Barton has earlier 
this morning said, gee, we're worried we're going to have to 
have Mr. Reid, Sir Robert, who I believe lives in England, how 
can we get control over ICE? Do we have to have a regulation in 
London and a regulation in the United States?
    Let's remember who ICE is. It is very nice that Sir Robert 
is here today. Usually Mr. Jeffrey Sprecher or Mr. Vice from 
Atlanta, Georgia comes to testify before this and other 
committees. I'm sure it's nice to have Sir Robert here today 
waving the British flag. ICE is headquartered in Atlanta. Its 
trading engines are in Chicago. It's trading 30 percent of the 
West Texas Intermediate benchmark crude oil contract on United 
States terminals located in the United States and denominated 
in United States dollars.
    Now it is true that the International Petroleum Exchange, 
when I was at the CFTC, came to us as a London corporation with 
London crude oil contracts, trading on a London floor, and 
asked for permission not to register as a full designated 
contract market because they were truly a foreign entity. And I 
wrote the template of the letter that approved that. I'm sorry 
that I did. But our thesis was that it was truly a British 
corporation. We never envisioned that the International 
Petroleum Exchange would be bought by the Atlanta 
Intercontinental Exchange, which, by the way, people said who 
are the founders? The founders are Goldman Sachs, Morgan 
Stanley, British Petroleum and the Flour Corporation. They 
founded this exchange to be competitive to Mr. Newsome, Dr. 
Newsome, as a fully regulated exchange operating outside of 
United States' regulation.
    Now the question for this Congress is, can an Atlanta 
corporation, a headquartered Atlanta corporation, I believe Sir 
Robert's bosses, trading engines in Chicago, trading 30 percent 
of our contract, in U.S. denominated dollars, do we have the 
authority, should we be calling them a foreign corporation? 
They're not a foreign corporation. It's a United States' 
corporation by any measure. And so when we ask the question, 
gee, will this go off to England, this trading? That means will 
it go off to the Chicago trading engine, not to England.
    You have been told there are two major markets. One is Sir 
Robert's, whose headquarters is in Atlanta and trading engine 
is in Chicago trading our contract, and the other is Mr. 
Newsome. This is a United States' market. It makes sense that 
it's a United States market. We're dealing with West Texas 
Intermediate petroleum delivered in Cushing, Oklahoma.
    Now Mr. Lukken has proudly announced that after 
negotiations with the Financial Services Authority, by the way, 
who has two supervisors for these markets, and if you look at 
it worldwide, it's 50 percent of the futures contracts in the 
world, two supervisors, they have never brought an enforcement 
action in the energy futures markets since they came into 
existence in 1997.
    Mr. Lukken has negotiated with the British to regulate what 
is happening here in the United States, and he has gotten 
limited conditions. He is going to get some speculation limits. 
He is going to get some identification. But he isn't going to 
have the power under section 8, 9 to go to the floor or the 
headquarters of the Intercontinental Exchange when that market 
does no longer accurately reflect the forces of supply-demand.
    Now if the first panel and the second panel proved anything 
I believe it is that these markets no longer represent supply-
demand and I want to emphasize, I agree, supply-demand is a 
problem. I don't want to be misunderstood. Supply-demand is a 
problem. But what we've heard today is there is a speculative 
premium.
    Mr. Stupak has introduced this legislation. This 
legislation effectively takes us back to December 19, 2000, 
before the Commodity Futures Modernization Act was passed. 
There is not a provision in that bill that wasn't the law in 
1999. We weren't hearing about skyrocketing oil prices in 1999. 
In fact, before Mr. Newsome went to NYMEX, I visited NYMEX, and 
the traders were sitting reading newspapers on the floor. Why? 
Oil was $15 a barrel. Straight on. No volatility. Each of the 
things that was talked about today could be taken care of by 
Mr. Lukken this week. He doesn't need legislation and I can 
tell you why. If he needs legislation, there are two parallel 
bills circulating around. One is the appearance of regulation 
without really providing it, and there are bills in accordance 
with Chairman Stupak's thing that provide real regulation. You 
heard about the ``end the Enron'' loophole. It didn't end the 
loophole. Please don't take legislation that doesn't fix this 
problem. I will be happy to answer questions.
    [The prepared statement of Mr. Greenberger follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Stupak. Thank you and thank you to each of you for your 
testimony.
    Mr. Newsome, in your testimony you said that there is no 
evidence that increased speculation is impacting oil prices. 
You cite NYMEX research department analysis that, quote, 
``noncommercial speculative positions in oil futures are 
declining relative to commercial future holdings.'' From that 
you conclude that speculative interest is not causing prices to 
increase. But isn't it the case that your analysis excludes 
trading of the West Texas intermediate crude oil, futures oil 
on ICE futures in Europe, which adds additional 30 percent 
trading volume on top of NYMEX?
    Dr. Newsome. That's true, Mr. Chairman, and my comments in 
the testimony reflect only the information that we see and that 
we collect on the New York Mercantile Exchange. Obviously the 
information at ICE and the over-the-counter markets is not a 
component of that.
    Mr. Stupak. So it's also the case that comparing commercial 
versus noncommercial open interest is largely a worthless 
exercise, isn't it?
    Dr. Newsome. No, I wouldn't say it's worthless. Certainly 
we are in agreement that it can be made better. I think the 
index funds, the activity, the swaps dealers is a relatively 
new scenario. Certainly as soon as we became familiar with that 
we immediately supported the CFTC, further delineating that 
information so that we could see exactly what the customers 
were doing behind the swaps dealers.
    Mr. Stupak. So speculative interest is, when you look at 
swaps and when you look at the speculative positions in the 
commodity index, investments certainly are causing increase in 
oil prices, are they not?
    Dr. Newsome. No, sir, I would not agree with that. 
Certainly there are more speculators in the market. But if you 
look at how the market operates, and there are two things I 
would bring up, one is that because of the very nature that 
they are speculators, they cannot make or take delivery of the 
contract and they will always trade out of that contract prior 
to expiration. So they're not even in the market at expiration 
when the key pricing figure is developed.
    Mr. Stupak. And because they never take delivery and they 
roll that contract over, every time they roll it over don't 
they set a new floor price?
    Dr. Newsome. But by the nature of a roll, a roll by 
definition is selling the front month and then turn around and 
buying a back month. So my point is because they are 
speculators, if you believe that they have the ability to drive 
the price higher when they're buying, why does it not drive it 
lower when they're selling, which they have to sell every 
month?
    Mr. Stupak. Because every time you roll, and every time you 
buy every month or when they sell, they come in at a higher 
price than what they sold at, do they not? Especially with all 
the extra money? If you go back to the chart that Mr. Lukken 
had up, where he said it was basically flat, you saw the price 
continue to increase. So every time you roll one of those over, 
there is a new floor that is being created. You add that large 
investment of money called the pension funds and others who are 
bringing money in which is driving up the price.
    Dr. Newsome. Again, you know by the very nature of the roll 
they have to sell. And there is no question and no one is 
arguing that prices are not going higher. It's just the 
fundamental reason why prices are going higher, and the fact 
that the speculators have to sell each month before expiration 
in no way is driving the market lower. And therefore it's hard 
for me to believe that on the flip that they are driving the 
market higher.
    Mr. Stupak. Let me ask you this. How do you define 
excessive speculation?
    Dr. Newsome. Well, I think we take steps to make sure that 
we do not have excessive speculation at NYMEX. One of the 
comments that has been thrown around today is that there are no 
position limits. We've absolutely hard position limits on all 
of our contracts with the New York Mercantile Exchange. Those 
are hard limits.
    Mr. Stupak. What are those hard limits?
    Dr. Newsome. 3,000 contracts for the last 3 trading days.
    Mr. Stupak. So what is the limit on ICE?
    Dr. Newsome. There are no limits.
    Mr. Stupak. There are none?
    Dr. Newsome. Yes, sir.
    Mr. Stupak. All right. So, and Mr. Lukken said you can have 
a limit with you and you can go and have a limit with London 
futures so you don't take the aggregate, you just take 
individuals, right?
    Dr. Newsome. And we have experienced that in our markets, 
speculators who bumped up against position limits who we 
required to stop trading.
    Mr. Stupak. Then they go to ICE like Amaranth did?
    Dr. Newsome. Yes, exactly.
    Mr. Stupak. Should swap dealers trading standardized 
contracts in order to counter markets for energy which can 
affect prices in the futures market directly or indirectly be 
subject to disclosure requirements and oversight by the CFTC?
    Dr. Newsome. Certainly the price discovery mechanism is one 
that I think is near and dear to the marketplace and to the 
extent that an OTC contract becomes large enough and linked to 
a contract and therefore has an influence on price discovery, 
without question it should be regulated.
    Mr. Stupak. Would NYMEX support a requirement that such 
trades be cleared through an exchange as a way to provide 
transparency and ensure accountability?
    Dr. Newsome. I mean we do have a very big component of our 
business that is clearing over-the-counter trades. The way we 
currently do that, we make that fully transparent to the CFTC 
and those trades become aggregated as part of our position 
limits as well.
    Mr. Stupak. OK, you're regulated by CFTC?
    Dr. Newsome. Yes, sir.
    Mr. Stupak. We've been here now for about 6 hours, we're 
probably going to be here for another hour. Why wouldn't we 
just apply all the trades that are going to ICE the same 
regulatory scheme that NYMEX has? Would not this problem go 
away with excessive speculation that we're alleging? Wouldn't 
that be a way to do it?
    Dr. Newsome. And we have been advocating that for the last 
2 years.
    Mr. Stupak. Sir Robert Reid, would you like to comment on 
that? Why wouldn't you just, since you're a foreign exchange by 
name only--you have your offices in Atlanta, Chicago, the 
trades are here, it's on West Texas Intermediate crude. Other 
than name, you're a U.S. company. So why wouldn't you just be 
subject to the same regulations as NYMEX?
    Mr. Reid. We need to correct a few things first. First of 
all, we were founded in 1981 and we operate under the 
regulation of the Financial Services Authority.
    Mr. Stupak. In London.
    Mr. Reid. And many comments have been made about the laxity 
of that. All I can say is if that is lax regulation, I never 
want to see hard regulation.
    The second thing is we have been to the CFTC. I have 
personally been in Washington across, around a panel like this, 
being asked questions. All our information is available to the 
CFTC if they want it.
    Now as far as limits are concerned, as I said in my 
introductory remarks, this is all about supervision and knowing 
your market. We know the positions of each of the people on our 
markets. And if they look unusual or if they look as if they're 
growing and we don't understand it, then we call them in and we 
ask the questions. We can ask them to reduce or we can ask them 
to close them down. This is what I would call effective 
management, effective supervision.
    Mr. Stupak. But in all honesty, the FSA, you don't require 
position limits, right? NYMEX has hard limits. You don't 
require position limits?
    Mr.Reid. We set our own limits.
    Mr. Stupak. You set your own. 
    Mr. Reid. Yes. We look at what people have done and if we 
feel a small player has got beyond and may not be up to the 
sort of limits that NYMEX is talking about, we do something 
about it.
    Mr. Stupak. On the Amaranth case then when NYMEX said to 
Amaranth, you're getting too big, you can't be here, you're 
holding too much of the futures, they went to yours and to ICE 
and actually got bigger, and then they went bankrupt to the 
tune of about eight point something billion dollars. So where 
was the accountability? Where were the position limits there?
    Mr. Reid. I have no difficulty. If limits are wanted, 
limits can be provided. As I said to you in my opening remarks, 
limits must not be used as a crutch to avoid you doing the 
effective supervision of the market. You can't fall asleep 
under the governance of limits. You run the market as an 
effective supervisor.
    Now if I can just say a little bit more.
    Mr. Stupak. Just a minute, my time is up.
    Mr. Reid. It's quite ample, your description of ICE. ICE 
acquired the Petroleum Exchange. And they acquired it simply 
because the Petroleum Exchange would not have continued to 
exist if it didn't have an electronic solution. ICE provided 
that electronic solution, and that's what made the Petroleum 
Exchange as successful as it is today. And that is the reason 
that it has 24 percent of the WTI market because NYMEX did not 
have an electronic system at the time and we were able to 
attract people because of the electronic nature of our system. 
I don't see why we should be criticized and penalized because 
in fact we're ahead of the electronic revolution.
    Mr. Stupak. No one is saying to penalize you or say you 
shouldn't play by the same rules. Didn't ICE buy NYBOT, New 
York Board of Trade?
    Mr. Reid. Yes.
    Mr. Stupak. So there is no U.S. company of BOT. So aren't 
you really a U.S. company doing business in the United States 
with most of your research work done?
    Mr. Reid. Well, our board for our exchange in London got 
independent directors that are directly responsible to the FSA. 
It is not, as it were, as people describe it as a dark pawn. In 
fact it's a very open, clear pawn.
    Mr. Stupak. Maybe your board is not, but the contracts 
you're trading certainly affect the U.S. markets, U.S. prices, 
U.S. economy, therefore why should you not be subject to the 
CFTC regulation like NYMEX?
    Mr. Reid. The CFTC has as much information as they want. 
The exchange of information in discussion with the CFTC is 
expensive. There's no question that they have anything we want. 
I made that clear when I came to Washington in 2006.
    Mr. Stupak. And my time has expired. Mr. Barton for 
questions, please.
    Mr. Barton. Thank you, Mr. Chairman. I'm not used to being 
in the center. I'm used to being down there on the end. But if 
I'm going to be in the center, I want to move one more chair to 
the right. I want to start out.
    Mr. Stupak. I'll put you on ICE.
    Mr. Barton. I want to start out by complimenting Sir Robert 
for testifying. In the 22 years that I have been on this 
subcommittee and the full committee I don't believe we've had 
many foreign-born nationals testify at all. Most of them use 
that as a reason not to testify. So I want to compliment you 
for being here, and I can also tell you in the 22 years in the 
Oversight Subcommittee where we take testimony under oath, 
you're the first person who ever refused to raise their right 
hand by saying you didn't have one.
    Mr. Reid. That is because I was next to Mr. Greenberger.
    Mr. Barton. You're doubly complimented. Now having said 
that, I want to start with Professor Greenberger. Is the ICE 
exchange that is physically based in Atlanta but is owned by 
the London agency, the London firm, is that a U.S. company or a 
British-based company? And who regulates it?
    Mr. Greenberger. Mr. Barton, it's just the reverse of that. 
The Atlanta company owns the British office that Sir Robert 
comes under.
    Mr. Barton. I was only 180 degrees off.
    Mr. Greenberger. There is a lot of confusion here, and I 
think it should be straightened out. So it's run and 
headquartered in Atlanta, Georgia. It was founded by Morgan, 
Goldman and British Petroleum. Now it has gone public. They 
still own stock in it, but it has gone public. The trading 
engine was brought, the mechanisms were brought, as the CFTC 
letter just the other day made clear, brought from London into 
the United States. In January 2006, I'm sure much to Dr. 
Newsome's surprise, they suddenly announced they are going to 
start selling U.S. West Texas delivered product.
    Mr. Barton. Before you go further, the company, the 
exchange in Atlanta, who has regulatory authority, not 
information-receiving authority, but pure regulatory authority, 
is it the CFTC or is it the British equivalent of the CFTC?
    Mr. Greenberger. The CFTC allowed the British equivalent to 
have authority over U.S. trading terminals trading our 
contracts.
    Mr. Barton. So in absolute bottom line, the exchange that 
is located in Atlanta selling West Texas, or trading, posting 
West Texas Intermediate, the CFTC does not have the same 
regulatory authority as they do over the NYMEX?
    Mr. Greenberger. They don't. And I might just add, Mr. 
Barton, that they could if they wanted to because I drafted the 
template. They could terminate that status, and they threatened 
to terminate that status tomorrow, and this would be a U.S.-
regulated exchange.
    Mr. Barton. My question to Sir Robert, if the Congress 
directed or if the CFTC so chose under their existing charter 
to extend direct regulatory authority to the ICE exchange under 
the same terms and conditions as they currently do to the 
NYMEX, would your position or your company's position be to 
accept it or to fight it?
    Mr. Reid. As far as I'm concerned, when we discussed this 
with the CFTC in 2006 and the FSA were present, it was agreed 
that the regulatory system and regulatory information that was 
required by the CFTC would be provided for by ICE----
    Mr. Barton. That is all well and good, but that is not an 
answer to my question.
    Mr. Reid. As far as we're concerned, as it stands now, the 
FSA is our regulator. We operate in the City of London.
    Mr. Barton. I understand that. But you're not answering my 
question.
    Mr. Reid. What was your question then?
    Mr. Barton. You're pretty good at this. I think you have 
testified before some parliamentary----
    Mr. Reid. If you don't ask some questions, you won't get 
any answers.
    Mr. Barton. My question is you're not regulated, ICE 
exchange is not regulated under U.S. statutes like NYMEX is. If 
we so chose by act of Congress or if the CFTC thinks they have 
the authority, like Professor Greenberger says, and wants to 
extend it by regulation, by administrative act, would ICE 
accept it or fight it? It's pretty straightforward.
    Mr. Reid. It's not a straightforward question because it's 
a matter of international politics.
    Mr. Barton. I'm not asking about international politics----
    Mr. Reid. This is a matter in which I will need to take 
advice.
    Mr. Barton. You're going to fight it. I'm going to assume 
the default position, if it is not yes, is no.
    Mr. Reid. No. The answer is not a yes or no. The answer is 
the decision will be taken when the question is asked.
    Mr. Barton. It's an important question because we in the 
United States Congress and those agencies which we control by 
statute can enforce any law that we put on the books. If a 
foreign company, agency, individual, chooses to voluntarily 
cooperate with those rules and regulations, well and good. But 
if you take the position that you're not subject to the 
regulations and choose not to voluntarily comply, it's a very 
complex question how we enforce that. And if the end result is 
to set up, and each of you gentlemen with NYMEX and ICE, you're 
in business to make money. You're in business to gain market 
share. You're in business, you want to provide all these great 
market transparency and price discovery and all that, but 
bottom line if nobody buys your contract, you go out of 
business and nobody takes your contract. So, if we do something 
that raises margins and has hard, hard rules against exemptions 
and all these things that increase transparency and try to 
dampen the pure so-called excessive speculation, whatever that 
is, a person who would tend to work on the NYMEX is going to 
say, aha, there's another market here, we will just go over 
there. Now it has already been shown, as our subcommittee 
chairman has pointed out, in the natural gas market that 
happened. And the response was, we set our own regulation. We 
set our own limits based on a gentlemanly conversation between 
what we think is good for the client. That is not the same as a 
hard limit.
    Now, I may look dumb, and sometimes I actually say and do 
dumb things. But I understand competitive markets, and I 
understand that the reason ICE exists is to make money for 
whoever runs it and secondarily to provide competition for who 
dominated the market before, which is NYMEX.
    Now we wouldn't be having this conversation if oil was at 
$15 a barrel. You know, we're having it because when we go 
home, people come up, if they see me gassing my car up, they 
say you're Congressman Barton, which is not really, because it 
says U.S. House 6 and a Barton bumper sticker on my car, what 
are you going to do about high gasoline prices? And one of the 
things that we can do is do something to dampen the speculative 
price impact in the market. So it's very important whether your 
exchange--which I'm all for having two exchanges so that we 
give people a competitive option, but we've got to get you to 
play by the same rules. If you don't play by the same rules, 
whichever exchange has the least stringent rules is going to 
get all the business. That is just pure common sense.
    So it's important, my question. I will give you one more 
chance. You fight it or you welcome it? Or not welcome it, but 
accept it?
    Mr. Reid. This is my last chance, is it?
    Mr. Barton. Almost. I have one more question. Probably. I'm 
over 2 minutes.
    Mr. Reid. Well, obviously in a situation of which if you 
want to do something regarding margins or you want to do 
something about the category of people who trade on these 
exchanges and change the structure of the Exchange, then 
obviously the regulators on both sides of the Atlantic are 
going to have to discuss how this is going to be interpreted. I 
don't think you would expect me to concede now that anything 
that you may decide to do, for example, on margins that we 
would necessarily agree with, right?
    Mr. Barton. No, I don't expect you to agree.
    Mr. Reid. So what I'm saying is----
    Mr. Barton. It would be nice if you did, but I don't expect 
you to.
    Mr. Reid. Let's hear what you want to do and then we will 
see from our point of view in the U.K. What we think would be a 
sensible thing to do. After all this is really about a global 
corporation. The relationship between the CFTC and the FSA is 
extremely close.
    Mr. Barton. And I think it's very fortunate that the 
exchange you're talking about----
    Mr. Reid. I'm 100 percent behind----
    Mr. Barton [continuing]. Is based in London as opposed to 
in Moscow. I think that is a good thing that we have a London-
based situation as opposed----
    Mr. Reid. We're not so happy with Moscow at the moment.
    Mr. Barton. But you have a history in your country of 
markets and regulation and the British system of trading has 
been around for 4 or 500 years.
    My last question, Mr. Chairman, is we've heard from all the 
other panelists what they think the speculative price is. We've 
heard some people say half the current price, which would be 
close to $70. What do you three gentlemen think if we did some 
of the things that we're talking about doing, if we took Dr. 
Masters' proposal, we increased margin, we set strong position 
limits, we limited the ability to get exemptions, we had more 
price transparency, how much would that impact the price? In 
other words, what do you think the speculative bubble is? Dr. 
Newsome?
    Dr. Newsome. I think it would have very little impact.
    Mr. Barton. If you don't change the underlying market 
fundamentals, it's not going to do any good?
    Mr. Newsome. Correct.
    Mr. Barton. Sir Robert?
    Mr. Reid. Can I just take a few minutes on this?
    Mr. Barton. It's up to the chairman.
    Mr. Reid. I was in Lagos in 1974 at the time of the first 
OPEC breakthrough, and they went to auction. They went to 
auction, and the oil price was down about $12. They went to 
auction, and the highest price bid was $42. People couldn't 
believe that. They multiplied it by almost 4 times. The oil was 
never lifted, but that is what it was. Six years later, coming 
on through 1974 on to 1980 when Khomeini actually took over 
power in Iran, that was a different thing. What happened there 
was he subtracted 3 million barrels a day out of the supply 
side. That set the whole world in a spin. Now if you remember 
here, you actually rationed your airplanes as to how they could 
fly. In fact you have a situation in which airplanes were 
tankering oil out of the Caribbean and moving it back into U.S. 
so as you could complete your domestic flights. I believe what 
you're seeing now is a genuine concern that the oil is not 
going to be forthcoming irrespective of the price.
    If you take Nigeria, which I know well, if you take 
Nigeria, you're looking at a situation in the delta and the 
swamps where basically they cut out 230,000 barrels a day 5 
days ago, they cut out another 200,000 barrels a day yesterday. 
The whole situation is very difficult. I think the market 
senses that this is a very, very uncertain period at this time, 
and I think that is where your speculation is coming from. That 
will change in time.
    Mr. Barton. Thank you.
    Mr. Greenberger. I agree with what was said in the first 
panel this morning and I agree with that because I was a 
regulator in these markets and I know what happens when there 
is no police on the beat. It's just not a matter of throwing 
money at the thing, throwing billions and billions of dollars, 
which is the, quote, excessive speculation. If you don't have 
regulators looking at these markets with care, people engage in 
prearranged trades, running ahead. If you go to Mr. Newsome's 
website he has his own market surveillance committee and they 
list all the things they look for in their markets. And these 
markets are not only free of police for purposes of throwing 
money excessively, but I'm very confident that if a thorough 
investigation were done we would find the kind of malpractices.
    And the final point I would say about this, if we keep 
pussy footing about this, we've got an investigation. It will 
come in September 15. We'll have an interagency task force. We 
will negotiate with the United Kingdom. We don't think there is 
speculation even before we ended the investigation. That is a 
signal to these traders. And these traders are low down, 
they're the wild, wild west, which I'm sure being from Texas 
you would understand. And when they hear that the CFTC doesn't 
think there's speculation, they're breathing a sigh of relief. 
The way these guys will get hit is with a two-by-four.
    And I might add, a guy who used the two-by-four was Sam 
Graves of Missouri in December of 2005. He walked to the floor 
of the House of Representatives and added on the floor a floor 
amendment to the CEA Reauthorization Act. The price of natural 
gas was $14 per million BTU. It was at an all-time record high. 
And he said I want transparency and the House adopted that 
legislation in natural gas. It never ultimately passed, but 
within 6 weeks the price of natural gas dropped to $9. If you 
threaten serious, tough business, you will drive this price 
down because right now, these traders are acting in the dark. 
And it's not just throwing money at problems. There are the 
classic manipulations that led the farmer to get the Commodity 
Exchange Act passed to begin with. The farmers, as Chairman 
Dingell said, were getting hosed by the fast talking guys in 
Chicago. I have a quote in my testimony from 1892 of a wheat 
farmer in the Farm Belt saying I look out at my field and I 
don't own it. The guys in Chicago own it because they determine 
the price I sell my wheat at.
    Mr. Barton. Thank you. Thank you, Mr. Chairman, for your 
courtesy.
    Mr. Stupak. Mr. Dingell for questions.
    Mr. Dingell. Thank you, Mr. Chairman. Professor 
Greenberger, what would be the price if we were to get 
transparency and what would be the price if we were to get rid 
of all this speculation in the marketplace with regard to a 
barrel of crude?
    Mr. Greenberger. I'm in agreement with the experts who were 
in the first panel that it would go down between--somewhere 
between 25 and 50 percent.
    Mr. Dingell. How much?
    Mr. Greenberger. 25 and 50 percent.
    Mr. Dingell. Now you said something in your testimony 
earlier. You said that the CFTC could end excess speculation, 
and they could do it without new legislation. What would be 
required for them to bring this about?
    Mr. Greenberger. If Mr. Lukken would agree, as he has 
threatened to do in his most recent letter to the FSA, to 
terminate this phony foreign board of trade for a U.S. company 
and require--and I would require it within 30 days--that the 
London board, that the Intercontinental Exchange register as a 
designated contract market, that would drive the speculators 
because then they would be under speculation limits and Mr. 
Lukken could oversee the margins. And in fact he could use his 
emergency authority. And when the oil price spikes $11 in one 
day, he can go to ICE, he can go to NYMEX, takes names, kick 
ankle, and drive those prices down. Right now, a lot of 
traders, from Goldman Sachs and Morgan Stanley on down, may 
very well believe that nobody is watching them. My experience 
is once they know that someone is looking over their shoulder, 
the funny business stops.
    Mr. Dingell. Appears to me maybe they're right. I don't 
think anybody is watching them.
    Mr. Greenberger. I worry that that is the case. And by the 
way, the swaps dealer problem, that was not a problem before 
the CFMA was passed. Let me be clear about that. There were 
swaps dealers out there, but they were operating in what they 
called legal uncertainty because the swaps dealers were trading 
futures contracts illegally off exchange. The CFMA made all of 
that legal. And if we just said, as Chairman Stupak has said, 
Congressman Van Hollen, DeRosa, many Members in the Senate, all 
energy futures must be traded on a regulated contract market 
like Mr. Newsome's. Then all of this stuff, the index funds, 
everything, would have to be in a transparent market. By the 
way, I would add----
    Mr. Dingell. How do we make them be transparent?
    Mr. Greenberger. By bringing all--by doing what Chairman 
Stupak has recommended in his bill, energy futures must be 
traded on a regulated exchange. No Goldman Sachs index funds, 
no foreign board of trades. Everything would have to go through 
a transparent exchange, overseen by the CFTC, not just for 
position limits and spec limits, but for wash trades, 
prearranged trades, emergency authority could be used, they 
would self-police themselves. On December 19, 2000, that was 
the way these markets operated. Everybody had to be in an 
exchange. We freed that. We freed that. Now maybe people didn't 
understand what they were doing at the time, but we now know 
it.
    Now when we hear that we, quote, closed the Enron loophole, 
as Mr. Lukken explained, he now has to go contract by contract 
to prove that a contract should be regulated. The old system 
was every contract was regulated, not having to prove it 
contract by contract. And then Mr. Lukken informed Congress 
after they passed the Enron loophole, by the way this doesn't 
apply to crude oil, because crude oil is being traded in a 
foreign board of trade. So no petroleum products are covered by 
the, quote, end the Enron loophole.
    Chairman Stupak has a very reasonable proposal that he has 
put forward that just takes us to the status quo of where we 
were on December 19, 2000. And by the way, Chairman Greenspan, 
Secretary Summers, Chairman Levitt of the SEC, all told 
Congress, don't deregulate nonfinancial futures contracts. 
They're too easily manipulated. It wasn't unexpected that this 
was going to happen. They predicted it.
    Mr. Dingell. Mr. Professor, how do you define excessive 
speculation?
    Mr. Greenberger. Excessive speculation to my mind is that 
speculation which exceeds speculation limits properly set and 
properly enforced. And I don't want to belabor this point, with 
all respect for Dr. Newsome, and I have a great deal of respect 
for him, I don't think the spec limits on NYMEX are adequate.
    Mr. Dingell. Where 71 percent of the oil that is moved is 
moved through contracts but not through pipelines, that would 
be excessive, would it not?
    Mr. Greenberger. Absolutely. And you see the figures, I 
forget what the first figure was, 2000?
    Mr. Stupak. Number 2.
    Mr. Greenberger. Look at what the figures were. It was 37 
percent speculation. The rest, 63 percent, commercial. Once 
these markets were deregulated it flipped to 71 percent, 29.
    Mr. Dingell. Can you identify the key loopholes in the 
Commodity Exchange Act which you think need to be closed?
    Mr. Greenberger. Yes. The Enron loophole needs to be 
completely closed. The farm bill was a good start. But it does 
not completely close. It doesn't even apply to petroleum 
products. Foreign boards of trade who come into the United 
States with U.S. terminals selling U.S. delivered products 
should register with the CFTC. We heard something about you 
can't regulate foreign board of trades. I deal with that 
exclusively and substantially in my testimony. You most 
certainly can. And Mr. Lukken threatened the ICE exchange if 
they don't comply with his conditions, he is going to make them 
register. They should register.
    The final thing is the swaps dealer loophole. The swaps 
loophole, that is energy contracts traded off exchange. If you 
put--ended the Enron loophole, the Goldman Sachs, Morgan 
Stanley would have to Mr. Newsome's shop and have their index 
funds or become an exchange themselves. We freed that. We are 
the enemy.
    Mr. Dingell. Professor, my time is running out. I have to 
get to another question. If you please, Mr. Newsome, why--and 
Sir Robert--please inform us why the two of you should be 
treated differently under the laws of different countries? Why 
should you not be treated exactly alike for your actions which 
are in the United States and which affect U.S. Markets?
    Dr. Newsome. Mr. Dingell, when, under--ICE operating under 
the no action letters listing their own contracts, giving 
access to U.S. customers, we were fine under that scenario and 
the fact that we didn't have exacting regulatory regimes. 
However, when they started listing U.S. delivered contracts, 
the WTI in particular, then at that point we said that is not 
what the no action letters were intended to do, and we believe 
there should be the same regulatory regime.
    Mr. Dingell. Why shouldn't you be treated exactly the same?
    Dr. Newsome. We think you should be if you're trading the 
same product.
    Mr. Dingell. Sir Robert, why shouldn't you be treated 
exactly the same?
    Mr. Reid. What we have said is we will do whatever the CFTC 
wants you to do.
    Mr. Dingell. Would you do that?
    Mr. Reid. We, in fact, agreed to position limits. We have 
no difficulty with that.
    Mr. Dingell. I want to make sure I heard you straight. You 
said you would do whatever the CFTC says----
    Mr. Reid. Yes. They've asked us for more information. We've 
given them more information. They've asked us to do the 
position limits, we have done the position limits.
    What I find hard to see is what more we need to do. I'm 
amazed at this level of suspicion created by Professor 
Greenberger that thinks we operate a casino, which we don't.
    Mr. Dingell. This is a fine answer. But it is not to the 
question. Why should you be treated any differently than NYMEX? 
And on top of that, the next question was, if CFTC told you to 
do something would you do it?
    Mr. Reid. Yes. Why am I treated differently? I am treated 
differently. I'm treated twice. I'm treated by FSA and I'm 
treated by the CFTC. I get it two times. He only gets it once.
    Mr. Dingell. Professor Greenberger, why should they be 
treated differently?
    Mr. Greenberger. They shouldn't be treated differently. 
It's essentially a United States entity, but even if it wasn't, 
if they have U.S. trading terminals trading U.S.-delivered 
product and they're in the United States they're subject to our 
jurisdiction. And by the way, Mr. Newsome is a very, very 
bright, skillful executive. He has articulated in his testimony 
well, If you're going to let this ruse go on, I'm going to 
London, I'm opening a London exchange, I'm going to get 
certified by the FSA. Then I'm going to get a no action letter 
to put my London terminals into the United States, and I will 
be regulated by the FSA instead of the CFTC. We've already let 
Dubai in on those terms.
    Mr. Dingell. Out of curiosity. What would be the attitude 
of the American people if we were to find out that something 
was set up in Dubai which was going to do the same thing, or 
what would be the attitude of our people if something was to be 
set up in Moscow or in Jeddah or in Riyadh?
    Mr. Greenberger. Chairman Dingell, Dubai has already gotten 
permission to bring their terminals in the United States and to 
sell West Texas Intermediate to be regulated by the Dubai 
Financial Services Authority. That is the law under Chairman 
Lukken right now.
    Mr. Dingell. So they have already gotten permission.
    Mr. Greenberger. Yes. They haven't started trading but they 
have permission to trade.
    Mr. Dingell. I had heard this, and that is why I asked the 
question.
    Mr. Greenberger. So you will have to go back, such as Mr. 
Barton, when you're stopped at gas stations and when they say 
to you, hey, we have to do something about this, you can say 
well, I have every confidence, Chairman Lukken has assured me, 
that the Dubai Financial Services Authority has comparable 
regulation to us. That is laughable. You're laughing. It is 
laughable. But that is where we are right now.
    Mr. Dingell. Occasionally I laugh when I hurt.
    Mr. Chairman, I have used more time than I'm entitled to. 
Thank you for your courtesy.
    Mr. Stupak. Thank you, Mr. Chairman. Mr. Burgess for 
questions please.
    Mr. Burgess. Thank you, Mr. Chairman. Dr. Newsome, if I 
could ask you, just following up the chairman's line of 
questioning, does the CFTC have any authority over Dubai if 
they see bad things happening on their selling look-alike West 
Texas Intermediate contracts?
    Dr. Newsome. The CFTC has a much larger hook into the 
activities in Dubai than they currently do with ICE, primarily 
because NYMEX is one of the founding members of the Dubai 
Mercantile Exchange, the Oman contract is cleared by NYMEX in 
New York, and there is a clearing order with lots of regulatory 
bells and whistles tied to that.
    At the very beginning, in Dubai, we announced that if we 
ever traded the WTI contract, which we do have the no action 
letter to do so, that day one it would include full position 
limits, the full large trader reports that we have recommended 
that the ICE should submit to the CFTC as well.
    Mr. Burgess. Very well. Now, too, Chairman Dingell was 
asking the question about transparency and how does 
transparency affect prices. He asked it to Professor 
Greenberger. I just wondered if you wanted to expound on that 
as well.
    Dr. Newsome. We are in full support of open transparency 
and competitive markets. So while we may have some disagreement 
on what is driving the price, there is no disagreement from us 
that these markets should be made completely transparent.
    Mr. Burgess. Mr. Greenberger, you heard me questioning 
Chairman Lukken a few moments ago. Now, he made the statement 
to me that the final language in the Commodities Future 
Modernization Act was the same as passed in this committee, as 
passed on the House floor, as appeared in the appropriations 
bill, December 15 or 19, whatever that day was, in 2000. That 
was before I was born, so I don't know. So you tell me, is the 
language the same?
    Mr. Greenberger. It's the same, but it's misleading to say 
that for this reason. The Senate bill did not have the Enron 
loophole as passed in it. The Senate bill had a much more 
controlling deregulation of those markets. Chairman Lugar did 
that. And some Members in the House wanted to substitute the 
Senate bill for the House bill and they couldn't do it. But 
here is what happened. On December 15th, out of the clear blue 
sky, maybe the 14th it starts, Congress comes back in a lame-
duck session to pass an 11,000-page omnibus appropriation bill. 
The Senate has a voice vote. I have gone back to the 
Congressional Record. The bill is not laid out in the 
Congressional Record. True, it was read, but I'm very confident 
the Senate did not understand that the Senate bill did not 
include the much more restrictive version than the House bill. 
And why is that important? Because if the Senate bill 
legislation had passed, we probably would still have Enron 
today. They would have been saved from themselves. Moreover, 
people have said Secretary Summers supported whatever happened 
on December 15th. I have gone to the Congressional Record. 
Secretary Summers' letter appears not on December 15th, but on 
January 2nd, 2001, as something that was never read to the 
Senate on December 15th.
    Mr. Burgess. Well, if I could, and I will enter this into 
the record, I have the page from the Congressional Record, 
Senate 11897, December 15, 2000, Exhibit 1, December 15, 2000, 
Honorable Tom Harkin, Ranking Member, Committee on Agriculture, 
Nutrition, Forestry, U.S. Senate, Washington, D.C.
    ``Dear Senator Harkin, the members of the President's 
Working Group on Financial Markets strongly support the 
Commodities Futures Modernization Act. This important 
legislation will allow the United States to maintains its 
competitive position in the over-the-counter derivative markets 
by providing legal certainty and promoting innovation, 
transparency and efficiency in our financial markets while 
maintaining appropriate protections for transactions in 
nonfinancial commodities and for small investors. Sincerely, 
Lawrence H. Summers, Secretary, Department of the Treasury; 
Arthur Levitt, Chairman, SEC; Alan Greenspan, Chairman, Board 
of Governors of the Federal Reserve; William J. Rainer, 
Chairman, Commodity Futures Trading Commission.'' Again dated 
December 15, 2000. I will submit that to the chairman for the 
record.
    [The information appears at the conclusion of the hearing.]
    Mr. Burgess. Now I will just say that was before my time 
and I don't know really all that was involved in that, but I do 
think we don't do ourselves any service, we don't further the 
cause when we misquote and misrepresent things. I think we 
heard from Chairman Lukken today that he has all the tools he 
needs right now to send the message to the excessive 
speculation that he could control it and it could stop. I for 
one don't understand frankly why he is not doing that. I hope 
he takes it to heart what he learned on the committee today and 
perhaps tomorrow will dawn a new day and he will exercise that 
authority. But I don't see that it furthers the cause in any 
way to continue to misrepresent things.
    This language was passed in this committee, was passed on 
the floor of the House, was passed in the omnibus bill. 
December 15, 2000, the letter was read into the Congressional 
Record. I think it's time to move on from that, repeal it by 
all means, but at the same time to indicate that there was 
something else going on I think does a disservice.
    Mr. Greenberger. Mr. Burgess, if I could have a point of 
privilege. The President's Working Group on Financial Markets 
thought that the Senate's version of the Enron loophole was in 
that bill when they wrote the letter, not the House version. A 
fast trick was pulled on the President's Working Group and on 
the Senate. The letter that endorses what happened is in the 
January 2nd, 2001 Congressional Record. I don't think there is 
a Senator who knew that the Enron loophole in the House version 
was on the Senate bill. And I might add, Mr. Burgess, that was 
considered to be extremely controversial, that Enron was going 
to be allowed to use its own exchange, which ultimately led, by 
enforcement actions, to the rising of electricity prices on the 
West Coast by 300 percent.
    Mr. Burgess. Let me interrupt you there. And I'm not here 
to debate the merits of that legislative language. All I would 
submit is that that language was passed by the House, roll call 
vote 540, 19 October 2000, 7:02 p.m., Commodities Futures 
Modernization Act. Many people on this committee on both sides 
of the dais voted aye in response to that bill. In fact, the 
total vote was 377 to 4, with 51 nonvoting.
    Mr. Greenberger. And I would submit the Senate did not 
understand that the House version instead of the Senate version 
was put on the Senate bill. It was never explained to the 
Senate. That was duplicitous.
    Mr. Burgess. Sometimes you do have to speak slowly and 
clearly to the Senate in simple, declaratory sentences. But 
nevertheless it was passed by this House. I will yield back the 
balance of my time, Mr. Chairman.
    Mr. Stupak. Thank you, Mr. Burgess. Mr. Melancon for 
questions, please.
    Mr. Melancon. Thank you, Mr. Chairman. I appreciate it. I 
would like to ask Dr. Newsome, and just for the record he and I 
have been friends for some 20 years, back when he was just one 
of those lowly staffers over on the other side in the Senate, 
that august body we've been talking about for the last few 
minutes. But Dr. Newsome, I noticed you sitting here today 
making notes and such. But I would like you, if you would, just 
give me some of your thoughts and comments of what was said, 
what you feel was right, what you feel was wrong. I will allow 
you to go ahead and speak if you would.
    Dr. Newsome. Thank you, Congressman, for that opportunity. 
I think maybe one thing, when we started this hearing, we all 
had to stand up and take the oath that we were going to tell 
the truth and the whole truth, and that is what we did. So, a 
couple of things maybe I'd just go back and say that at least 
from our viewpoint are not completely accurate or may be at the 
very least misunderstood and one--and with all due respect to 
the chairman, the chart that has been showed all hearing long 
about speculators, the two pie charts, I think both of those 
are wrong. I think the one that shows the speculative activity 
at roughly 37 percent did not include some speculative activity 
that is trading through the swaps dealers, so that 2000 number 
was probably a little bit low. But on the flip side, assuming 
that all of the swaps dealer activity is speculative activity 
is equally as wrong, because at least from our experience in 
NYMEX a substantial portion of the volume going through the 
swaps dealers is commercial activity. So therefore making the 
assumption that 71 percent of the volume on NYMEX WTI is 
speculative is incorrect.
    Secondly, it was said a number of times by the first panel, 
particularly by Mr. Masters, that there is no position limits 
on WTI crude. Again that is a false statement. We do have hard 
position limits on the last 3 days before expiration, and we do 
have position accountability then out the remainder of the 
curve.
    There was another comment that said there were margin 
loopholes and I know there was a debate about what to do with 
margins, but certainly there are no margin loopholes. Every 
market participant in our market is charged the same margin 
that is evaluated every day by our staff. It's determined based 
upon volatility in the market, and every market participant 
pays that price. There are no loopholes.
    And then I guess the final thing I would say, there has 
been a lot of question about the flight from U.S. markets 
depending upon what might happen with further regulation. I can 
tell you with 100 percent certainty if we overregulate these 
markets there will be a flight away from these markets.
    Dr. Newsome. It has happened in the past. It will happen 
again. Maybe not necessarily to other exchanges, but certainly 
to the over-the-counter marketplace, which dwarfs the size of 
our markets now. There is no question in my mind that we will 
lose business to the over-the-counter marketplace.
    Mr. Melancon. And I don't think that you are concerned with 
competition. It is just fair competition. Would that be a fair 
assumption?
    Dr. Newsome. Absolutely. We just want a level playing 
field.
    Mr. Melancon. Thank you. Thank you, Mr. Chairman. I yield 
back my time. Thank you, Mr. Newsome.
    Mr. Stupak. Thank you. Thank you, Mr. Melancon. Mr. Burgess 
has asked that we put in the December 15, 2000, Congressional 
Record Senate side. Without objection, that will be added. Mr. 
Burgess also asked a CRS report on Commodity Futures 
Modernization Act of 2000: Derivatives Regulation Reconsidered, 
dated January 29, 2003. When the whole thing is provided, we 
will put it in the part of the record. A few more questions 
before I wrap up here, if I may. Mr. Newsome, when do you 
expect the West Texas Intermediate crude oil contract to be 
listed on the Dubai exchange?
    Dr. Newsome. Mr. Chairman, no date has been set.
    Mr. Stupak. What is causing delay of not putting it on 
there then? That is the intent, isn't it, to put it on there?
    Dr. Newsome. That is the intent certainly is to put it on. 
But that will be listed on the electronic system supplied by 
NYMEX. It is not in the queue yet to be listed, so we are 
months away.
    Mr. Stupak. So the clearing of these trades then will be 
listed on your computers on NYMEX?
    Dr. Newsome. Yes.
    Mr. Stupak. OK. With over 60 percent of the WTI contracts 
traded on ICE Futures originate in the U.S., given the 
preponderance of trades on this exchange originate in the U.S. 
and involve contracts with U.S. delivery points, why shouldn't 
the CFTC require ICE Futures to register as a designated 
contract market?
    Dr. Newsome. Thank you for that question, because I 
appreciate the chance to comment on it. We think when we look 
at the marketplace and what is important with regard to 
transparency through the large trader reports, limiting the 
role of speculators in the market, that the items outlined in 
at least one of the Senate bills and by the CFTC are adequate 
without requiring ICE to become a designated contract market. 
Certainly a concern from our standpoint is that if that was 
required, then U.S. exchanges would then be retaliated against 
by foreign jurisdictions and required to become full 
registrants in every jurisdiction around the world that we want 
to do business in.
    Mr. Stupak. If you are doing business in Dubai, and if you 
are going to be selling product in Dubai intended for Dubai, 
why shouldn't you come underneath Dubai law and not U.S. law?
    Dr. Newsome. Well, we are currently fully regulated by the 
Dubai Financial Services Authority and by the CFTC because of 
the nature of the way we set up the business.
    Mr. Stupak. So then it shouldn't make any difference then.
    Dr. Newsome. Well, I mean there is a lot--there are a 
number of markets around the globe much larger than the Dubai 
marketplace. And if we had to go to every foreign jurisdiction 
and go through the regulatory process it would cost us millions 
and millions of dollars and lots of time. If there wasn't a 
method to achieve what we think is needed in terms of 
transparency and position limits, I would agree completely with 
you. But I think we have a methodology through the conditioning 
of the foreign board of trade no-action letter to achieve what 
needs to be achieved.
    Mr. Stupak. OK. NYMEX Holdings is about to become a foreign 
board of trade in the United Kingdom, isn't it?
    Dr. Newsome. We are going through that process now.
    Mr. Stupak. So will this exchange mirror the same contracts 
on ICE Futures such as west Texas crude, heating oil, gasoline?
    Dr. Newsome. I think Professor Greenberger was three or 
four steps in front of us. First of all, we are very proud to 
be a U.S. entity and regulated by the CFTC, and that will not 
change. With regard to our efforts in the United Kingdom, what 
we are trying to do is get on a level playing field in the 
European marketplace with the Intercontinental Exchange.
    Mr. Stupak. It sound likes you are saying if I can't beat 
'em, I might as well join 'em.
    Dr. Newsome. Only with regard to the European marketplace.
    Mr. Stupak. Well, will you be applying for a no-action 
letter and tell the CFTC it is about to become a foreign-owned 
trade----
    Dr. Newsome. We will supply--regardless of what we do 
where, we will always supply the position limits and the 
large----
    Mr. Stupak. So you won't be applying for a no-action 
letter? You won't apply for a no-action letter?
    Dr. Newsome. Well, we could.
    Mr. Stupak. Sure you could.
    Dr. Newsome. But if we do, we will condition it up front to 
supply the information to the CFTC that we have asked them to 
collect from ICE.
    Mr. Stupak. OK. You know, you said that if we regulate that 
these markets will go offshore. But first of all, any futures 
contract that calls for a physical delivery inside the U.S. is 
automatically subject to CFTC regulation, right?
    Dr. Newsome. Correct.
    Mr. Stupak. So even if they are offshore, but if the 
contractis going to be for physical delivery within the U.S., 
they are still going to come underneath CFTC authority.
    Dr. Newsome. Not necessarily. Only if they apply for the 
no-action letter to have access to U.S. customers.
    Mr. Stupak. OK. But the questions was, statement was a 
future contract that calls for physical delivery in the U.S. 
comes underneath our jurisdiction.
    Dr. Newsome. If it was a physical contract----
    Mr. Stupak. Right. So whether I am on Dubai or on your 
London Holdings, as long as the physical delivery is going to 
be in the U.S., it comes underneath the U.S. law, right?
    Dr. Newsome. Absolutely.
    Mr. Stupak. So there isn't going to be a foreign flight if 
we do this regulation. If we pass H.R. 6330, the PUMP Act of 
2008, that is not going to drive people out of this market 
here, is it?
    Dr. Newsome. No, I think it will because most of the 
foreign boards of trade are going to list a cash contract that 
is based on a physical U.S. contract, not the actual physical.
    Mr. Stupak. But any future contract that cash settles 
against a U.S. contract with physical delivery provisions is 
also automatically subject to CFTC regulation.
    Dr. Newsome. No, sir. The other exchange in Dubai that has 
listed the WTI contract does so completely outside the purview 
of the CFTC because they have not applied for a no-action 
letter to have access to U.S. customers. So they can list any 
contract U.S.-based that they want to completely outside the 
purview of the CFTC or any U.S. regulator.
    Mr. Stupak. Professor, I know you want to jump in there.
    Mr. Greenberger. Yes, I want to jump in on two points. Mr. 
Newsome said I am a couple steps ahead of him. In his testimony 
he said while that affiliate, the London affiliate, will follow 
the path of other exchanges regulated by other regulators and 
will be applying for CFTC no-action relief. So I am not two 
steps ahead. I just read his testimony.
    Dr. Newsome. I thought you were making the assumption that 
we are going to transfer all of our NYMEX business.
    Mr. Greenberger. No, no, no, no. All I meant was you are 
going to apply for relief, sell West Texas Intermediate, it 
will be regulated by the FSA directly instead of by the United 
States. I don't know what your share is going to be between 
your U.S. and U.K. Exchange. Now with regard to the Dubai 
exchange that has not gotten a no-action letter, Mr. Newsome 
says, oh, they are outside of the CFTC jurisdiction. No, they 
are not. I briefed that completely in the testimony. The 
leading case in CFTC enforcement jurisdiction is a Japanese 
copper trader trading on the London Metal Exchange and driving 
up the price in the United States. No contacts or virtually 
none to the United States. A U.S. warehouse here, what have 
you.
    The CFTC imposed a $150 million enforcement action on 
Sumitomo, the Japanese corporation trading on the London Metal 
Exchange. If you harm our markets, we can go after you. The 
Justice Department has memos on this. The CFTC has memos. And 
that is the irony here. ICE is in the United States. We don't 
have to go to London to get them. Mr. Newsome tells you that 
Dubai is going to do all this stuff, now, Mr. Newsome is in 
partnership with Dubai. My argument is if he is in partnership 
with Dubai when Dubai comes to the United States, that is a 
United States entity if Mr. Newsome is in partnership with 
them. And he says, well, we will impose this, we will impose 
that. Great. But that is not U.S. law. He is doing that as a 
matter of largesse. Maybe Mr. Lukken will enforce that through 
his enforcement things. But I want to tell you when your gas-
paying constituents come to you and say is Dubai, is ICE, is 
London NYMEX going through London and coming back to the United 
States fully regulated as a U.S. exchange would be, the answer 
is no. The foremost reason is I read you the emergency 
authority. Mr. Lukken will not have emergency authority to go 
in an emergency and tell ICE what it ought to do, set temporary 
margins, temporary position limits. You are not going to be 
fully regulated. If you want U.S. trading terminals with U.S.-
delivered contracts on them to be fully regulated, you have the 
power to insist.
    The final point I would make is this idea that everybody is 
going to run abroad, I mean, Mr. Newsome is going to London 
because he wants to get the same loophole that ICE has by going 
through London. But there are 20 foreign exchanges who came to 
the United States and said please let us trade here, but don't 
have us regulate fully. Why are they here? As the first panel 
said, it is the only fully liquid profitable market in the 
world. Everyone needs to be here. And if they go abroad and 
they do bad things to our gas-paying consumers we can go after 
them under U.S. law.
    Mr. Stupak. Sure. And from a practical point of view, you 
need liquidity, you need critical mass. And we are 3 percent of 
the world population, but consume 25 percent of the oil. So, I 
mean, you are going to trade here no matter what. I don't think 
you are going to go abroad.
    Mr. Greenberger. You need liquidity and you need mass, but 
you also need profits. And this is where the futures trading 
gets done on U.S. delivered West Texas Intermediate delivered 
in Cushing, Oklahoma.
    Mr. Stupak. Sure. Largest consumer of energy and largest 
producer of food commodities.
    Mr. Greenberger. Exactly.
    Mr. Stupak. There you are. Mr. Newsome wanted to add.
    Dr. Newsome. I would like to respond, Mr. Chairman, to that 
if I can. Several things. One, as I made the comments in my 
statement, I said there is a very real threat of that business 
leaving the regulated exchanges. I said it could go to foreign 
exchanges, but more likely than not it would go to the over-
the-counter market. There is no question about that. With 
regard to the Dubai Exchange that is in question, in no way are 
they or will they be regulated by the CFTC. You should not be 
misled there.
    If there is some type of manipulative activity that occurs 
that has an impact on U.S. markets, Mr. Greenberger is exactly 
right, then the CFTC has a hook to go after them from an 
enforcement standpoint. But in no way are they regulated by the 
U.S. And then with regard to London, I simply can't let Mr. 
Greenberger tell you what our business plan is in London when 
he is not aware of what it is. He has made some assumptions 
that are wrong. Our plans to go into London is simply onefold. 
There are differences in law with regard to clearing the 
business. We tried from New York on a number of occasions to 
list the London contracts, the European contracts, and to pull 
that business to the CFTC-regulated marketplace. Because of 
differences in clearing, particularly with regard to 
bankruptcy, it was very difficult for us to compete in that 
marketplace.
    So we made the decision to partner with the London 
clearinghouse, who is a London clearer, to list those same 
contracts so that we could do a more effective job of competing 
in the European space period.
    Mr. Stupak. Mr. Burgess, questions?
    Mr. Burgess. Yes, thank you, Mr. Chairman. Dr. Newsome, Mr. 
Greenberger, just so I am clear that I understand, first on the 
issue of the West Texas Intermediate, my understanding was back 
in, I guess, 1974 those contracts had to be delivered to 
Oklahoma, and that was a method of keeping speculation in check 
during the Arab oil embargo of the 1970s?
    Dr. Newsome. No, I mean we have had speculative position 
limits on that contract since it was listed day one.
    Mr. Burgess. OK. Then the look-alike that you reference on 
the Dubai market, the way that the CFTC would still have the 
ability to regulate that is they can take action against Dubai 
if they see evidence of bad behavior. Is that correct?
    Dr. Newsome. They would have complete transparency and 
position limits to keep the speculative activity low. If there 
was an enforcement option, they would have to cooperate with 
the Dubai Financial Services Authority.
    Mr. Burgess. And what does that enforcement action look 
like? If that were to happen, what would we see?
    Dr. Newsome. It would depend upon what kind of activity was 
taking place in the market. If it was manipulative activity on 
Dubai that had an impact on the U.S. markets, as Mr. 
Greenberger commented on a moment ago, they could go after 
those market participants. If it is related----
    Mr. Burgess. And what is the enforcement hook that they 
have? What would they do?
    Mr. Greenberger. If they are impacting U.S. markets and 
they can get jurisdiction over those people, as they got over 
the Sumitomo Japanese copper company, they will fine them $150 
million and reference them to the Justice Department for 
prosecution if they feel that is the case. And my point isn't 
that the Dubai Gold Exchange, which is different than Mr. 
Newsome's partner, which is selling West Texas Intermediate 
exclusively in Dubai, is not that they have to become CFTC-
regulated, but what everybody is telling you is if you regulate 
here we are going to run somewhere else in the world to avoid 
transparency. And what I am saying is the only reason they are 
going somewhere else is to continue operating in dark markets. 
And if they think they are outside of U.S. jurisdiction, they 
are not. We can go after them there, and we have when there has 
been effective enforcement at the CFTC.
    Mr. Burgess. I think that was the thrust of Mr. Masters' 
testimony. I don't want to put word in his mouth, but I think 
he so much as said that in the first panel this morning. But 
going back, of course, to Chairman Dingell when he was 
stressing or trying to get an answer about the question of 
transparency, again, if CFTC sees a problem, if the 
transparency is there, if CFTC sees the problem they can go 
after it. So the transparency then becomes the key to this 
whole process.
    Mr. Greenberger. Well, the only addition to that is if Mr. 
Newsome has an emergency on his exchange, the CFTC can go 
there, set temporary position limits, temporary this, temporary 
that. If it happens on ICE, they have got to go to the FSA to 
ask the FSA to do it. Go to London to have the FSA do something 
in the United States, or go to Dubai to ask Dubai--for example, 
if we have a $11 rise in a single day and everybody goes nuts 
and the CFTC is enforcing and says we want to go in there and 
see what is happening, Dubai is going to have terminals in the 
United States, but they are going to have to go to the Dubai 
Financial Services Authority and ask them if it is OK if they 
look into the matter. There is a big difference between getting 
large trader data reporting from Dubai and be able to directly 
regulate things that are happening before your very eyes 
instead of having to go to Dubai and ask permission to do so. 
And as Mr. Newsome just said, if you see manipulative activity 
you have to go to Dubai to see whether you can enforce.
    Mr. Burgess. Sir Robert, we will give you the last word.
    Mr. Reid. One needs to correct a bit of reality as opposed 
to fiction.
    Mr. Burgess. Please.
    Mr. Reid. If there is a problem that worries the CFTC, they 
pick up the phone and they speak to the chief executive in our 
organization or they speak to the FSA. This is an open line. 
And it operates two, three times a week. So these people know 
each other and they deal with the problems. And really to 
describe it as you have to go cap in hand to Britain to 
actually get information, I actually think you are completely 
misrepresenting the position. Now, what I would say, in 
fairness to Dubai, Dubai is a new organization, it is a new 
country, but it really is trying to do the best it can. And I 
am sure the fact that NYMEX has gone there, they will help them 
with that. And essentially, you should get a regime there which 
is every bit as good as you will get in London. And so 
therefore, you are contributing to the development of global 
trade. It may be uncomfortable for the people who want to stay 
domestic, but basically for those who want to go international 
and have got an entrepreneurial flair like Jim, then let them 
go and support them.
    Mr. Burgess. At the same time, though, the degree of 
transparency that we are all talking about is dependent on the 
CFTC's enforcement ability. I am not reassured that someone can 
pick up a phone and call someone else half a world away. You 
may have that level of trust, but certainly after 6 hours of 
hearings today I don't have that. But thank you, Mr. Chairman. 
You have been very generous with the time. And I will yield 
back.
    Mr. Stupak. Mr. Melancon, anything?
    Mr. Melancon. No.
    Mr. Stupak. OK. That is going to conclude this panel. 
Professor, you look like you want to say something.
    Mr. Greenberger. I just wanted to say one other thing. Sir 
Robert says you can pick up the phone. The CFTC negotiated for 
several weeks to lead to the letter they just issued. They 
didn't pick up the phone. They had to do a diplomatic 
negotiation.
    Mr. Reid. OK, just one final word on that.
    Mr. Stupak. Sure, Sir Robert. You came the farthest so you 
get the last word.
    Mr. Reid. If you could put on the record we are not a 
loophole, we are a reef note. We are firm and stable and 
secure.
    Mr. Stupak. That is on the record. It is so noted. I am not 
saying you are going to get agreement with this committee, but 
so noted.
    Mr. Reid. Thank you, sir.
    Mr. Stupak. Well, thank you. That concludes all questions. 
I want to thank all of our witnesses for coming today and for 
your testimony. It has been a long, but very interesting 
hearing. I ask for unanimous consent that the hearing record 
will remain open for 30 days for additional questions for the 
record. Without objection, the record will remain open. I ask 
unanimous consent the contents of our document binder be 
entered into the record. Without objection, the documents will 
be entered in the record. I also ask unanimous consent that the 
letter we received from the U.S. Commodities Futures Trading 
Commission dated June 20th, 2008, addressed to myself and Mr. 
Dingell, be made part of the record. I also ask unanimous 
consent that this report from CS Commodities Group, Update and 
Key Commodity Themes for 2008, it is a report referenced by Mr. 
Masters in the first panel, be made part of the record. Without 
objection, these two documents will be added. That concludes 
our hearing. Without objection, this meeting of the 
subcommittee is adjourned.
    [Whereupon, at 6:24 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

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