[Senate Hearing 110-382]
[From the U.S. Government Publishing Office]



 
                                                        S. Hrg. 110-382

                  SPECULATION IN THE CRUDE OIL MARKET

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

                             JOINT HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                                and the

                         SUBCOMMITTEE ON ENERGY

                                 of the

               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                           DECEMBER 11, 2007

                               ----------                              

        Available via http://www.access.gpo.gov/congress/senate

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs



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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK PRYOR, Arkansas                 NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk
                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                     CARL LEVIN, Michigan, Chairman
THOMAS R. CARPER, Delaware           NORM COLEMAN, Minnesota
MARK L. PRYOR, Arkansas              TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

            Elise J. Bean, Staff Director and Chief Counsel
                       Dan M. Berkovitz, Counsel
  Mark L. Greenblatt, Staff Director and Chief Counsel to the Minority
          Mark D. Nelson, Deputy Chief Counsel to the Minority
                     Mary D. Robertson, Chief Clerk
                                 ------                                

               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii              PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota        LARRY E. CRAIG, Idaho
RON WYDEN, Oregon                    LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota            RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana          JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           BOB CORKER, Tennessee
KEN SALAZAR, Colorado                JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas         GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
              Frank Macchiarola, Republican Staff Director
             Judith K. Pensabene, Republican Chief Counsel
           Angela Becker-Dippmann, Professional Staff Member
                   Melissa Shute, Republican Counsel
                                 ------                                
                         Subcommittee on Energy

                BYRON L. DORGAN, North Dakota, Chairman

DANIEL K. AKAKA, Hawaii              LISA MURKOWSKI, Alaska
RON WYDEN, Oregon                    LARRY E. CRAIG, Idaho
TIM JOHNSON, South Dakota            RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana          JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

   Jeff Bingaman  and Pete V. Domenici are Ex Officio Members of the 
                              Subcommittee


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Levin................................................     1
    Senator Dorgan...............................................     8
    Senator Coleman..............................................    11
    Senator Murkowski............................................    14
    Senator Collins..............................................    18
    Senator Wyden................................................    20
    Senator Craig................................................    22
    Senator Barrasso.............................................    23
    Senator Cantwell.............................................    24
    Senator Menendez.............................................    25
    Senator McCaskill............................................    26
Prepared statements:
    Senator Tester...............................................    22
    Senator Bingaman.............................................    61
    Senator Salazar..............................................    61

                               WITNESSES
                       Tuesday, December 11, 2007

Guy F. Caruso, Administrator, U.S. Energy Information 
  Administration, U.S. Department of Energy......................    27
Fadel Gheit, Managing Director and Senior Oil Analyst, 
  Oppenheimer & Co., Inc., New York, New York....................    29
Edward N. Krapels, Special Advisor, Financial Energy Market 
  Services, Energy Security Analysis, Inc., Wakefield, 
  Massachusetts..................................................    30
Philip K. Verleger, Jr., President, PK Verleger, LLC, Aspen, 
  Colorado.......................................................    32

                     Alphabetical List of Witnesses

Caruso, Guy F.:
    Testimony....................................................    27
    Prepared statement with attachments..........................    67
Gheit, Fadel:
    Testimony....................................................    29
    Prepared statement...........................................    76
Krapels, Edward N.:
    Testimony....................................................    30
    Prepared statement...........................................    78
Verleger, Philip K. Jr.:
    Testimony....................................................    32
    Prepared statement...........................................    98

                                APPENDIX

Charts submitted for the Record by Senator Levin.................    63

                                EXHIBITS

 1. GCrude Oil Prices (NYMEX), Jan 2002-Dec 2007, chart prepared 
  by the Majority Staff, Senate Permanent Subcommittee on 
  Investigations.................................................   118
 2. GU.S. Crude Oil Inventories, 2007 Compared to Previous 5-Year 
  Average, chart prepared by the Majority Staff, Senate Permanent 
  Subcommittee on Investigations.................................   119
 3. GCrude Oil Futures and Options, Speculative Positions, 2002-
  2007, chart prepared by the Majority Staff, Senate Permanent 
  Subcommittee on Investigations.................................   120
 4. GU.S. Crude Oil: Prices and Inventories at Cushing, OK, 2007, 
  chart prepared by the Majority Staff, Senate Permanent 
  Subcommittee on Investigations.................................   121
 5. GWhy Are Oil Prices So High?, This Week In Petroleum, Energy 
  Information Administration, November 7, 2007...................   122
 6. GDistorting a Benchmark, International Energy Agency--Oil 
  Market Report, April 12, 2007..................................   127
 7. GTrends in Hedge Fund Industry Assets and Oil Prices, chart 
  prepared by Office of Senator Byron Dorgan.....................   128
 8. GDecrease in the Price of Saudi Light Relative to WTI Since 
  May 2007, chart prepared by Office of Senator Byron Dorgan.....   129
 9. GThe Role of Market Speculation In Rising Oil And Gas Prices: 
  A Need To Put The Cop Back On The Beat, Staff Report prepared 
  by the Permanent Subcommittee on Investigations of the 
  Committee on Homeland Security and Governmental Affairs, June 
  27, 2006.......................................................   130
10. GLetter to The Honorable Samuel W. Bodman, Secretary, U.S. 
  Department of Energy, October 18, 2007, from Senators Levin, 
  Wyden, Bingaman, Reed, McCaskill, Dorgan and Kerry, regarding 
  the Strategic Petroleum Reserve................................   182
11. GSTEO Supplement: Why are oil prices so high?, Energy 
  Information Administration/Short Term Energy Outlook, August 
  2006...........................................................   184
12. GShort-Term Energy Outlook Supplement: Why Are Oil Prices So 
  High?, Energy Information Administration/Short-Term Energy 
  Outlook Supplement--November 2007..............................   191
13. GU.S. Commodity Futures Trading Commission press releases....   197
14. GSpeculative Interest in Crude Oil (Percent of Open Interest 
  Held by Speculators), chart prepared by the Majority Staff, 
  Senate Permanent Subcommittee on Investigations................   201
15. GCrude Oil Futures Contracts, Open Interest, NYMEX, 2002-07, 
  chart prepared by the Majority Staff, Senate Permanent 
  Subcommittee on Investigations.................................   202
16. G$100 oil and the `S' word, quote from CCNMoney.com, chart 
  prepared by Office of Senator Byron Dorgan.....................   203
17. GU.S. Crude Oil Stocks, chart prepared by Office of Senator 
  Byron Dorgan...................................................   204
18. GQuotes from October 21, 2007 Washington Post story by David 
  Cho, Energy Traders Avoid Scrutiny, chart prepared by Office of 
  Senator Byron Dorgan...........................................   205
19. GLetter to the U.S. Senate Energy and Natural Resources 
  Committee, dated December 11, 2007, from Dr. Bert Zauderer, 
  Coal Tech Corp, regarding oil and gas data.....................   206
20. Ga. and b. Inserts for the hearing record from The Honorable 
  Guy F. Caruso, Administrator, Energy Information 
  Administration, U. S. Department of Energy.....................   208
21. GResponses to supplemental questions for the record submitted 
  to The Honorable Guy F. Caruso, Administrator, U.S. Energy 
  Information Administration, U. S. Department of Energy.........   211
22. GResponses to supplemental questions for the record submitted 
  to Fadel Gheit, Managing Director and Senior Energy Analyst, 
  Oppenheimer & Co. Inc..........................................   230
23. GResponses to supplemental questions for the record submitted 
  to Edward N. Krapels, Special Advisor, Financial Energy Market 
  Services, Energy Security Analysis, Inc........................   235
24. GResponses to supplemental questions for the record submitted 
  to Philip K. Verleger, Jr., President, PK Verleger, LLC........   240


                  SPECULATION IN THE CRUDE OIL MARKET

                              ----------                              


                       TUESDAY, DECEMBER 11, 2007

                                 U.S. Senate,      
            Permanent Subcommittee on Investigations,      
                  of the Committee on Homeland Security    
                                and Governmental Affairs,  
                   Joint hearing with the Subcommittee on Energy,  
                         Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The Subcommittees met, pursuant to notice, at 10:03 a.m., 
in Room 216, Hart Senate Office Building, Hon. Carl Levin, 
Chairman of the Permanent Subcommittee on Investigations, 
Committee on Homeland Security and Governmental Affairs, and 
Hon. Byron L. Dorgan, Chairman of the Subcommittee on Energy, 
Committee on Energy and Natural Resources presiding.
    Present: Senators Levin, McCaskill, Tester, Coleman, 
Collins, Dorgan, Wyden, Cantwell, Menendez, Bingaman, Salazar, 
Murkowski, Craig, Corker, and Barrasso.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Good morning, everybody. The Permanent 
Subcommittee on Investigations and the Subcommittee on Energy 
are conducting a joint hearing this morning into why U.S. oil 
prices keep rising despite what appears to be an adequate U.S. 
supply of oil.
    The price of crude oil recently rose above $99 per barrel, 
a record high. Just before Thanksgiving, the national average 
price of gasoline went over $3.10 per gallon for the second 
time this year. The price of diesel fuel is at a record high, 
as is the price of home heating oil. These record high prices 
severely hurt millions of Americans and American businesses. 
They raise the cost of virtually everything in our daily 
lives--the gasoline in our cars and trucks, the food we eat, 
air travel, heating our homes and offices, generating 
electricity, and manufacturing countless industrial and 
consumer products. It is our duty in Congress to do everything 
that we can to ensure that the price Americans pay for energy 
is a fair price.
    Just about a year ago, on January 18, 2007, the price of 
crude oil on the New York Mercantile Exchange (NYMEX), was 
about $50 per barrel. A few weeks ago, the NYMEX price reached 
an all-time high of just over $99 per barrel. The chart to my 
left, Exhibit 1, shows that huge increase in the price of 
oil.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1, which appears in the Appendix on page 118.
---------------------------------------------------------------------------
    And although the price of oil virtually doubled during this 
period, an unprecedented rise of nearly $50 in just 1 year, the 
overall inventory of oil in the United States has been above 
the 5-year average for the entire year. Exhibit 2 shows the way 
that inventory has remained above the 5-year average.\1\ It 
just defies the laws of supply and demand to have an 
astronomical increase in the price of oil at the same time the 
U.S. inventory of oil has stayed above average.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 2, which appears in the Appendix on page 119.
---------------------------------------------------------------------------
    On any given day, we can read in the newspapers or hear on 
the television the familiar explanations for why the price of 
oil is so high--instability in the Middle East, bad weather 
affecting oil production platforms, civil strife in oil-
producing countries, the declining value of the dollar. These 
are just a few of the ``usual suspects'' that are often cited 
as the reasons for high prices.
    The problem with these explanations is not that they are 
false. Most of them are true. But most of them have been true 
for some time. Unfortunately, instability in the Middle East is 
not new. There is always bad weather somewhere around the globe 
that affects oil production and transportation. There is, 
unfortunately, a lot of civil strife in a number of oil-
producing countries. The dollar rises and the dollar falls. The 
world is a dangerous place. These factors alone cannot justify 
a doubling in the price of oil.
    So what else can help explain these record prices? In this 
hearing, we will examine some of the other factors that are 
contributing to the high price of oil as well as what we can do 
about it.
    One key factor that has contributed to the rise in oil 
prices over the past few years is the virtual explosion of 
trading of paper contracts for oil delivery in future months, 
trading which is speculative and not intended to result in the 
actual delivery of oil. Traders are trading paper oil contracts 
in record amounts. In the last 4 years, we have seen a huge 
increase in the number of oil futures contracts traded in the 
New York Mercantile Exchange, and there has also been 
tremendous growth of trading of U.S. crude oil in London. As 
Secretary of Energy Bodman recently said, the prices for crude 
oil are now set in New York, London, Tokyo, Singapore, and 
other trading hubs around the world.
    Data compiled by the Commodity Futures Trading Commission 
(CFTC), shows that in the past few years, out of this overall 
increase in energy trading, the amount of trading due to 
speculation has nearly tripled. Chart 3--that is Exhibit 14 \2\ 
in the exhibit book--shows that in the last few years, the 
percentage of oil futures contracts held by speculators has 
risen from around 15 percent to nearly 45 percent. These are 
traders who are solely interested in trading for a profit 
rather than hedging their positions to assure a stable supply 
at a price that they can count on. These energy speculators not 
only comprise a larger percentage of U.S. oil trades, but are 
also responsible for a larger dollar amount involved in U.S. 
energy commodity trades.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 14, which appears in the Appendix on page 201.
---------------------------------------------------------------------------
    A fair price is a price that reflects the forces of supply 
and demand for a commodity, not the trading strategies of 
speculators who are only in the market to make a profit by 
buying and selling of paper contracts with no intent to 
actually purchase, deliver, or transfer the commodity. But as 
we have all too often seen in recent years, when speculation 
grows so large that it has a major impact on the market, prices 
get distorted and stop reflecting true supply and demand.
    Last year, our Subcommittee released a bipartisan report 
called ``The Role of Market Speculation in Rising Oil and Gas 
Prices: A Need to Put the Cop Back on the Beat.'' \1\ The 
report found that trading of futures contracts by speculators 
had increased the demand for oil futures, and this additional 
demand for contracts had contributed an additional $20 to the 
price of oil. At the time, the price of oil was about $70 per 
barrel, so speculation was a major contributor to what was then 
thought to be sky-high crude oil prices. Our report recommended 
additional market transparency and stronger market oversight to 
reduce the effects of increased speculation.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 9, which appears in the Appendix on page 130.
---------------------------------------------------------------------------
    Given the hefty increases in speculation in the U.S. oil 
market, we need to know what the effect of all this speculation 
has been on U.S. oil prices. To what extent, for example, has 
dramatically increased speculation contributed to the 
extraordinary jump in prices that we have seen this year? Is 
speculation responsible for about $20 per barrel of oil or 
more? This is a vitally important question. If the 
extraordinary increase in oil prices is not based on actual 
supply and demand, then we need to figure out what role is 
being played by speculation and what steps can be taken to 
restore the market's focus on supply and demand.
    Speculation is not, of course, the only reason for sky-high 
oil prices in 2007. One additional key reason that we want to 
examine is the policy of the Administration relative to adding 
oil to the Strategic Petroleum Reserve (SPR). One of today's 
witnesses, Dr. Philip Verleger, will present his analysis of 
how the Administration's program to fill the SPR with high-
quality crude oil, known as sweet crude, has contributed to the 
recent price increases. He will tell us how the SPR fill 
program has helped deplete supplies of sweet crude normally 
used to fulfill crude oil futures contracts traded on the NYMEX 
and how those reduced supplies have, in turn, pushed up crude 
oil prices.
    There is a third problem, as well, that the SPR fill 
program has exacerbated. The fact that the standard NYMEX 
futures contract that sets the benchmark price for U.S. crude 
oil requires a particular type of high-quality crude oil known 
as West Texas Intermediate (WTI), to be delivered at a 
particular location, which happens to be Cushing, Oklahoma. 
Because the price of the standard contract depends upon the 
supply of WTI, which again is but one type of sweet crude oil, 
the supply and demand conditions in Oklahoma have a 
disproportionate influence on the price of NYMEX futures 
contracts. Four years ago, I called for reform of this outdated 
feature of the standard NYMEX crude contract, but it has never 
been fixed and the problems caused by the standard contract 
have gotten worse.
    The next chart, which is Exhibit 4, shows that in 2007, the 
crude oil inventory in Cushing, Oklahoma, fell.\1\ When that 
inventory crashed, it caused a big supply drop in Oklahoma, 
even though overall U.S. crude oil inventories remained above 
average. But because the Oklahoma supply fell, the benchmark 
price on the NYMEX jumped, since again the NYMEX price depends 
on the supply and demand for oil at Cushing, Oklahoma.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 4, which appears in the Appendix on page 121.
---------------------------------------------------------------------------
    According to Dr. Verleger, it is only sweet crude oil that 
now is in relatively short supply compared to demand, and that 
is part of the reason why oil on the NYMEX has become so 
expensive. Indeed, last month, the difference in price between 
sweet crude oil and some other types of crude oils reached $20, 
$30, or even $40 per barrel in U.S. trading. That is a pretty 
striking price gap.
    Why does it matter that the Administration is depositing 
sweet crude into the SPR? It matters because the price of one 
key type of sweet crude, WTI, determines the price of the 
standard NYMEX contract. The standard NYMEX contract price, in 
turn, is a major influence on the price of fuels refined from 
crude oil, such as gasoline, heating oil, and diesel. That 
means when the WTI price is no longer representative of the 
price of U.S. crude oil in general, the prices of all these 
other commodities are also thrown out of whack.
    And the Department of Energy has made the situation much 
worse by purchasing several million barrels of sweet crude and 
depositing them into the SPR over the past few months. Those 
purchases removed sweet crude from the marketplace and reduced 
the supply of oil available for WTI contracts. And as you can 
see from this chart,\1\ the drop of several million barrels in 
the inventory of crude oil at Cushing since August has been 
accompanied by a huge increase in the price of U.S. crude oil. 
It seems that the only place in the United States where price 
really reflects supply and demand is in Cushing, Oklahoma.
    In the last 4 months, DOE has taken several million barrels 
of sweet crude off the market to fill the SPR, regardless of 
price. If DOE had simply postponed the SPR fill for 1 year, it 
would not only have alleviated the upward pressure on U.S. oil 
prices, but also saved U.S. taxpayers millions of dollars. 
Based on the market and futures prices at the time the DOE 
bought oil for the SPR, DOE could have saved $10 per barrel by 
simply locking in the futures price and deferring current 
deliveries for 1 year. That is because at the time the oil was 
acquired, the futures price for delivering the oil in 1 year 
was about $10 per barrel cheaper than the current price. Since 
the Administration bought enough oil to deposit another 8.7 
million barrels in the SPR, that $10 million price difference 
would have translated into a 1-year taxpayer savings of nearly 
$87 million.
    In light of Congress's direction in the Energy Policy Act 
of 2005 to fill the SPR in a manner that minimizes costs to 
taxpayers and minimizes impacts on oil prices, it is 
incomprehensible why DOE continues to fill the SPR without 
taking advantage of the lower futures prices when they exist.
    This state of affairs raises two questions. First, why is 
DOE contributing to the shortage of sweet crude oil by placing 
it into the SPR and thereby helping boost the standard NYMEX 
price? What's worse, it is our understanding that the DOE 
intends to deposit another 7 million barrels of sweet crude oil 
into the SPR beginning next month. DOE will be taking this 
high-quality oil off the market just at the time when it will 
be in the highest demand to produce gasoline and diesel fuel 
for the spring and summer driving seasons.
    Second, it appears that we have an oil futures market that 
reflects the supply and demand conditions in Oklahoma, but not 
necessarily the overall supply and demand situation in the 
United States as a whole. Our Subcommittee raised this very 
issue in 2003 and called on the CFTC and NYMEX to work together 
to revise the standard NYMEX crude oil futures contract to 
reduce its susceptibility to local imbalances in the market for 
WTI crude oil. The Subcommittee report suggested that allowing 
for delivery at other locations could reduce the volatility of 
the contract. It is truly disappointing that since our report 
was issued, no progress has been made in allowing for delivery 
in other places than Cushing. Again, the price of oil to our 
consumers is higher because of that failure.
    The final problem is that a large portion of trading of WTI 
crude oil now takes place in London, regulated by the British 
authorities under British law. How can we really know what is 
influencing our oil markets when we can't see all the market 
data? Although the CFTC has a data sharing agreement with the 
British authorities, none of this data is available to the 
public. Unlike the U.S. oil futures market, there is no public 
data on how much of the trading occurring in London is done by 
speculators. So a key issue is how can we improve the 
transparency of the crude oil market?
    In addition to stopping the SPR fill, fixing the NYMEX 
contract, and getting information about WTI trades in London, a 
number of us have introduced the Close the Enron Loophole Act 
to improve the transparency of U.S. energy markets. Our bill 
would give the CFTC the authority to police what are now 
unregulated electronic trading markets for large energy 
traders. This vitally needed legislation is more important 
right now for natural gas prices, but there is nothing 
preventing crude oil contracts from being traded on unregulated 
electronic markets, as well, and which took place until 
recently. Many of us are working together to pass this 
legislation as part of the farm bill.
    All of our witnesses today are very knowledgeable about the 
oil markets. I thank all of them for their willingness to 
testify at this joint hearing and we all look forward to their 
testimony.
    I would also like to express particularly my appreciation 
to the Ranking Member of the Permanent Subcommittee, Senator 
Coleman, and his staff for their support in organizing this 
hearing, and to our colleagues on the Senate Energy Committee 
for working together with us to conduct this joint hearing. In 
particular, I want to thank Senators Dorgan and Murkowski of 
the Subcommittee on Energy for all of their efforts. The price 
of oil is an important issue for all of us and our 
constituents, as it affects virtually every aspect of our 
economy. I am glad that we have worked together so closely so 
that we can focus our witnesses and our attention in a single 
forum where this issue can be examined.
    [The prepared statement of Senator Levin follows:]
                OPENING STATEMENT OF SENATOR CARL LEVIN
    Good morning. The Permanent Subcommittee on Investigations and the 
Subcommittee on Energy are conducting a joint hearing into why U.S. oil 
prices keep rising despite what appears to be an adequate U.S. supply 
of oil.
    The price of crude oil recently rose above $99 per barrel, a record 
high. Just before Thanksgiving, the national average price of gasoline 
went over $3.10 per gallon for the second time this year. The price of 
diesel fuel is at a record high, as is the price of home heating oil. 
These record high prices severely hurt millions of Americans and 
American businesses. They raise the cost of virtually everything in our 
daily lives--the gasoline in our cars and trucks, the food we eat, air 
travel, heating our homes and offices, generating electricity, and 
manufacturing countless industrial and consumer products. It is our 
duty in the Congress to do everything we can to ensure that the price 
Americans pay for energy is a fair price.
    Just about a year ago, on January 18, the price of crude oil on the 
New York Mercantile Exchange (NYMEX) was about $50 per barrel. A few 
weeks ago, the NYMEX price reached an all-time high of just over $99 
per barrel. [Exhibit 1] Although the price of oil virtually doubled 
during this period--an unprecedented rise of nearly $50 in just one 
year--the overall inventory of oil in the United States has been above 
the 5-year average for the entire year. [Exhibit 2] It seemingly defies 
the laws of supply and demand to have an astronomical increase in the 
price of oil at the same time the U.S. inventory of oil has stayed 
above average.
    On any given day, we can read in the newspapers or hear on the 
television the familiar explanations for why the price of oil is so 
high. Instability in the Middle East, bad weather affecting oil 
production platforms, civil strife in oil producing countries, the 
declining value of the dollar. These are just a few of the ``usual 
suspects'' that are often cited as the reasons for high prices.
    The problem with these explanations is not that they're false. Most 
of them are true. But most of them been true for some time. 
Unfortunately, instability in the Middle East is not new. There is 
always bad weather somewhere around the globe that affects oil 
production and transportation. There is, unfortunately, a lot of civil 
strife in a number of oil producing countries. The dollar rises, and 
the dollar falls. The world is a dangerous place. These factors alone 
cannot justify a doubling in the price of oil.
    So, what else can help explain record prices? In this hearing we 
will examine some of the other factors that are contributing to the 
high price of oil, as well as what we can do about it.
    One key factor that has contributed to the rise in oil prices over 
the past few years is the virtual explosion of trading of paper 
contracts for oil delivery in future months--trading which is 
speculative and not intended to result in the actual delivery of oil. 
Traders are trading paper oil contracts in record amounts. In the last 
four years we have seen a huge increase in the number of oil futures 
contracts traded on the New York Mercantile Exchange. And there also 
has been tremendous growth of trading of U.S. crude oil in London. As 
Secretary of Energy Bodman recently said, ``The prices for crude oil 
are now set in New York and London and Tokyo, Singapore and other 
trading hubs around the world.''
    Data compiled by the Commodity Futures Trading Commission (CFTC) 
shows that, in the past few years, out of this overall increase in 
energy trading, the amount of trading due to speculation has nearly 
tripled. This next chart shows that in the last few years the 
percentage of oil futures contracts held by speculators has risen from 
around 15% to nearly 45%. [Exhibit 14] These are traders who are solely 
interested in trading for a profit, rather than hedging their positions 
to assure a stable supply at a price they can count on. These energy 
speculators not only comprise a larger percentage of U.S. oil trades, 
but are also responsible for the larger amount of dollars involved in 
U.S. energy commodity trades.
    A fair price is a price that accurately reflects the forces of 
supply and demand for a commodity, not the trading strategies of 
speculators who only are in the market to make a profit for themselves 
by the buying and selling of paper contracts with no intent to actually 
purchase, deliver, or transfer the commodity. But as we have all too 
often seen in recent years, when speculation grows so large that it has 
a major impact on the market, prices get distorted and stop reflecting 
true supply and demand.
    Last year, my Subcommittee released a bipartisan report, ``The Role 
of Market Speculation in Rising Oil and Gas Prices: A Need to Put the 
Cop Back on the Beat.'' The report found that trading of futures 
contracts by speculators had increased the demand for oil futures, and 
this additional demand for contracts had contributed an additional $20 
to the price of oil. At the time the price of oil was around $70 per 
barrel, so speculation was a major contributor to what was then thought 
to be sky-high crude oil prices. Our report recommended additional 
market transparency and stronger market oversight to reduce the effects 
of increased speculation.
    Given the hefty increases in speculation in the U.S. oil market, we 
need to know what the effect of all this speculation has been on U.S. 
oil prices. To what extent, for example, has dramatically increased 
speculation contributed to the extraordinary jump in prices we have 
seen this year? Is speculation responsible for $20 per barrel of oil? 
More? This is a vitally important question. If the extraordinary 
increase in oil prices is not based on actual supply and demand, then 
we need to figure out what role is being played by speculation, and 
what steps can be taken to restore the market's focus on supply and 
demand.
    Speculation is not, of course, the only reason for sky-high oil 
prices in 2007. There's another key reason we want to examine, and that 
is the policy of the Administration relative to adding oil to the 
Strategic Petroleum Reserve (SPR). One of today's witnesses, Dr. Philip 
Verleger, will present his analysis of how the Administration's program 
to fill the SPR with high-quality crude oil, also known as sweet crude, 
has contributed to the recent price increases. He will tell us how the 
SPR fill program has helped deplete supplies of sweet crude normally 
used to fulfill crude oil futures contracts traded on the NYMEX, and 
how those reduced supplies have, in turn, pushed up crude oil prices.
    There's a third problem as well that the SPR fill program has 
exacerbated--the fact that the standard NYMEX futures contract that 
sets the benchmark price for U.S. crude oil requires a particular type 
of high quality crude oil known as West Texas Intermediate (WTI) to be 
delivered at a particular location, Cushing, Oklahoma. Because the 
price of the standard contract depends upon the supply of WTI, which 
again is but one type of sweet crude oil, the supply and demand 
conditions in Oklahoma have a disproportionate influence on the price 
of NYMEX futures contracts.
    Four years ago, I called for reform of this outdated feature of the 
standard NYMEX crude oil contract, but it has never been fixed and the 
problems caused by the standard contract have gotten worse. This next 
chart [Exhibit 4] shows that in 2007, the crude oil inventory in 
Cushing, Oklahoma, fell. When that inventory crashed, it caused a big 
supply drop in Oklahoma, even though overall U.S. crude oil inventories 
remained above average. But because the Oklahoma supply fell, the 
benchmark price on the NYMEX jumped, since, again, the NYMEX price 
depends on the supply and demand for oil at Cushing, Oklahoma.
    According to Dr. Verleger, it is only sweet crude oil that now is 
in relatively short supply compared to demand, and that is part of the 
reason why oil traded on the NYMEX has become so expensive. Indeed, 
last month, the difference in price between sweet crude oil and some 
other types of crude oils reached $20, $30, even $40 per barrel in U.S. 
trading. That's a striking price gap.
    Why does it matter that the Administration is depositing sweet 
crude into the SPR? It matters because the price of one key type of 
sweet crude, WTI, determines the price of the standard NYMEX contract. 
The standard NYMEX contract price, in turn, has a major influence on 
the price of fuels refined from crude oil such as gasoline, heating 
oil, and diesel. That means when the WTI price is no longer 
representative of the price of U.S. crude oil in general, the prices of 
all of these other commodities are also thrown out of whack.
    And DOE has made the situation much worse by purchasing several 
million of barrels of sweet crude and depositing them into the SPR over 
the past few months. Those purchases remove sweet crude from the 
marketplace and reduce the supply of oil available for WTI contracts. 
As you can see from the chart, the drop of several million barrels in 
the inventory of crude oil at Cushing since August has been accompanied 
by a huge increase in the price of U.S. crude oil. [Chart 4]. It seems 
that the only place in the United States where price really reflects 
supply and demand is in Cushing, Oklahoma.
    In the last four months, DOE has taken several million barrels of 
sweet crude off the market to fill the SPR, regardless of price. If DOE 
had simply postponed the SPR fill for one year, it would have not only 
alleviated the upward pressure on U.S. oil prices, but also saved U.S. 
taxpayers millions of dollars. Based on the market and futures prices 
at the time the DOE bought oil for the SPR, for example, DOE could have 
saved $10 per barrel by simply locking in the futures price and 
deferring current deliveries for one year. That's because at the time 
the oil was acquired, the futures price for delivering the oil in one 
year was about $10 per barrel cheaper than the current price. Since the 
Administration bought enough oil to deposit another 8.7 million barrels 
in the SPR, that $10 price difference would have translated into a one-
year taxpayer savings of nearly $87 million. In light of Congress's 
direction in the Energy Policy Act of 2005 to fill the SPR in a manner 
that minimizes costs to taxpayers and minimizes impacts on oil prices, 
it is incomprehensible why DOE continues to fill the SPR without taking 
advantage of the lower futures prices.
    This state of affairs raises two questions. First, why is DOE 
contributing to the shortage of sweet crude oil by placing it into the 
SPR, and thereby helping boost the standard NYMEX price? What's worse, 
it is our understanding that DOE intends to deposit another 7 million 
barrels of sweet crude oil into the SPR beginning next month. DOE will 
be taking this high-quality oil off the market just at the time when it 
will in the highest demand to produce gasoline and diesel fuel for the 
spring and summer driving seasons.
    Second, it appears that we have an oil futures market that reflects 
the supply and demand conditions in Oklahoma, but not necessarily the 
overall supply and demand situation in the United States as a whole. 
Our Subcommittee raised this very issue in 2003, and called on the CFTC 
and NYMEX to work together to revise the standard NYMEX crude oil 
futures contract to reduce its susceptibility to local imbalances in 
the market for WTI crude oil. The Subcommittee report suggested that 
allowing for delivery at other locations could reduce the volatility of 
the contract. It is truly disappointing that since our report was 
issued no progress has been made in allowing for delivery in other 
places than Cushing. Again, the price of oil to our consumers is higher 
because of that failure.
    A final problem is that a large portion of trading of WTI crude oil 
now takes place in London, regulated by the British authorities under 
British law. How can we really know what is influencing our oil markets 
when we can't see all of the market data? Although the CFTC has a data-
sharing agreement with the British authorities, none of this data is 
available to the public. Unlike the U.S. oil futures market, there is 
no public data on how much of the trading occurring in London is done 
by speculators. So a key issue is how can we improve the transparency 
of the crude oil market?
    In addition to stopping the SPR fill, fixing the NYMEX contract, 
and getting information about WTI trades in London, a number of us have 
introduced the ``Close the Enron Loophole Act'' to improve the 
transparency of U.S. energy markets Our bill would give the CFTC the 
authority to police what are now unregulated electronic trading markets 
for large energy traders. This vitally needed legislation is more 
important right now for natural gas prices, but there is nothing 
preventing crude oil contracts from being traded on unregulated 
electronic markets as well, and which took place until recently. Many 
of us are working together to pass this legislation as part of the Farm 
Bill.
    All of our witnesses today are very knowledgeable about the oil 
markets. I thank all of them for their willingness to testify at this 
joint hearing. I look forward to their testimony.
    I would also like to express my appreciation to the Ranking Member 
of the Permanent Subcommittee, Senator Coleman, and his staff, for 
their support in organizing this hearing, and to our colleagues on the 
Senate Energy Committee for working together with us to conduct this 
joint hearing. I want to particularly thank Senators Dorgan and 
Murkowski of the Subcommittee on Energy for their efforts. The price of 
oil is an important issue for all of us and our constituents, as it 
affects virtually every aspect of our economy. I am glad that we have 
been able to work together so we can focus our witnesses and our 
attention in a single forum where this issue can be examined.

    Senator Levin. Senator Dorgan.

              OPENING STATEMENT OF SENATOR DORGAN

    Senator Dorgan. Mr. Chairman, thank you very much. We were 
intending to hold a hearing in our Subcommittee this very week 
with some of the same witnesses, and when we saw that you were 
holding this hearing, we suggested that it be joint. I very 
much appreciate your cooperation. I think this is a very 
important hearing.
    The Close the Enron Loophole Bill is essential. I chaired 
the hearings in the Commerce Committee where Ken Lay came and 
took the Fifth Amendment. I chaired a good number of hearings 
on Enron in that Commerce Subcommittee and know a fair amount 
about what happened back then. No one is suggesting there is an 
equivalent set of actions here. We now know that what happened 
with respect to the Enron loophole is that markets were 
manipulated. Billions of dollars were extracted from the 
pockets of the victims, that is the consumers, particularly on 
the West Coast. We know that it was criminal activity and a 
criminal enterprise now. But we know that much of that was able 
to take place outside of the view of regulators.
    This question of the price of oil on the futures market 
raises the same sort of issues, and long past the time when we 
discovered Enron was a criminal enterprise, we have not yet 
closed the Enron loophole that allowed all that activity to 
take place outside of the view of regulators. I am proud to be 
a cosponsor, Mr. Chairman, of that legislation.
    There is not a free market in oil. With the substantial 
blockbuster mergers in the oil industry, the companies have 
more power and more muscle in the marketplace. The OPEC nations 
control 40 percent of the world's oil supply, including the 
faucet that feeds much of our oil addiction. Ninety percent of 
the oil is controlled by companies that are at least partially 
or wholly state-owned, and, of course, that moves them away 
from some of the market principles. And finally, the 
commodities futures market, in my judgment, has become an orgy 
of financial speculation, a carnival of greed almost, and I 
believe it is substantially increasing the market price for a 
barrel of oil.
    I used to teach a little economics, and some might hear 
that statement and say, well, it must have been very little, 
but I will say this. There are some, I think, thoughtful 
economists who take a look at what is happening in the futures 
market and say that this has become an unbelievable amount of 
speculative activity that is driving up the price of oil, 
having very little to do with supply and demand.
    There is so much money sloshing around in these markets 
these days. Hedge funds are up hip deep into these markets. 
Investment banks are also into these markets. I don't know 
because I haven't investigated it, but I have read 
investigative reports that investment banks in some cases are 
even constructing storage facilities in order to store oil, 
keep it off the market, anticipating the market price will 
increase. That means you reduce supply, and as you reduce 
supply, drive up price and hold oil for profits later. These 
are people that don't want to buy any oil. They don't want to 
ever own any oil except on paper, but they want to be in the 
futures market to be speculators and make a lot of money.
    Now, Mr. Chairman, if I might show Exhibit No. 18 \1\ 
first, your Subcommittee did some extraordinary work in 
detailing the Amaranth issue. A 32-year-old energy trader 
helped to lead to the collapse of an $8 billion hedge fund. 
This is in natural gas. You all did this. It was interesting to 
me, why is it that you were able to dig this out and the 
referees, the people that are supposed to wear the striped 
shirts, the people that are paid on the public payroll, didn't 
know this. Why is it that the regulators couldn't see this? It 
is because we have a system in which they are prevented from 
knowing what happens on the unregulated exchanges.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 18, which appears in the Appendix on page 205.
---------------------------------------------------------------------------
    And so if I might see Exhibit No. 16,\1\ after I read about 
Amaranth and the work that you had done on this Subcommittee, 
which seems to me to just be ``case closed'' in terms of should 
we do something, CNNMoney.com had this on it. It said, ``It has 
been rumored that Goldman Sachs has over $80 billion in the 
market. Its influence is so big traders refer to the day of the 
month when the bank sells the current month contract and buys 
the future month as the `Goldman roll' due to its effect on 
price.'' Once again, the notion of big investment banks being 
involved in this speculative market.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 16, which appears in the Appendix on page 203.
---------------------------------------------------------------------------
    That is a change. That is new. And it dramatically affects 
the market in a way that is not related to ordinary supply and 
demand relationships. So something is wrong.
    I support the marketplace. I think it is a wonderful thing. 
When it works well, it is the best allocator of goods and 
service. And you must have a futures market for liquidity and 
so on. But it seems to me that the case has been made that we 
have a circumstance now where there is no shortage of oil. We 
can make a case that, yes, China is going to have 100 million 
additional cars on the road in 15 years and has demand. You can 
make lots of cases that we are going to be short of oil in the 
future. I understand that.
    But look at the fundamentals now and evaluate. Are we short 
of oil? What would cause these prices to move up and bob around 
at $90 and $100 a barrel? The cause, in my judgment, is 
unbelievable speculation and unregulated over-the-counter 
markets that leaves this country and the markets open to market 
manipulation of oil prices.
    We need to give the CFTC the broader ability to prevent 
fraud, manipulation, excessive speculation in these commodity 
markets, and a good start in doing that is the Close the Enron 
Loophole bill. If there is a legal loophole that can be 
exploited, our experience having served in Congress and 
watching this is it will be exploited. When we see it being 
exploited, we have a responsibility to change it.
    If price increases in oil are due to supply and demand 
imbalances, then economic policies can be developed to 
encourage investments in new energy sources and conservation. 
If price increases are due to geopolitical factors in producer 
countries, then you develop foreign policies to try to respond 
to that. If price increases are due to hurricane damage that 
damage investments, then you can develop other kinds of 
approaches in Congress to respond to that. But to the extent 
that energy prices are the result of excessive speculation, 
only a cop on the beat, only an effective regulator with the 
tools to regulate, with both oversight and enforcement 
authority, is going to solve this problem.
    So, Mr. Chairman, I thank you. I am pleased to join you. 
And once again, I see no justification in the marketplace for 
oil prices to reach $100 a barrel. I think there is a carnival 
of speculation out there that is unhealthy for this country and 
this Congress has a responsibility to give regulators the tools 
they need.
    Senator Levin. Thank you so much, Senator Dorgan. Senator 
Coleman.

              OPENING STATEMENT OF SENATOR COLEMAN

    Senator Coleman. Thank you, Mr. Chairman. Over the past 5 
years, the Permanent Subcommittee on Investigations has 
conducted a number of investigations into volatility and price 
increases in essential U.S. energy commodities, including 
natural gas, gasoline, and crude oil. These investigations have 
examined not only the role of market speculation in rising 
energy prices, but also the adequacy of government oversight in 
the markets that set these prices.
    Today's hearing, which focuses on the impact of market 
speculation on crude oil prices, continues the Subcommittee's 
bipartisan effort to ensure the integrity of U.S. energy 
prices. As always, I would like to thank Chairman Levin and his 
staff for their hard work on these issues.
    Americans are upset because they are paying more for oil 
than ever before, and a lot of people are concerned that 
speculation is behind the record price surge. Today's hearing 
is an important step in addressing these concerns and an 
important reminder that high energy prices affect all 
Americans.
    Over the past several years, U.S. oil and gas markets have 
experienced unprecedented volatility and significant price 
increases. Since 2000, the price of crude oil has jumped from a 
range of $25 to $30 per barrel to over $90 per barrel. And 
since last year alone, crude oil prices have increased by $20 
to $30 per barrel, often approaching a staggering $100 per 
barrel.
    Record high crude oil prices have affected everything from 
home heating bills to holiday travel, and American families and 
small businesses are feeling the squeeze. Today, the cost of 
gasoline at the pump hovers around $3 a gallon. Diesel fuel, 
which is often used by trucking companies and delivery 
services, remains even higher. And of particular concern back 
home in Minnesota, the cost of heating oil continues to rise.
    As a Senator from the Midwest, I know all too well that 
heating bills will place millions of Americans in financial 
jeopardy this winter. I will never forget the testimony I heard 
during the Subcommittee's field hearing in St. Paul last year. 
Too many Americans find themselves in similar circumstances to 
Deidre Jackson and Lucille Olsen, who testified about the 
burdens caused by rising energy costs. In the case of Ms. 
Olsen, her home heating bill represented 30 percent of her 
monthly income. As a senior citizen trying to cope with the 
high cost of health insurance and prescription drugs, last 
year's spikes in energy prices made it difficult for her to 
make ends meet. Ms. Jackson, a working mother of three and a 
college student, shared with me the financial jeopardy she 
faced as a result of a home heating bill that increased by more 
than 100 percent.
    As crude oil prices have soared to record levels, Ms. 
Jackson's and Ms. Olsen's testimony provided powerful reminders 
of the real world impacts of high energy prices. In the short 
term, this situation means there is a lot of hardship for a lot 
of folks who can't afford double-digit heating increases, and I 
have got to tell you, in Minnesota, where I have already been 
shoveling snow--it was minus-9 in St. Paul not too long ago, 
and I think minus-27 in Northern Minnesota--there is going to 
be a great impact. So it is important that Congress consider 
the factors that have contributed to the record price run-up.
    The Department of Energy has announced larger than expected 
stockpiles of both crude oil and gasoline, and most experts 
agree that there is no overall shortage of U.S. crude. 
Nevertheless, oil prices remain at near record highs, 
suggesting that forces other than supply and demand may have 
contributed to these increases.
    People are concerned that speculative trading is the reason 
for the unprecedented price surge for crude oil. We have called 
today's hearing to specifically address these concerns.
    A number of Subcommittee investigations have focused on the 
troubling level of high-risk speculative trading that occurs on 
U.S. energy markets, much of it on unregulated over-the-counter 
energy exchanges exempted from government oversight. Financial 
institutions, pension funds, hedge funds, and other speculative 
investors have deployed tens of billions of dollars in 
speculative capital to U.S. crude oil markets. These traders 
bring important liquidity and vitality to our energy markets, 
but they should not be allowed to overwhelm the real buyers and 
sellers of crude oil, including utilities and industrial users. 
For this reason, it is imperative that Congress provide 
regulators with the statutory authority and budget necessary to 
police our energy markets and ensure the integrity of our 
energy prices.
    That said, it is still hard to pin the run-up on crude oil 
on speculation run amok. The markets still appear to respond to 
supply and demand fundamentals. Last year, as Chairman Levin 
noted, our report highlighted the impact of speculation on the 
price of oil and gas. Again, though, as we look at it in terms 
of responding to fundamentals, it appears that the long-term 
underlying trend for crude oil is that demand is increasing 
while supply remains tight. Geopolitical instability, including 
uncertain situations in Iraq and Iran, have created fears of 
potential supply disruption and a substantial risk premium has 
been built into current prices.
    Beyond those temporary concerns, global demand for crude 
oil fueled by China and India's development continues to 
increase, leaving many investors worried that global supplies 
cannot keep pace with demand. Add to these concerns the fact 
that our refining capacity cannot satisfy projected demand, and 
it becomes clear that there is more behind high crude oil 
prices than just market speculation.
    Oil prices are at record highs because the United States 
and the rest of the world are consuming oil at unprecedented 
levels. It is a matter of when, not if, global supplies will be 
unable to meet our demand. And we here in Congress cannot 
forget that we are part of the problem.
    The Chairman noted and went through with great detail the 
impact on cost of putting sweet crude oil into the strategic 
reserve. I intend to question the witnesses about this. There 
are concerns about whether there are environmental regulations 
that impact this. But clearly, that is from a micro perspective 
part of the problem.
    We also have to look at the macro. We have not taken the 
necessary steps to reduce our dependence on foreign oil. More 
than ever before, it is imperative that we explore alternative 
sources of energy. At the same time, the U.S. Congress must 
work to ensure the integrity of U.S. energy markets by 
providing regulators, as I said before, with the statutory 
authority and resources necessary to do their job. As we do so, 
we must protect competition and avoid unintended consequences, 
namely creating incentives for investors to move to less-
transparent energy markets, including those offshore.
    Just one last comment on this, kind of the macro issue. As 
we deal with the cost of oil today, one of the things that I 
can't forget is that in the early 1970s, this country went 
through a run-up in the cost of gasoline, went through long 
lines, and for a moment it appeared that we would do something 
about it. Brazil went through the same thing. In 1970, they 
embarked on a course of ending their country's dependence on 
foreign oil and what happened is despite then the rises and 
falls in the price of gas and a barrel of oil, Brazil stayed on 
course and today is in a situation where they don't have to 
import foreign oil. It is hard to buy a car in Brazil that is 
not a flex-fuel engine.
    In this country, unfortunately, as prices dropped, it 
pulled the market out of a lot of alternative sources of 
energy, and 30 years later, we find ourselves still kind of at 
the starting gate. I think whatever we do here, that we have to 
take a long-term perspective and understand that we have to end 
dependence on foreign oil.
    So I hope as we address the situation this winter, that we 
are looking five, ten winters ahead so that the generation 
after me doesn't come up to the plate and find themselves in 
the same situation.
    Again, I would like to thank Chairman Levin for initiating 
today's bipartisan hearing. I would like to thank today's 
witnesses for their testimony on these important issues. Thank 
you, Mr. Chairman.
    [The prepared statement of Senator Coleman follows:]
               OPENING STATEMENT OF SENATOR NORM COLEMAN
    Over the past five years, the Permanent Subcommittee on 
Investigations has conducted a number of investigations into volatility 
and price increases in essential U.S. energy commodities, including 
natural gas, gasoline, and crude oil. These investigations have 
examined not only the role of market speculation in rising energy 
prices, but also the adequacy of government oversight in the markets 
that set these prices. Today's hearing, which focuses on the impact of 
market speculation on crude oil prices, continues the Subcommittee's 
bipartisan effort to ensure the integrity of U.S. energy prices. As 
always, I would like to thank Chairman Levin and his staff for their 
hard work on these issues. Americans are upset that they are paying 
more for oil than ever before, and a lot of people are concerned that 
speculation is behind the record price surge. Today's hearing is an 
important step in addressing these concerns and an important reminder 
that high energy prices affect all Americans.
    Over the past several years, U.S. oil and gas markets have 
experienced unprecedented volatility and significant price increases. 
Since 2000, the price of crude oil has jumped from a range of $25-$30 
per barrel to over $90 per barrel. In the last year alone, crude oil 
prices have increased by a $20-$30 per barrel, often approaching a 
staggering $100 per barrel.
    Record high crude oil prices have affected everything from home 
heating bills to holiday travel, and American families and small 
businesses are feeling the squeeze. Today, the cost of gasoline at the 
pump hovers around $3 a gallon. Diesel fuel, which is often used by 
trucking companies and delivery services, remains even higher. And of 
particular concern back home in Minnesota, the cost of heating oil 
continues to rise.
    As a Senator from the Midwest, I know all to well that heating 
bills will place millions of Americans in financial jeopardy this 
winter. I will never forget the testimony I heard during the 
Subcommittee's field hearing in St. Paul last year. Too many Americans 
find themselves in circumstances similar to Deidre Jackson and Lucille 
Olson, who testified about the burdens caused by rising energy costs. 
In the case of Ms. Olson, her home heating bill represented 30 percent 
of her monthly income. As a senior citizen trying to cope with the high 
costs of health insurance and prescription drugs, last year's spikes in 
energy prices made it difficult for her to make ends meet. Ms. Jackson, 
a working mother of three and a college student, shared with me the 
financial jeopardy she faced as a result of a home heating bill that 
had increased by more than 100 percent. As crude oil prices soar to 
record levels, Ms. Jackson's and Ms Olson's testimony provided powerful 
reminders of the real-world impacts of high energy prices.
    In the short-term, this situation means there is a lot of hardship 
for a lot of folks who can't afford double-digit heating cost 
increases. It is critical that Congress examine the factors that have 
contributed to the record price run-up. The Department of Energy has 
announced larger-than-expected stockpiles of both crude oil and 
gasoline, and most experts agree that there is no overall shortage of 
U.S. crude. Nevertheless, oil prices remain at near record highs, 
suggesting that forces other than supply and demand may have 
contributed to these increases.
    People are concerned that speculative trading is the reason for the 
unprecedented price surge for crude oil. We have called today's hearing 
to specifically address these concerns. A number of Subcommittee 
investigations have focused on the troubling level of high-risk, 
speculative trading that occurs on U.S. energy markets--much of it on 
unregulated, over-the-counter energy exchanges, exempted from 
government oversight. Financial institutions, pension funds, hedge 
funds, and other speculative investors have deployed tens of billions 
of dollars in speculative capital to U.S. crude oil markets. These 
traders bring important liquidity and vitality to our energy markets, 
but they should not be allowed to overwhelm the real buyers and sellers 
of crude oil, including utilities and industrial users. For this 
reason, it is imperative that Congress provide regulators with the 
statutory authority and budget necessary to police our energy markets 
and ensure the integrity of our energy prices.
    That said, it is still hard to pin the price run-up for crude oil 
on speculation run amuck. The markets still appear to be responding to 
supply and demand fundamentals. The long-term underlying trend for 
crude oil is that demand is increasing while supply remains tight. 
Geopolitical instability, including uncertain situations in Iraq and 
Iran, has created fears of potential supply disruptions, and a 
substantial ``risk premium'' has been built into current prices. Beyond 
those temporary concerns, global demand for crude oil, fueled by China 
and India's development, continues to increase, leaving many investors 
worried that global supplies cannot keep pace with demand. Add to these 
concerns the fact that our refining capacity cannot satisfy our 
projected demand and it becomes clear that more is behind high crude 
oil prices than market speculation.
    Oil prices are at record highs because the U.S. and the rest of the 
world are consuming oil at unprecedented levels. It is a matter of 
when, not if, that global supplies will be unable to meet our demand. 
And we here in Congress cannot forget that we are part of the problem. 
We have not taken the necessary steps to reduce our dependence on 
foreign oil. More than ever before, it is imperative that we explore 
alternative sources of energy. Moreover, Congress must work to ensure 
the integrity of U.S. energy markets by providing regulators with the 
statutory authority and resources necessary to do their jobs. As we do 
so, however, we must protect competition and avoid unintended 
consequences--namely, creating incentives for investors to move to less 
transparent energy markets, including those offshore.
    Again, I would like to thank Chairman Levin for initiating today's 
bipartisan hearing. I would like to thank today's witnesses for their 
testimony on these important issues.

    Senator Levin. Thank you so much, Senator Coleman. Senator 
Murkowski.

             OPENING STATEMENT OF SENATOR MURKOWSKI

    Senator Murkowski. Thank you, Mr. Chairman, and thank you 
to the panel here before us this morning. I appreciate your 
being here. I do believe that your testimony this morning will 
be very helpful to us as we seek to determine whether 
increasing demand, market speculation, or a combination of 
those and other factors have led us to where we are today, with 
the price of crude oil approaching really an all-time high.
    In looking at how oil is traded, it is also important to 
focus on the basic fundamentals of the market. In the global 
market, the price of oil is set by supply and demand 
conditions. Economics 101 teaches us that when demand is high 
and supply is low, the market will see an increase in price. 
So, therefore, even as we examine the possible role that 
speculation has played in the increase of crude oil prices, we 
must not lose sight of the fact that high oil prices are being 
driven by a lot of different factors out there. These include 
the increases in global oil demand, reduced supply, ongoing 
geopolitical concerns, and decreased refinery capacity. We all 
know that oil demand in China, for example, appears to be 
continuing its recent double-digit advances.
    Since the beginning of this year, oil prices have increased 
by nearly 40 percent, and while this is very steep, it is not 
unprecedented. Over the past 10 years, crude oil prices have 
increased by approximately 370 percent. Much of this increase 
occurred in the absence of heavy trading and is broadly 
attributed to the increase in global demand.
    According to the EIA, global demand for oil is projected to 
rise by 1.1 million barrels per day in 2007 and 1.5 million 
barrels per day in 2008. Total U.S. petroleum consumption is 
expected to increase by 0.5 percent in 2007 and 1 percent in 
2008. This increase, which has brought the demand levels much 
closer to supply levels, can be connected to the economic 
growth of the United States and to colder winter temperatures, 
which will continue to boost the demand for our heating oil.
    So with the high prices and the growing consumption, we 
have got to figure out ways that we can increase our domestic 
production. Currently, the OPEC countries continue to be the 
largest oil producing countries and hold the largest percent of 
oil reserves. Seventy-seven percent of the world's oil reserves 
are located outside of the United States. Since November 2007, 
OPEC's production has decreased by 1.2 million barrels per day, 
partially the result of political instability in Nigeria, 
Venezuela, and Iran. We know that events in these countries 
have directly contributed to and quite honestly become a 
constant factor in higher crude oil prices.
    Also related to the topic of increasing supply is the need 
to increase our ability to refine the supply and to diversify 
the places where refining takes place. EIA has reported that 
the current domestic refinery capacity expansion plan estimates 
approximately one million barrels per day by 2012. This is the 
equivalent of five new refineries. Our domestic refining 
capacity is growing, but not as quickly as we would hope that 
it would.
    So we need to find ways to increase capacity at existing 
refineries more quickly, and we also need to explore and 
promote ways to build new refineries in places outside of the 
Gulf of Mexico. We look back to Hurricane Katrina and certainly 
realize that that made us painfully aware that the lack of 
refining capacity in this country must be addressed. We have 
got to ensure that new refineries are built. If we don't 
address the need for more refinery capacity in the United 
States, our dependence on our imports for petroleum products 
will continue to increase, our record trade deficit will grow 
even larger as we have to import more finished products, and 
the number of skilled jobs lost from the construction, 
operation, and maintenance of domestic refineries will 
increase.
    So in spite of the increase in oil and petroleum costs, 
global oil markets will likely remain tight as world oil 
demands continue to grow. The best way to continue to address 
this issue is to increase domestic production, promote 
alternative fuels, and conserve greater amounts of energy, no 
great revelation there. Certainly as an Alaska Senator, I would 
be remiss if I didn't take an opportunity to urge that in this 
Nation as we look to increased domestic production that we look 
to the Arctic Coastal Plain. We also need to increase 
development in the Outer Continental Shelf and to increase oil 
shale production in the West.
    I do appreciate the significance, the timing of this 
hearing this morning, the willingness to hold the hearing to 
examine crude oil speculation in greater detail, but I also 
view this as an opportunity to recognize that while speculation 
may contribute to high oil prices, it is just one piece in a 
much larger puzzle.
    So again, Mr. Chairman, I appreciate you convening this 
joint hearing this morning and look forward to the testimony 
from all. Thank you.
    [The prepared statement of Senator Murkowski follows:]
              OPENING STATEMENT OF SENATOR LISA MURKOWSKI
    Welcome. I want to thank our panel of witnesses for taking time out 
of their busy schedules to join us today. Your testimony will be 
invaluable as we seek to determine whether increasing demand, market 
speculation, or a combination of those and other factors have led the 
price of crude oil to approach its all-time high.
    As oil prices approached the $100 per barrel mark, the media began 
to draw attention to financial energy market activity. Market analysts 
began to question whether supply and demand, coupled with geopolitical 
instability and a number of short-term incidents, were enough to drive 
crude prices as high as they are.
    This prompted those of us in Congress, private industry, and 
consumers to begin a similar debate, and to seek answers about the 
effects that energy trading has on the price of crude oil and its 
supply. Some have now concluded that energy prices are pushed and 
sustained at high levels because of speculation, and that the large 
privately owned oil companies and financial banks are manipulating the 
market.
    Oil is the world's most actively traded global commodity, and there 
are several different ways it can be traded. For example, oil can be 
traded on the ``spot'' market, which involves transactions for 
immediate or short-term delivery of oil at a specific site. Oil can 
also be traded through futures contracts, which are agreements to 
purchase or sell a given amount of crude oil at a price determined when 
the agreement is reached.
    Futures contracts can be traded in two venues: 1) on the New York 
Mercantile Exchange (NYMEX) which is traded in units of 1,000 barrels 
of oil to be delivered at Cushing, Oklahoma, and 2) off the exchange in 
over-the-counter (OTC) transactions, which often occur through voice-
brokers or online market platforms. Traders in each of these markets 
must follow certain guidelines, although the level of regulatory 
scrutiny that applies depends on the market in which the oil is traded 
in.
    The requirements for future energy contracts are laid out in the 
Commodity Exchange Act (CEA), last amended in 2000 with passage of the 
Commodity Futures Modernization Act. These requirements include record-
keeping and reporting, market surveillance, curbs on excessive 
speculation, and the establishment of various financial standards. And 
even though OTC contracts are traded without Commodity Futures Trading 
Commission oversight under current law, they are still subject to the 
CEA antifraud and anti-manipulations provisions.
    In looking at how oil is traded, it is also important to focus on 
the fundamental basics of the market. In the global market, the price 
of oil is set by supply and demand conditions. Economics 101 teaches us 
that when demand is high and supply is low, the market will see an 
increase in price; when supply outpaces demand, the price of the 
commodity will decrease. Therefore, even as we examine the possible 
role speculation has played in the increase of crude oil prices, we 
must not lose sight that high oil prices are being driven by many 
factors. These include increases in global oil demand, reduced supply, 
ongoing geo-political concerns, and decreased refinery capacity.
    Since the beginning of this year, oil prices have increased by 
nearly 40 percent. While steep, this is not unprecedented--over the 
past 10 years, crude oil prices have increased by approximately 370 
percent. Much of this increase occurred in the absence of heavy trading 
and is broadly attributed to the increase in global demand. According 
to the Energy Information Administration, or EIA, global demand for oil 
is projected to rise by 1.1 million barrels per day in 2007 and 1.5 
million barrels per day in 2008. Total U.S. petroleum consumption is 
expected to increase by 0.5% in 2007 and 1.0% in 2008. This increase, 
which has brought demand levels much closer to supply levels, can be 
connected to the economic growth of the U.S. and to colder winter 
temperatures, which will continue to boost demand for heating oil.
    With high prices and growing consumption, we need to find ways to 
increase our domestic production. Even though U.S. oil production is 
projected to average 5.1 million barrels per day in 2007, which is an 
increase of 0.3% from 2006 production levels, this is just a portion of 
the supply needed to meet the demand. And unfortunately this country 
still relies heavily on foreign oil imports and so the Organization of 
the Petroleum Exporting Countries (OPEC) needs to increase supply 
production to fill in the gap.
    Currently, OPEC countries continue to be the largest oil producing 
countries and hold the largest percent of oil reserves. 77% of the 
world's oil reserves are located outside of the U.S., with a large 
portion held by national or state-owned oil companies. These reserves 
are considerably larger than the reserves owned by ExxonMobil, the 
largest multinational oil company. Yet, since November 2006, OPEC has 
decreased production by 1.2 million barrels per day, partially because 
of political instability in Nigeria, Venezuela, and Iran. Events in 
these countries have directly contributed to, and become a constant 
factor in, higher crude oil prices.
    Related to the topic of increasing supply is the need to increase 
our ability to refine the supply, and to diversify the places where 
refining takes place. EIA reports that current domestic refinery 
capacity expansion plan estimates are approximately 1 million barrels 
per day by 2012, equivalent to five new refineries. But this figure is 
one-third lower than EIA's estimate in 2006, which projected refinery 
capacity of 1.5 million barrels per day in 2012. So domestic refining 
capacity is declining, but demand is still increasing.
    We need to find ways to increase capacity at existing refineries. 
We need to explore, and promote, ways to build new refineries in places 
outside the Gulf of Mexico. Less capacity will not restrain demand--it 
will restrict supply, and ultimately increase prices at the pump. When 
supply and demand are tight, there is also little flexibility to 
accommodate unplanned refinery outages, which could have dangerous 
consequences.
    Hurricane Katrina made it painfully clear that the lack of refining 
capacity in this country must be addressed. Almost 50% of the U.S. 
refinery capacity is located in the Gulf Coast. Hurricane Katrina shut 
down 10% of U.S. refinery capacity. We did not have spare space at 
other refineries to absorb that shock. Over the past several years, 
refineries have been consistently running close to 90 percent capacity 
utilization, compared to 78 percent utilization in 1985.
    We need to ensure that new refineries are built. If we do not 
address the need for more refinery capacity in the United States:

      our dependence on imports for petroleum products will 
continue to increase,
      our record trade deficit will grow even larger as we have 
to import more finished products, and
      the number of skilled jobs lost from the construction, 
operation and maintenance of domestic refineries will increase, 
depriving hardworking Americans of a chance to earn a good living.

    In spite of the increase in oil and petroleum costs, global oil 
markets will likely remain tight as world oil demands continue to grow. 
The best way to address this continuing issue is to increase domestic 
production, promote alternative fuels, and conserve greater amounts of 
energy.
    As an Alaska Senator I would like to see development occur on shore 
from the Arctic coastal plain in Alaska. We also need to increase 
development in the outer continental shelf and to increase oil shale 
production in the West.
    Mr. Chairmen, I appreciate your willingness to hold this hearing 
and examine crude oil speculation in greater detail. But this is also 
an opportunity to recognize that while speculation may contribute 
something to high oil prices, it is just one piece of a much larger 
puzzle. Those of us in Congress have a responsibility to ensure 
affordable energy for all Americans, but we will not succeed in this 
effort until we examine and address every factor which could be behind 
high prices. I look forward to hearing from today's witnesses, and, 
going forward, to working with the members of these Subcommittees to 
resolve this serious matter.

    Senator Levin. Thank you, Senator Murkowski.
    Let me now call upon the Ranking Member of the Homeland 
Security Committee, Senator Collins, and then we will call on 
the other Senators who are here in the order of their 
appearance for their opening statements, if they have any. 
Senator Collins.

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. Thank you. Thank you, Mr. Chairman. Long 
before the first official day of winter, the people of my State 
of Maine have been coping with cold weather and feeling the 
strain of high prices for home heating oil, gasoline, diesel 
fuel, and other products refined from fuel. According to the 
Energy Information Administration, last month, the benchmark 
price for a barrel of domestic crude oil averaged nearly $95. 
Compare that to $59 for November a year ago and you see a 
startling increase in a single year.
    That remarkable rise touches virtually every aspect of our 
economy. Oil prices significantly affect the costs of heating 
homes, driving family cars and commercial trucks, running 
fishing boats, operating farm and logging equipment, flying 
airplanes, making fertilizers, manufacturing plastics--the list 
goes on and on.
    Many causes contribute to the sharp rise in oil prices: 
Increased global demand for crude oil, instability in the 
Middle East and Venezuela, supply decisions of the OPEC cartel, 
insufficient U.S. refining capacity, the declining value of the 
dollar, and speculative trading on future markets.
    I would note that Chairman Levin and I joined forces a few 
years ago on a bipartisan amendment directing the Department of 
Energy to better manage the Strategic Petroleum Reserve. We 
worked on legislation, which I was proud to be the cosponsor of 
Senator Levin's proposal, that the DOE should suspend purchases 
when prices were high so as not to further drive up prices by 
taking oil off the market. Now I question whether the intent of 
our amendment has been realized in the implementation by the 
Department of Energy.
    Our paramount challenge, of course, is to reduce our over-
reliance on imported oil. That dependence threatens our 
economic and national security. We need to pursue the long-term 
goal of energy independence just as fervently as the Nation 
embraced President Kennedy's goal in 1961 of putting a man on 
the moon.
    In the meantime, however, we must increase funding for the 
Low-Income Heating Assistance Program and take other actions to 
ease the current impact of high prices. For example, Congress 
should pass carefully crafted legislation to help curb 
speculation on futures markets that can artificially drive up 
energy prices beyond what normal supply and demand 
considerations would produce.
    As has been mentioned this morning by Senator Levin and 
Senator Coleman, an investigation by the Permanent Subcommittee 
concluded that speculators can create additional demand for 
oil, driving up the price even when they seldom deliver or 
receive any oil themselves. I have heard recently from the 
Maine Oil Dealers Association and from commercial truckers in 
Maine who firmly believe that speculation has been a factor in 
the most recent oil price increases that are hurting their 
businesses and their customers.
    Unfortunately, there is a lack of publicly available data 
to track the effect of speculation on market prices and 
manipulation can go undetected on certain unregulated markets, 
and that is why I support expanding the authority of the 
Federal Government to oversee energy futures markets and to 
provide greater transparency, which I think is the best 
safeguard against manipulation.
    I recognize that such legislation must be carefully 
crafted, however. The ability to have contracts keyed to future 
prices can provide significant benefits. Legislation is needed, 
but it must be carefully targeted so as not to damage 
legitimate risk hedging functions.
    Well-functioning markets obviously benefit consumers by 
promoting price competition, by encouraging the development of 
new products and by attracting capital for new enterprises. But 
it is also a fact that when the government and the public have 
little information about trades on unregulated or lightly-
regulated markets, real abuses can occur. Unsupervised markets 
are open to deceptive practices and active or passive 
collusion. Government has a vital role to play in ensuring that 
markets are transparent and competitive, and regulators must 
have the information and authority that they need to limit 
excesses that can cause disruptive price swings or artificial 
increases in price levels.
    This hearing will help us better identify and quantify the 
role of excessive speculation in the level and volatility of 
oil prices. It will also help us identify exactly what steps we 
should take to ensure that Federal regulators have the right 
tools to guard against manipulation and other abuses.
    I want to commend both the Chairmen and the Ranking Members 
for their leadership in pursuing these issues and I look 
forward to the testimony of our expert witnesses. Thank you, 
Senator Levin.
    [The prepared statement of Senator Collins follows:]
             OPENING STATEMENT OF SENATOR SUSAN M. COLLINS
    Long before the first official day of winter, the people of Maine 
have been coping with cold weather and feeling the strain of high 
prices for home heating oil, gasoline, diesel fuel, and other products 
refined from oil.
    According to the Energy Information Administration, last month the 
benchmark price for a barrel of domestic crude oil averaged nearly $95. 
Compare that to $59 for November a year ago, and you see a 60 percent 
increase in a single year.
    That remarkable rise touches virtually every aspect of the economy. 
Oil prices significantly affect the costs of heating homes, driving 
family cars and commercial trucks, running fishing boats, operating 
farm and logging equipment, flying airplanes, making fertilizers, 
manufacturing plastics, and so on.
    Many causes contribute to the sharp rise in oil prices: increased 
global demand for crude oil, instability in the Middle East and 
Venezuela, supply decisions of the OPEC cartel, insufficient U.S. 
refining capacity, the declining value of the dollar, and speculative 
trading on futures markets.
    I would also note that Chairman Levin and I joined forces a few 
years ago on a bipartisan amendment to the 2005 energy bill directing 
the Department of Energy to better manage the Strategic Petroleum 
Reserve by suspending purchases when prices were high so as not to 
drive up prices further by taking oil off the market. There are 
questions, however, about whether the Administration has implemented 
this program effectively.
    Our paramount challenge, of course, is to reduce our over-reliance 
on imported oil. That dependence threatens our economic and national 
security. We need to pursue the long-term goal of energy independence 
just as fervently as the nation embraced President Kennedy's goal in 
1961 of putting a man on the moon.
    In the meantime, however, we must increase funding for the Low 
Income Heating Assistance Program and take other actions to ease the 
current impact of high prices. For example, Congress should pass 
carefully crafted legislation to help curb speculation on futures 
markets that can artificially drive up energy prices beyond what normal 
supply-and-demand considerations would produce.
    In 2005, an investigation by this Subcommittee concluded that 
speculators can create additional demand for oil, driving up the price 
even though they seldom deliver or receive any oil themselves. I have 
heard recently from the Maine Oil Dealers Association and from 
commercial truckers in Maine who firmly believe that speculation has 
been a factor in the oil-price increases that are hurting their 
businesses and their customers.
    Unfortunately, there is a lack of publicly available data to track 
the effect of speculation on market prices, and manipulation can go 
undetected on certain unregulated markets. That is why I support 
expanding the authority of the federal government to oversee energy 
futures markets and to provide greater transparency to guard against 
manipulation.
    Such legislation must be carefully crafted, however. The ability to 
make contracts keyed to future prices can provide significant benefits, 
such as allowing heating-oil dealers and other businesses to hedge 
their risk exposure to future price changes. Legislation is needed but 
should be carefully targeted so as not to damage legitimate risk-
hedging functions.
    Well-functioning markets benefit consumers by promoting price 
competition, by encouraging development of new products, and by 
attracting capital for new enterprises.
    But it is also a fact that when government and the public have 
little information about trades on unregulated or lightly regulated 
markets, real abuses can occur.
    Unsupervised markets are open to deceptive practices and active or 
passive collusion. Government has a vital role to play in ensuring that 
markets are transparent and competitive. Regulators must have the 
information and authority to monitor trading and to limit excesses that 
can cause disruptive price swings or artificial increases in price 
levels.
    This hearing will help us identify and quantify the role of 
excessive speculation in the level and volatility of oil prices, and 
highlight the steps we must take to ensure that federal regulators have 
the right tools to guard against manipulation and other abuses.
    I commend the Chairman and the Ranking Member for their leadership 
in pursuing these issues and look forward to the testimony of our 
expert witnesses.

    Senator Levin. Thank you, Senator Collins. Senator Wyden.

               OPENING STATEMENT OF SENATOR WYDEN

    Senator Wyden. Thank you, Mr. Chairman, and I, too, want to 
join colleagues in commending you and the bipartisan leadership 
of both of these Committees.
    I have been digging into this issue, as well, for a number 
of years. What really triggered it was 2 years ago--I think 
Senator Cantwell was there, as well--Lee Raymond, who was then 
the head of Exxon Mobil, came before the Energy Committee and I 
asked him about speculation in the oil market. And Mr. Raymond, 
obviously one of the most knowledgeable people in the oil 
business, said that he believed that speculation in the oil 
markets was adding $20 a barrel to the price of oil when oil 
was then $55 a barrel. I note we have experts at the table. Mr. 
Gheit has been quoted in the paper, obviously one of the most 
knowledgeable people in the business, saying that speculation 
is adding as much as $30 to the price of a barrel of oil.
    So given what we came to learn from these experts, I began 
to look at the landscape with respect to speculation generally, 
and I think that Chairman Levin, Senator Coleman, and others 
described how complicated this is. And it is quite clear that 
there are a variety of different ways in which the speculators 
engage in their various activities.
    Some do it on the financial side, which is primarily what 
we have been talking about today, efforts that come under the 
jurisdiction of the Commodity Futures Trading Commission, 
agencies charged with overseeing the financial side. Some, and 
I am very concerned about this now and will touch on it in just 
a second, are simply buying oil and holding it. The effort to 
oversee this has been pretty much non-existent, which gets me 
to Mr. Caruso, I have always thought is a very good guy, but I 
think this agency really has its head in the sand with respect 
to the extent of this problem.
    I want to read into the record now, Mr. Chairman, just a 
couple of comments from this agency, which is the lead agency, 
the lead Federal agency for analyzing information about prices 
and supply. They say, for example, in August 2006, ``available 
evidence suggests that increased speculative activity in the 
oil markets is a symptom of rather than a cause of high oil 
prices.'' In their analysis in November 2007, they pretty much 
dismiss the whole issue because they say ``it is difficult to 
assess.''
    Now, there is no question about that, because the markets 
are tight. Certainly they are volatile. These are all 
conditions where you would naturally have speculators try to 
take advantage of those factors, but that is all the more 
reason why the lead Federal agency in this area ought to get 
off the sidelines, abandon this ``see no evil, hear no evil, 
speak no evil'' approach, and get into the business of 
analyzing this information.
    I will close, Mr. Chairman, by saying I am particularly 
interested in how they have responded to this question of those 
who are holding oil in the physical market. There is no doubt, 
and some of our witnesses are going to talk about this today, 
that there are a number of commodities speculators that are 
buying and holding oil, literally barrels of oil sitting in 
storage. Now, despite record prices for the purchase of each of 
these barrels, inventories have been above average because they 
obviously believe they can make good money when the price goes 
higher.
    The Energy Information Agency reports inventory levels. 
When they were before the Energy Committee earlier, I asked 
that they report what data they had on who was holding the oil. 
The answer is they don't know because they don't collect the 
information. So they really don't have good data. And that is 
what they are supposed to be in the business of, on one of the 
key issues that I think the American people have a right to 
know as we dig into this speculation issue. I think they ought 
to be in the position of really looking at what is going on, 
collecting the sort of large trader information on, for 
example, physical energy inventory, and we get to the bottom of 
this. And we continue the work that you, Mr. Chairman, and our 
colleagues on a bipartisan basis are pursuing.
    I thank you.
    Senator Levin. Thank you, Senator Wyden.
    On an early bird basis, let me see if the following 
Senators have opening statements. Senator Corker.
    Senator Corker. I would just as soon hear the testimony.
    Senator Levin. Thank you very much. Senator Craig would be 
next.

               OPENING STATEMENT OF SENATOR CRAIG

    Senator Craig. Mr. Chairman, let me thank all of you for 
this hearing. Critical to the American consumer is the price of 
their energy, and we know that it is pinching, it is binding, 
it is distorting disposable income in households. It will 
change the way Americans think and react.
    That is good in many respects as the markets change and as 
a need in pricing for new forms of energy begin to shape the 
market and shape our policy, and we see that happening now, Mr. 
Chairman, and it is critically important that, in part, it 
continue. Renewable fuel standards, diversity in the 
marketplace, a full portfolio of energy is increasingly 
important. We are all here scurrying to find resources to build 
incentives into new technologies and to the laboratory to bring 
things to market.
    While all of that goes on, clearly, Mr. Chairman, 
transparency is important. There is no excuse for profiteering 
against the pocketbook of the poor, and the marketplace has to 
be transparent so that it is visible when it happens.
    We also know, and I have listened to all of the statements 
this morning, I don't disagree with most of it. It is a 
phenomenally integrated world market with forces and demands 
that are new and different and diverse. At the turn of the 
century, 4 percent of the energy supply was oil. Today, it is 
now 96 percent when we talk about transportation. Whether it is 
Caruso or others looking at the markets in the out years, we 
know that by 2020, based on current demand curves, that it is 
going to be a 60 percent increase in demand. We have got to 
diversify. We know that. At the same time, we recognize current 
uses and the need to supply those uses.
    I am not quite sure that I have any ability to look out 20 
years from now and predict what the American economy will be 
like based on the adjustments it is currently making as a 
result of unprecedented high energy. Speculators will try to 
judge that. Markets will try to judge that. At the same time, 
in judging it, we ought to demand open and clear transparency 
in the markets so that those judgments are sound and so that 
the distortion is as limited as possible.
    Gentlemen, I am anxious to hear from you.
    Senator Levin. Thank you, Senator Craig.
    Senator Tester has a statement that shall be made part of 
the record. He had to leave to preside.
    [The prepared statement of Senator Tester follows:]
                OPENING STATEMENT OF SENATOR JON TESTER
    Thank you Mr. Chairman,
    As the cost of oil has risen to record levels--Montanans along with 
Americans from across the country--have had to bear the cost of rising 
oil prices whether they are filling up their vehicles, heating their 
homes, or buying goods that were transported by truck, ship, or rail.
    In the last 15 years, the price of oil has gone from selling 
consistently around $20 in the 1990's to $66 per barrel in 2006, and is 
projected to average $72 per barrel in 2007 with a possible increase to 
nearly $85 per barrel on average in 2008.
    Oil prices are a complicated issue with global implications. China, 
India and other growing economies will continue to consume larger 
quantities of the world's oil supply and the demand will continue to 
grow exponentially. Furthermore, natural disasters like Hurricane 
Katrina and political upheaval in the Middle-East, Africa and South 
America disrupt supplies and increase the cost worldwide.
    But the fact of the matter is that 100 dollar oil cannot be 
explained by supply and demand alone. Speculation in the crude oil 
market is driving up costs and making fortunes at the expense of the 
American consumer.
    Normally I don't think the government should meddle too much in the 
affairs of business, but in the case of big oil companies and the 
companies that speculate and trade the product, there need to be some 
checks and balances. Energy is an issue with broad economic and 
national security implications and without taking steps to slow the 
pace of rising energy costs, the economy of our whole nation will 
suffer.
    This issue also highlights the need of this Congress to pass an 
energy bill that creates a comprehensive strategy for energy production 
and conservation. It is mandatory that we act to ensure that Montanans 
can afford to fill up the tanks in their trucks and farm equipment, 
that Minnesotans can afford to pay their heating bills and the small 
businesses from New England to California have the resources to pay for 
their energy costs. Homegrown fuel, alternative energy and, and better 
fuel efficiency can all help get energy costs back in line with 
American consumer's ability to pay.

    Senator Levin. Senator Barrasso is next.

             OPENING STATEMENT OF SENATOR BARRASSO

    Senator Barrasso. Thank you very much, Mr. Chairman. While 
I am not a Member of this Subcommittee, I am a Member of the 
full Committee and the Energy Committee has an open policy of 
allowing Members to attend and thank you very much for allowing 
me to be here, Mr. Chairman.
    Senator Levin. You are welcome.
    Senator Barrasso. Coming from Wyoming, whose economic well-
being and tax base is so reliant on oil and natural gas 
production, I am particularly interested in today's discussion. 
Much of the oil production background is literally discussed 
every day around Wyoming's coffee shops. Even in the submitted 
testimony, they talk about a differential of $30 per barrel of 
oil when one of the refineries was down in Colorado a year ago. 
So this is a key point for us.
    Our State coffers in Wyoming literally boom and bust on the 
prices of energy commodities. Revenues for our schools, our 
municipalities, our counties, and the State is closely tied to 
energy prices. Significant market moves, whether caused by 
natural disaster, by geopolitical forces, or basic supply and 
demand, have an enormous impact on my constituents and the 
government services on which they rely.
    With respect to oil prices and the associated markets, I am 
here today to learn from this distinguished panel. From a 
legislative perspective, I want to make sure that the Federal 
Government is doing the right things, and if the government 
policies are causing harm to the market, I want to know about 
that and how we can participate.
    From the demand side, I am here for my consuming 
constituents. As all of the other Members of the Senate 
testified, in Wyoming, I think we are even more impacted by 
gasoline prices due to the significant distances that my 
constituents travel from town to town.
    Again, thank you for holding the hearing. I look forward to 
the discussion.
    Senator Levin. Thank you, Senator Barrasso. Senator 
Cantwell.

             OPENING STATEMENT OF SENATOR CANTWELL

    Senator Cantwell. Thank you, Mr. Chairman. I, too, want to 
add my thanks to you for holding this hearing. This is an issue 
that I have been involved in following since 2002 with Senator 
Feinstein when I first cosponsored her legislation regarding 
derivatives. I should just say that that experience, having 
dealt with the manipulation of electricity markets, with the 
perpetration of specific schemes to manipulate price, led us to 
an oversight and investigation about what statutes really are 
in place to protect consumers from these kinds of activities, 
whether they are the manipulation of physical supply and 
demand, or in this case that we are discussing today, in the 
moving around of resources.
    I want to say to you, Mr. Chairman, I believe it is the 
Permanent Subcommittee on Investigations and their continued 
focus on this issue that will actually bring us results, 
because you are saying that we are going to hold the agencies 
accountable for the oversight that needs to happen here. So I 
want to thank you personally for your due diligence and to the 
Ranking Member, as well.
    This simply today is a question about why oil should 
receive special treatment as a commodity that is traded. Now, 
when we look at this, this commodity, if you want to say that 
it is a commodity, we are spending $1 billion a day importing 
oil, and yet oil does not have the same regulations that other 
commodities have. They don't have the same recordkeeping, the 
reporting, the market surveillance, and the detection to 
prevent price manipulation, distortions, curbs, and excessive 
speculation and various other financial standards.
    Now, why in America do we regulate, as I have heard before 
at various committees, things like corn, hamburger, orange 
juice, but when it comes to oil, we seem to think that it 
shouldn't have the same market transparency functions and 
market oversight of those other products?
    And when people tried to say in the past, it is about 
derivatives, that somehow derivatives is too complicated for 
Members of the U.S. Congress to understand, they are wrong. We 
understand what is going on, and derivative contracts based on 
commodities, of agriculture commodities, cannot be traded on 
the future exchanges without those regulations. So you can't 
say that it is about derivatives because we have derivative 
agriculture products that we are not allowing to be over-the-
counter trades. We are saying, no, there has to be 
transparency. There has to be reporting. There has to be 
bookkeeping. We have to be able to go in and see if 
manipulation has occurred.
    So the fundamental question here today is why should oil be 
allowed to be traded on the ICE Exchange, on an international 
exchange, without the oversight to prevent, as my colleagues 
have already pointed out, that manipulation and speculation are 
not driving this market?
    Now, there are lots of issues about speculation. There are 
lots of issues about speculation in any market. But that is why 
you have rules in place. That is why you have reporting. That 
is why you have accounting. That is why you have bookkeeping, 
so you can go back and track and make sure that it is not, as 
some people have been in my office saying, some of those in the 
energy field who probably don't really like that their price 
has been speculated by hedge funds, that somehow people are 
holding supply off the shore, as my colleague Senator Wyden 
said, just to drive up the price so that 3 days later they can 
get the best price for the market.
    Consumers are getting squeezed, and in my State, I just 
came back from looking at the flood damaged areas of Washington 
State and we are still paying over $3 a gallon for gasoline and 
still pay the highest in the Nation, along with California and 
Oregon. We cannot let a commodity like energy, which is the 
lifeblood of our economy and affects so many other areas of how 
well our economy will do, to continue to have these loopholes, 
and I hope that the gentlemen testifying today will help 
elaborate about why transparency and recordkeeping is so 
important to protecting the consumers and the price they pay at 
the pump.
    I thank the Chairman.
    Senator Levin. Thank you very much, Senator Cantwell. 
Senator Menendez.

             OPENING STATEMENT OF SENATOR MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman. I want to thank 
you and the other leadership of our respective Committees here 
for calling this hearing.
    Oil prices and the market that set these prices are 
incredibly important to the world's economy, but it is also 
important to every aspect of working people's lives. Right now, 
Americans are paying twice as much for gasoline than they were 
5 years ago, and if the price of crude jumps again as we 
approach next year's summer driving season, it would not be 
surprising if the price of gasoline reached $4 a gallon. The 
constant squeeze our citizens feel on their bank accounts are 
not isolated to gasoline, of course. The winter that we are 
upon is already seeing record home heating prices, which is 
devastating, particularly for those on a fixed income. And in 
addition, any product that needs to be transported to market is 
becoming more expensive as the cost of transportation rises and 
the domino effect, the ripple effect, continues.
    With the unchecked rise in oil prices, people are losing 
faith in our markets. They see oil companies pocketing record 
profits. They see greedy market manipulators like Enron and 
Amaranth being caught and brought to justice, but they do not 
see actions being taken to make sure such crimes do not happen 
in the future.
    And Mr. Chairman, when we see the difference between the 
extraction price, in essence, what it costs to physically 
extract a barrel from the ground, and where oil is being sold 
at today, we see that there is a very significant difference, 
and whether that is by possible manipulation or a lack of 
transparency, I think the consumers have a right to have faith 
in this market of such an incredibly important commodity in 
their lives.
    And at the same time, moving beyond the domestic for a 
moment to the international, it seems to me that this is a huge 
boon to oil exporters who reap the benefits, as well, like 
Iran, which we are all engaged in a great debate on these days. 
There are some estimates that they are getting another $5.5 
billion extra a month because of this premium, so to speak. So 
it is interesting. We talk about sanctions. Just the call for 
sanctions raises the price of the oil, therefore giving Iran 
more money.
    We look at this whole process and the lack of transparency 
and manipulation, and I agree with Senator Cantwell about why 
should oil be the one commodity, and that is why I am proud to 
have joined you, Mr. Chairman, in your legislation. I am an 
enthusiastic cosponsor of your Close the Enron Loophole Act and 
I am hopeful that this will give us the opportunity to ensure 
that our markets function properly and restore people's 
confidence specifically in the commodities markets that are so 
critical in their personal lives, and I look forward to the 
testimony of the witnesses.
    Thank you, Mr. Chairman.
    Senator Levin. Thank you, Senator Menendez. Senator 
McCaskill.

             OPENING STATEMENT OF SENATOR MCCASKILL

    Senator McCaskill. Thank you, Mr. Chairman. As others have 
said already this morning, in the last 5 years, we have seen 
almost a 100 percent increase in speculative trading on crude 
oil futures and that is just the trading we know about. That 
doesn't count all the trading we can't track that is not 
through a regulated exchange.
    During that same period of time, as Senator Menendez said, 
gas prices have doubled. The purpose of this hearing is to try 
to figure out what is driving that increase.
    Well, I am positive of one thing. I am positive that 
America's middle class and working families are not behind the 
wheel driving this increase in speculation. Something has 
changed that is causing this massive amount of speculation that 
we have not seen before, and I think it is hard for us to 
imagine that it is not connected to the massive increase we 
have seen in gasoline prices for the people that I represent in 
Missouri. Greed is driving the speculation and grossly 
inadequate oversight to prevent manipulation.
    Who benefits from the unregulated markets? I think that is 
the question that we must try to answer today. I hope that the 
witnesses will think about that question in the context of 
their testimony. Who is benefiting from the unregulated 
markets? Speculators, no question about it. Oil companies, hard 
to imagine they are not, but we need to figure that out. 
Missourians who are paying more for gasoline than they ever 
imagined possible, I don't think so.
    I think it is very important that we try to get to the 
bottom of this, and we all understand, and I don't think we 
need to be told, the importance of liquidity in commodities 
markets. But as Senator Cantwell so articulately said, this is 
a commodity. It should be treated no differently. And until we 
treat it the same as other commodities, the American public is 
always going to assume that they are getting the short end as 
opposed to those who are sitting at the trading table making 
hand over fist.
    Thank you, Mr. Chairman, for holding this hearing today. I 
appreciate the opportunity to make a statement.
    Senator Levin. Thank you, Senator McCaskill.
    Let me now welcome our panel of witnesses to this morning's 
hearing: Guy Caruso, Administrator of the Energy Information 
Administration at the U.S. Department of Energy; Fadel Gheit, 
Managing Director and Senior Energy Analyst at Oppenheimer and 
Company in New York; Edward Krapels, the Director of Natural 
Gas and Power Markets at Energy Security Analysis, Inc., in 
Wakefield, Massachusetts; and Philip Verleger, Jr., President 
of PK Verleger, LLC, in Newport Beach, California. We welcome 
you this morning to this joint hearing of our two 
Subcommittees.
    Pursuant to Rule 6, all witnesses who testify before the 
Permanent Subcommittee on Investigations are required to be 
sworn. Since this is a joint hearing, we will follow that rule. 
We would ask all of you to please stand and raise your right 
hand.
    Gentlemen, do you swear that the testimony you are about to 
give before our two Subcommittees is the truth, the whole 
truth, and nothing but the truth, so help you, God?
    Mr. Caruso. I do.
    Mr. Gheit. I do.
    Mr. Krapels. I do.
    Mr. Verleger. I do.
    Senator Levin. A timing system today will give you a yellow 
light about 4 minutes from the time you begin, giving you a 
minute to conclude your remarks. We would very much appreciate 
it if your oral testimony consumed 5 minutes. We will put your 
full statements in the record, of course, and we will start 
with you, Mr. Caruso. Thank you for being here.

   TESTIMONY OF GUY F. CARUSO,\1\ ADMINISTRATOR, U.S. ENERGY 
     INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

    Mr. Caruso. Thank you very much, Mr. Chairman, Chairman 
Dorgan, and Members of both Subcommittees. It is an honor to be 
here to discuss recent developments in crude oil markets and 
the factors contributing to the increase in petroleum prices. 
The Energy Information Administration is the independent 
statistical and analytical agency within the Department of 
Energy. Our views are strictly those of EIA and should not be 
construed as representing those of the Department or the 
Administration.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Caruso appears in the Appendix on 
page 67.
---------------------------------------------------------------------------
    Oil prices have trended upward over the past several years, 
as a number of the other witness statements have indicated. The 
price of West Texas Intermediate (WTI), crude oil has climbed 
from $56 on average in 2005 to almost $100 per barrel last 
month. With these rising prices, oil markets have drawn the 
increasing interest and participation of investors and 
financial entities who do not directly engage in physical oil 
markets.
    The precise impact of these non-commercial market 
participants, as Senator Wyden pointed out, is difficult to 
assess. EIA believes that tight supply and demand fundamentals 
are the main drivers behind the rise in oil prices over the 
last several years. These factors include strong world economic 
growth, leading to increases in consumption; moderate growth in 
supply from non-OPEC nations; production decisions by members 
of OPEC; low spare production capacity in the world; tight 
global commercial inventories; refining bottlenecks around the 
world; and ongoing geopolitical risks and concerns about 
supply.
    Strong economic growth around the world continues to foster 
strong oil demand growth, with China, other developing 
countries in Asia, and the Middle East countries projected to 
account for a large share of the total world oil consumption 
growth this year and in 2008. At the same time, growth in non-
OPEC production has been significantly less than growth in 
consumption. This is concentrated in a few areas and there have 
been project delays and increasing decline rates in Mexico, the 
United Kingdom, and Norway. As a result, supplies must 
increasingly come from OPEC members or from inventories.
    OPEC members have altered production targets over the past 
few years, thereby keeping markets fairly tight. EIA expects 
OECD commercial inventories measured on a days supply basis to 
remain in the low end of the 5-year range in 2008.
    World surplus production capacity is expected to remain 
fairly low, averaging two to three million barrels per day 
through 2008, leaving the market vulnerable to unexpected 
supply or demand events that put upward pressure on prices. 
Because of the lack of supply or inventory cushions and low 
short-term price responsiveness of demand, large price 
increases are required to rebalance supply and demand.
    In the downstream markets, there is a low level of excess 
refinery capacity worldwide, which reduces flexibility when 
supply and demand balances are tight or there are unplanned 
refinery outages.
    Geopolitical instability in many OPEC as well as non-OPEC 
countries also puts additional upward pressure on inventory 
demand and crude oil prices.
    Some oil market observers are citing speculation as the 
main driver of the current high prices. However, the staff of 
the Commodity Futures Trading Commission have analyzed the 
behavior of managed money traders and found that they are most 
likely to follow than to lead position changes by other market 
participants. There have been many instances over the past few 
years when crude oil futures prices have risen along with an 
increase in the net long positions of non-commercial 
participants, that is, more buyers than sellers. However, there 
have been key periods in which the net position of these non-
commercial participants did not move in the same direction as 
prices, particularly in July and early November of this year.
    It appears that any correlation between speculative 
activity and rising prices is loose, at best. Evidence, 
reinforced by the CFTC study, suggests that speculators shift 
positions in response to price changes. If the tight supply and 
demand conditions weaken or are expected to weaken, we would 
expect speculative activity to decline, as has been seen very 
recently. Speculators and others are investing in oil markets 
because of tight market fundamentals and geopolitical security. 
Increased speculative activity is more of a symptom of market 
conditions than the cause, in our view.
    This completes my oral statement, Mr. Chairman, and I would 
be glad to answer any questions at the appropriate time.
    Senator Levin. Thank you very much, Mr. Caruso. Mr. Gheit.

 TESTIMONY OF FADEL GHEIT,\1\ MANAGING DIRECTOR AND SENIOR OIL 
      ANALYST, OPPENHEIMER & CO., INC., NEW YORK, NEW YORK

    Mr. Gheit. Thank you for having me. I have over 30 years of 
energy industry experience, the last 21 years as an analyst on 
Wall Street. My view, which represents my own and does not 
represent the company that I work for, which is Oppenheimer and 
Company, oil is unlike any of the commodities that we deal 
with. It is critical to global economic growth and our national 
security. It impacts our lives, influences our national 
policies, both domestic and foreign, and is likely to play a 
key role in shaping our future.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gheit appears in the Appendix on 
page 76.
---------------------------------------------------------------------------
    Over the last 40 years, oil prices fluctuated from under $3 
to a record of more than $98 only a few weeks ago. Oil traders 
and the media were cheering the rising oil prices and hoping 
for oil to break the $100 mark. Some analysts even predicted 
that oil prices are heading for $120 by the end of this year 
and expect it to be between $150 and $200 next year.
    I don't know where oil prices will go next month or next 
year, but I believe that the current high oil prices are 
inflated by as much as 100 percent. I don't think industry 
fundamentals of supply and demand justify the current high 
prices, which I believe are driven by excessive speculation. 
Based on various press accounts, others who share this view 
include our Energy Secretary, most OPEC ministers, and the 
heads of major international oil companies.
    Oil prices were close to $60 per barrel in August, rose 
sharply to almost $100 in November, although there was no 
changes in world supply and demand. The price surge, in my 
view, was a result of excessive speculation about potential 
supply disruption in the event of a military attack or strike 
against the Iranian nuclear facilities. The passing of the 
Senate resolution regarding the Iranian Revolutionary Guard as 
a terrorist organization seems to have been the catalyst 
speculators needed to fan the fire. The drop in the value of 
the U.S. dollar against major currencies also pushed for higher 
oil prices.
    No one has been able to accurately and consistently 
forecast oil prices, not oil companies, government, or people 
on Wall Street. However, this lack of reliable oil price 
forecasting has created a vacuum that has been filled, in my 
view, by financial players with very short investment horizon, 
which significantly increased the price volatility. 
Globalization of the financial market, ease of trading, rapid 
movement of large sums of capital, information overflow, and 
increased global tension have created an ideal environment for 
excessive speculation in the world market.
    Oil price volatility has attracted a large and growing 
number of speculators seeking the highest profit in the 
shortest time. Volatility, however, has an adverse impact on 
the oil industry because it increases uncertainty and distorts 
market fundamentals, which could result in poor investment 
decisions in securing adequate supply to meet world growing 
demand for oil.
    The oil industry operates in an environment driven 
primarily by factors it does not control--global economic 
growth, increased world oil demand, and reduced OPEC spare 
production capacity to historically low levels. Non-OPEC 
production is hampered by project delays, rising costs, and 
technical problems. These factors increase the risk of 
potential supply tightness.
    I believe that the oil markets need assurances from leaders 
of both major exporting and major importing countries as well 
as the oil industry. People need to know that the world is not 
running out of oil, that supplies are adequate, and that global 
stockpiles are sufficient to make up for any potential supply 
shortfall or demand surge. It is worth noting that the current 
global oil inventories of more than four billion barrels exceed 
the oil export volume from Iran for more than 2\1/2\ years, and 
Saudi Arabia for 15 months, and the entire Middle East for 6 
months.
    I believe that oil speculators use weekly petroleum data 
published by the Energy Information Administration to 
manipulate oil prices for their short-term gain. Speculators 
have used declining inventory levels to spread fears about 
potential shortages, when in fact it indicates exactly the 
opposite. Reducing inventory levels improves capital 
efficiency, especially in a high oil price environment. In 
addition, oil price backwardation makes it even more prudent 
for the oil industry to reduce inventories further. But more 
importantly, declining inventories, in my view, underscore that 
the industry is less concerned about shortages and is more 
confident about supply availability.
    While oil trading helps with its long-haul crude shipment 
against price volatility, I believe it should be regulated to 
ensure transparency, discourage excessive speculation, and 
prevent potential conflict of interest and abuse by traders. 
Several measures should be considered to regulate oil trading 
by financial players, including major investment banks, the 
commodity traders, hedge funds, and private equity funds. These 
include raising the current margin requirement to 50 percent of 
the value of the trade; setting limits on the number of oil 
contracts by each account; establishing a minimum holding 
period to hold these contracts; preventing conflicts of 
interest by financial institutions; and finally, imposing stiff 
penalties on violators, including minimum jail sentences. Thank 
you.
    Senator Levin. Thank you very much, Mr. Gheit. And now, Mr. 
Krapels.

 TESTIMONY OF EDWARD N. KRAPELS,\1\ SPECIAL ADVISOR, FINANCIAL 
    ENERGY MARKET SERVICES, ENERGY SECURITY ANALYSIS, INC., 
                    WAKEFIELD, MASSACHUSETTS

    Mr. Krapels. Good morning. Thank you, Mr. Chairman, 
Senators. Thank you very much for the invitation to come here. 
I am speaking today as a representative of my consulting 
company, Energy Security Analysis. We have been in the oil 
market forecasting business for 25 years, and as a matter of 
corporate survival, we have to take into account all the 
factors that influence oil prices.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Krapels appears in the Appendix 
on page 78.
---------------------------------------------------------------------------
    About 10 or 15 years ago, we began to divide the oil world 
into two sets of forces, physical and financial, and so you can 
see that from our perspective, we look at the fundamentals of 
financial markets as being as important to the price of oil and 
gas as the fundamentals of physical markets. That is my first 
point.
    Let me make four more practical points, because my old 
friend Phil Verleger is here and he is a true economist and I 
am a practical economist. Let me make four points as a 
practical guy.
    The discussion about the proper influence or how to depict 
the influence of speculators on oil prices to me often achieves 
a level of how many angels can dance on the head of a pin. When 
you get formal trained economists to address this problem, they 
will usually say, ``I am sorry, we can't find a correlation.'' 
But when you look at the market from the standpoint of a 
practitioner or people in the financial business, you will hear 
anecdotal evidence all the time that of course, financial 
trading is influencing the price of oil. I am in that camp.
    Of course, financial trading and speculation affect the 
price of oil because they affect the price of everything we 
trade. We live in a trading culture. We have funds that flow 
out of the dot-com sector into the housing sector, out of the 
housing sector into the commodities sector. Wherever these 
trillions and trillions of dollars go, they affect the price of 
whatever it is that they are trading. It would be amazing if 
oil somehow escaped this effect.
    So there is a bubble in oil prices that has lasted for 
several years, and in my opinion, it will last for several more 
years because the underlying condition of the world oil market 
is extremely tight and the demand responses, unfortunately, are 
very slow.
    My next point is do we have information that indicates how 
this mechanism works, and I suggest that the outstanding work 
done by your own staff on the Amaranth case and published last 
year in your special report constitutes the best piece of work 
I have seen in this respect and I congratulate the staff for 
the outstanding work that they did. Clearly, here was a market 
that was manipulated by a very large trader that from time to 
time had 40 or 50 percent of the open interest in the NYMEX 
market, and that was only the visible market because we didn't 
know how large their positions were in other markets. So for 
me, the debate is over. Of course, speculation affects 
commodity energy prices. There is no question about it.
    My next question, though, is what do you do? What do you do 
about that? I think that Mr. Gheit has told you, and I think 
your own staff has told you the things that need to be done. 
You do need to regulate these markets in the way that you have 
traditionally regulated these markets. I come out of the R.H. 
Coase School at the University of Chicago. R.H. Coase pointed 
to a paradox decades ago. He is a Nobel Prize winning 
economist. He said, isn't it paradoxical that the best markets 
have very clear regulation, and he pointed to American 
commodity markets as prime examples of that effect.
    We need to simply hold all the exchanges that trade energy 
to the same standards that we hold the New York Mercantile 
Exchange. I think the New York Mercantile Exchange is an 
outstanding market. The WTI market is a wonderful market. We 
simply need to have more disclosure, more information about how 
these other markets trade.
    The solution to the problem of what do we need to do about 
these exchanges is simple to me. It is disclosure, disclosure, 
disclosure. We simply don't have enough information. When your 
staff got the information through their subpoenas, they were 
able to see the effect that Amaranth had. The rest of us, 
including my clients, which include universities and people who 
buy oil, would love to have had that information about what the 
effects of the speculation on natural gas prices was, but we 
didn't have it because the CFTC didn't release it.
    So my last point, and this is awfully important, I think 
futures markets, like all the rest of you, I think futures 
markets are invaluable, that we need the liquidity, we need the 
financial services, we need the ability to hedge. So whatever 
we do, we mustn't throw out the baby with the bathwater. It is 
not an onerous obligation to say to the futures markets in 
energy, hold to these high standards that the NYMEX has. If we 
do that, I believe that we can have very effective oil and 
natural gas and power forward markets that are in the interests 
of all of us. Thank you very much.
    Senator Levin. Thank you very much, Dr. Krapels. Dr. 
Verleger.

    TESTIMONY OF PHILIP K. VERLEGER, JR.,\1\ PRESIDENT, PK 
                 VERLEGER, LLC, ASPEN, COLORADO

    Mr. Verleger. Senator Levin, thank you very much. Thank you 
for your kind comments on your introduction. It is a pleasure 
to appear here again and I thank the Senators for coming. It is 
a real pleasure to appear in this famous hearing room.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Verleger appears in the Appendix 
on page 98.
---------------------------------------------------------------------------
    Let me associate myself with Mr. Krapels's comments and 
especially with the comments on the Subcommittee's report on 
Amaranth. I have been studying the futures markets as an 
academician and policy maker for 20 years--and that report is 
the best. I learned more from it, particularly the deep data 
digging.
    Senator Levin. Thank you.
    Mr. Verleger. This is an important hearing, particularly on 
oil prices, and let me summarize my testimony. It is 20 pages 
and I will do it in 4 minutes.
    The rise of prices to almost $100 a barrel is first led 
this year by the removal of light sweet crude oil from the 
market by DOE beginning in the middle of August.
    Second, the price has also been pushed higher by 
liquidation of inventories. Senator Wyden would like to see 
inventories lower. We are all going to see substantial 
liquidation of inventories. Inventories are built or liquidated 
according to profit incentives. The incentives to hold 
inventories were profitable last year and in part by investment 
in passive futures. They are not profitable now and we are 
seeing massive liquidation.
    Third, sweet crude oil demand is being boosted by 
environmental regulations, particularly the new regulations 
requiring the limit of sulfur to 10 parts per million in both 
the United States and in Europe in diesel fuels.
    Fourth, I have been studying the oil market since 1971 and 
have been policy maker. I can't find any international event 
which explains why oil prices have risen recently. And as I 
said, I have been writing about commodity markets, studying 
futures markets. I think this is speculation.
    Let me start my prepared testimony at Figure 1 on page 
three of my prepared statement.\1\ I show there the price of 
WTI from January through December last year and January through 
November of this year. In that graph, I have taken the price of 
WTI from February through this last August by calculating the 
price of Brent and adjusting it using the traditional 
differential because the WTI market, as Senator Levin noticed, 
was distorted with the shutdown of a single refinery, the 
Valero McKee refinery.
---------------------------------------------------------------------------
    \1\ Figure 1 appears in the Appendix on page 100.
---------------------------------------------------------------------------
    If you look, the price last year up until August was 
identical, within 50 cents to a dollar a barrel, to this period 
of time. Then, since August, we have had the largest increase 
in prices in 30 years in absolute terms. It exceeds the price 
increase for the fall the Shah fell. It exceeds the price when 
Iraq invaded Iran. And it exceeds the price increase that we 
saw in 1990 when Iraq invaded Kuwait.
    Why is this? Well, if you look at a series of factors as a 
detective you cannot find any event such as a change in demand 
in China or in India this year to explain the increase. You 
also cannot attribute it to a shortage of crude oil on world 
markets. Between August and December, Saudi Arabia cut its 
price of oil by $10 a barrel. The Saudis couldn't sell their 
crude. You also can't explain it at this point by speculation.
    Now, in speculation, I want to distinguish between 
investors and speculators. Investors have poured billions of 
dollars--and if you turn to Figure 4 on page six of my prepared 
statement to a graph we prepared \2\--into passive investment 
vehicles, the Dow Jones AGI Index and the S&P Goldman Sachs 
Index. These are pushed by academics who argue that, in fact, 
commodities are an investment class. They earn returns like 
bonds and like assets and it is better to invest in these 
diversified commodities than, say, an oil company. We have seen 
money go up, but it is steady. It is not volatile.
---------------------------------------------------------------------------
    \2\ Figure 4 appears in the Appendix on page 103.
---------------------------------------------------------------------------
    You can, to a certain extent, explain the price increase by 
the change in the profitability of holding oil, and I show in 
Figure 8,\3\ nine graphs which show the return on investment, 
that is how much money a company made, and last year, companies 
could buy oil, put it in tanks, and earn a return that was 
seated on bonds. Not now.
---------------------------------------------------------------------------
    \3\ Figure 8 appears in the Appendix on page 106.
---------------------------------------------------------------------------
    But the big change that came since August of this year was 
the decision to put oil in the SPR, to take royalty in kind, 
and the decision to take sweet crude oil, because the sweet 
crude oil they are taking accounts for between three-tenths and 
six-tenths of a percent of the world's available sweet crude 
supply. Only 6 million barrels a day of world supply qualify 
for going into sweet crude for the SPR. Given the pressure for, 
need for light sweet crude, particularly in refining to make 
the low-sulfur diesels and other low-sulfur products, this has 
created a tightness on the market. If you apply the standard 
price elasticities, and Senator Dorgan taught economics, for 
demand for crude oil, particularly the ones Professor Nordhaus 
has produced at Yale, you come to the conclusion that this 
probably added $8, maybe $5, maybe as much as $10 a barrel to 
the price, just in terms of demand.
    This then was magnified by what is called delta hedging in 
the market. Many consumers have hedged their fuel costs using 
options. To do this they buy options so that if the price goes 
up, they still get their oil at $50 a barrel. This is a good 
way of hedging.
    But as the price goes up, the firms that have written those 
options have to buy more crude. Last year, when the prices 
started to fall after August 18, producers of crude oil who had 
bought puts were protected and the financial firms sold 
futures, so what happened is prices fell, say, to $60 on a 
cyclical decline and they were pushed down to $50 a barrel by 
what we call delta hedging in the financial community.
    This year, as the price has been pushed up from $75 to $80 
as oil was added to the SPR. This created a need by the banks 
and the other financial institutions that have written the 
options to buy oil futures. The purchases accelerated the price 
rise to $100.
    Now, my view--and I have always been an outlier of views on 
oil markets--this view is not widely held and I commend the 
Department of Energy, we are going to get a test of how right I 
am because they are going to double the rate at which they put 
sweet crude oil into the market over the next 6 months, from 
January until June.
    Senator Levin. Into the market?
    Mr. Verleger. Into the Strategic Petroleum Reserve. Excuse 
me. If, in fact, I am right, we are going to see prices be 
magnified up again by delta hedging because the physical 
refiners who need the light sweet crude will be bidding the 
price higher. They will be competing with DOE and we could see 
prices, if the experience from last August to November applies, 
we could see prices go, say, to $120 a barrel. If I am wrong, 
and I hope I am wrong, it won't happen. But all the economics 
now plus the way people hedge in terms of using options, 
particularly the airlines, other end users, set us up for an 
even larger price increase over the next 6 months.
    Thank you very much, and I am sorry to have gone over my 
time.
    Senator Levin. Thank you very much, Dr. Verleger.
    Mr. Caruso, let me start with you. Exhibit 14, if you will 
take a look at it, it shows that the number of speculative 
trades in crude oil has tripled from 2000, and these trades 
from speculators used to make up 15 percent of the outstanding 
crude oil future contracts on NYMEX.\1\ Now they make up 35 to 
40 percent of the outstanding contracts, so-called open 
interest. Is that dramatic increase shown by that chart in 
outstanding crude oil future contracts relevant? Might it be 
relevant in terms of oil prices? Just might it be relevant?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 14, which appears in the Appendix on page 201.
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    Mr. Caruso. Definitely. I would agree with Mr. Krapels's 
comments that speculative trading has had an impact on the 
market. My distinction is it is not the cause of the rising 
prices, it is following the market up.
    Senator Levin. Well, you said it had an impact----
    Mr. Caruso. It is not the driver of the market. It is part 
of the reason prices have gone up. We are not saying that it is 
irrelevant. It is definitely relevant and it is definitely part 
of the reason that we are seeing prices go up. We are just 
saying we can explain most of the change by the fundamental 
factors and the geopolitical risks----
    Senator Levin. Right. It might be a cause of increased 
prices?
    Mr. Caruso. It is part of the combination of factors.
    Senator Levin. So it may--I am not saying it is the cause. 
I am saying it might be a cause.
    Mr. Caruso. It is one of the many causes, yes.
    Senator Levin. What are you doing to determine the extent 
to which it is a cause? In your statement, the Energy 
Information Administration issued a report a few weeks ago that 
says, with the rapid rise in prices, oil markets have been 
drawing increased interest and participation from investors in 
financial entities without direct commercial involvement in 
physical oil markets. Those are folks we call speculators. The 
role of these non-commercial future markets participants in 
recent price developments is difficult to assess.
    Mr. Caruso. Yes.
    Senator Levin. Now, since there, in your judgment, may be a 
cause, and you are the most cautious on that--at least our 
other witnesses say they are clearly a cause, but your 
Administration says they might be a cause--instead of looking 
at the extent to which they are a cause, you turn to general 
principles. You say, let us focus instead on general principles 
because that favors a focus on fundamentals rather than 
consideration of alternative price drivers.
    Well, fundamentals obviously also have a major role, but 
since this amount of speculation even in your judgment may be a 
cause, and you are the most understated witness we have got 
here, but nonetheless it may be a cause, I want to know why 
your Administration is not acting to determine the extent to 
which it is a cause. Instead, you just simply go back to, we 
are going to look at the fundamentals.
    Mr. Caruso. We look at all----
    Senator Levin. Why don't you look at that?
    Mr. Caruso. We are looking at all the factors and----
    Senator Levin. To what extent are speculators a cause?
    Mr. Caruso. I don't think it is possible to actually 
accurately estimate the dollar amount, but----
    Senator Levin. How about a percentage?
    Mr. Caruso. I don't think it is possible.
    Senator Levin. But are you trying?
    Mr. Caruso. And what we do is rely on those who are 
providing the oversight and the enforcement, such as CFTC, and 
we rely on the studies that they have done and their studies 
show that it is not the fundamental cause of the prices going 
up.
    Senator Levin. So long as it may be a cause, it seems to me 
you are not doing your duty by not looking at the extent to 
which it is a cause. You have got very capable people, 
including witnesses sitting right next to you, who believe it 
obviously has a significant impact, and yet your 
Administration, which is supposed to determine these kinds of 
issues, has basically delegated that to someone else, and that 
is a major problem, I believe. And so all we can do is tell you 
that we think--I am speaking for myself, obviously--that the 
Department of Energy is failing to do what consumers in this 
country rely upon you to do, and that is to look at the causes 
of these oil prices skyrocketing. You have abdicated that. You 
have delegated that. You acknowledge it may be a cause, this 
excessive speculation, and yet you have not done your own 
analysis.
    Finally, before my time runs out, let me quote not just the 
Exxon Mobil chairman that was already quoted here this morning, 
but also Lord Browne, who when he was the BP Group chief 
executive said the following recently in 2006. ``There has been 
no shortage of inventories of crude oil and products have 
continued to rise. The increase in prices has not been driven 
by supply and demand.'' You disagree with that, is that true?
    I want to repeat it. ``The increase in prices has not been 
driven by supply and demand,'' Lord Browne.
    Mr. Caruso. I think the increase in prices has been 
determined by supply and demand and other factors, such as 
geopolitical risks which also have contributed to the 
speculation, in a sense, is what we are saying. It is a 
combination----
    Senator Levin. Whatever has contributed to the speculation, 
wouldn't you agree that the tremendous increase in the amount 
of speculation that has gone on is likely to be a factor in the 
increase in prices? Can we get that much out of you?
    Mr. Caruso. I would agree, it is a factor, and our analysis 
of the fundamentals indicates it is not a large factor, and we 
have done our diligence on this and we think it is part of the 
factor, but not a major factor.
    Senator Levin. Well, the diligence that you refer to is the 
CFTC that you have delegated this assessment to.
    Mr. Caruso. No, we have done our own work and then we have 
looked at other studies, such as CFTC, such as the IMF, other 
academics who are experts in the field of oversight and 
enforcement in the financial and commodities markets.
    Senator Levin. OK. My time is up. Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you very much.
    Mr. Caruso, I have been looking at your appropriations. I 
chair the Appropriations Subcommittee that funds the EIA and I 
was in the last week taking a look at how many people we have 
down there and what we are getting out of EIA, and I was just 
thinking about this as you were answering these questions. Your 
organization plays a very important role and has a very 
important function and Senator Levin is trying to understand 
what appears to be a contradiction.
    I think what you are saying today is that the fundamentals 
exist that are supportive of the current price trends in oil. 
Do you mean that you look at the fundamentals and say you 
believe the fundamentals support and justify what is happening 
to prices.
    Mr. Caruso. Not ``justify.'' I am saying that we can 
explain the behavior of the oil market by looking at the 
fundamentals of supply and demand and the other factors that go 
into decisionmaking by participants in the marketplace, such as 
concern over Iran, Iraq, and Nigeria. So it is a combination of 
all of those factors.
    Senator Dorgan. Let me put up a chart.\1\ Again, when I was 
looking at it, we spend about $100 million a year, roughly, for 
what you all do, and I want you to do it and do it well and 
provide us a lot of very important information. We need you to 
do your job well.
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    \1\ See Exhibit No. 8, which appears in the Appendix on page 129.
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    One of the witnesses mentioned the decrease in the price of 
Saudi light crude relative to the price of west Texas 
Intermediate crude since May 2007. Since May 2007, the spot 
price of oil has skyrocketed $30 a barrel, but the Saudis have 
had to continue to discount the price of their Saudi light 
relative to WTI crude by pricing it by nearly $10 a barrel 
discount.
    Now, it seems to me that just suggests that this is not 
market fundamentals. There is something upside down, something 
not working here. Do you sense that, as well? Is there 
something wrong with that?
    Mr. Caruso. Well, one of the factors that is not reflected 
in this chart is that at the same time as prices were behaving 
such as they are shown here, the Saudis were actually reducing 
production.
    Senator Dorgan. But that is not the issue. The issue is at 
what price are they selling what they produce? You have just 
changed the subject on me.
    Mr. Caruso. Yes.
    Senator Dorgan. When they have to discount by $10 a barrel 
what they are selling, isn't that at odds with the suggestion 
that the market system is working, that the fundamentals of 
supply and demand somehow work? It seems to me that 
relationship is counter to that. Do you agree with that?
    Mr. Caruso. I would agree with that. But at the same time, 
the Saudis have been leaders within OPEC to try to prop up the 
price of oil through----
    Senator Dorgan. Again, a different subject, but let me go 
to a couple of the other witnesses. I am trying to understand 
what we are learning here. It seems to me that there is a 
massive amount of speculation occurring, and one of the 
witnesses--maybe it was you, Dr. Verleger--you talked about the 
DOE's decision to fill the SPR, and I want to come back to Mr. 
Caruso to see whether DOE got information from you about what 
the impact of that might be.
    You talk about the price impact of the decision to fill the 
SPR with sweet crude and that the total world market for that 
is five million barrels, and then you indicated that was 
amplified by option hedging. I want to try and understand that 
a little more. Can you amplify on that?
    Mr. Verleger. I would be happy to, sir. There are a number 
of types of derivatives. The futures is the standard that we 
have had for 150 years. There are options on futures, through 
which a firm takes a long position or a short position. It is 
not obligated to take delivery. The option is essentially an 
insurance policy.
    So Southwest Airlines has bought call options on crude oil 
that keep its cost of crude oil at about $50 a barrel this 
year, next year, and the year after. That means if the price 
falls below $50, they pay a lower price because they are not 
required to take delivery.
    The firms that write the calls write an insurance policy to 
Southwest. These firms will buy futures as prices rise. This is 
called delta neutrality. When the prices go up, they buy 
futures.
    This year, what we have seen is we got the additional 
upward push in the light sweet crude price of $5 to $10 a 
barrel from the DOE policy. Then the firms that had written 
calls to Burlington Northern, to many other major consumers and 
speculators who buy calls had to buy futures to protect 
themselves. This magnified the price increase. This is why, as 
I said, this is the largest price increase in a 90-day period 
of time in 30 years.
    Senator Dorgan. And that is very important and I appreciate 
the answer and the better understanding.
    Mr. Gheit, I have seen in print, that you said there is not 
any justification for the price of a barrel of oil given the 
fundamentals these days to be over $55 a barrel. Is that 
correct?
    Mr. Gheit. Absolutely.
    Senator Dorgan. You feel strongly about that?
    Mr. Gheit. The industry can replace a barrel of crude today 
profitably and at less than $15 per barrel. There is an old 
rule of thumb that you expect the price to be three times what 
your replacement cost is, and the industry replacement cost 
could be well below $15 a barrel. That is given the fact that 
we still have access to reserves who have obviously been 
closing down between Russia and Venezuela and elsewhere. But 
having said that, rising costs in the industry, and with that 
all said, the industry can still be profitable at $45 oil.
    Senator Dorgan. One final question, Mr. Chairman. I am 
trying everything I can in some sort of an omnibus bill, some 
sort of appropriations process, to put a stop to this royalty 
in kind, taking sweet crude off the market and sticking it 
underground at this point. That is absolutely nuts, in my 
judgment. I am running into all kinds of bureaucratic problems 
in trying to stop the Department of Energy from continuing that 
activity and exacerbating it. But I still hope we can get that 
done.
    Mr. Caruso, has anybody at the Department of Energy 
consulted EIA and asked what the impact would be if we take 
sweet crude and start sticking it underground storage at 
current prices? Has anybody asked you what the impact would be?
    Mr. Caruso. I have not been asked, no.
    Senator Dorgan. Should they have asked you?
    Mr. Caruso. Well, we are available.
    Senator Dorgan. What would you have told them? Would you 
have told them what Dr. Verleger just suggested, that it is 
going to pump up the price of oil on the markets and it is 
going to exacerbate the price problem?
    Mr. Caruso. I don't know. Listening to Mr. Verleger's 
argument, it seems to be what he is saying is that world oil 
prices are really hyper-sensitive to these very small changes 
in light sweet crude, and I am unconvinced of that--because we 
have had large changes in light sweet crude, such as in 
Nigeria, a reduction of 500,000 barrels a day. We have had 
nothing like the kind of rise in price that Mr. Verleger has 
alluded to in the last part of 2007. So I have trouble 
reconciling how such a small reduction of supply of light sweet 
crude--I think it is about less than 20,000 barrels a day--
could have caused such a large price change. Whereas in 
Nigeria, a much larger reduction, 500,000 barrels a day, did 
not cause that big of an increase.
    Senator Dorgan. My time has nearly expired.
    Mr. Caruso. So I have a problem with----
    Senator Dorgan. Mr. Verleger, do you want to respond to 
that?
    Mr. Verleger. It depends on when the timing of the cut is. 
I mean, we had high inventories thanks to the actions of the 
financial firms. Mr. Krapels and I were in Vienna a year ago 
talking with the OPEC and EU countries about this, and since 
the money has come out and the stocks have gone down, markets 
are much more sensitive. But Mr. Caruso raises an interesting 
question. The royalty in kind oil is oil that is there. It is 
dependable. This is an expectation phenomena. And Nigeria's oil 
is oil that oil producers always are a little more concerned, 
and it goes to another market. The Nigerian oil--well, some of 
that oil doesn't come here, so I would have to look at that.
    Senator Dorgan. Let me just thank the witnesses, and Mr. 
Caruso, I would like you to be the whistle on the teapot here, 
but I don't hear a whistle from you. I just hear you sort of 
saying, well, things are OK and we look at the market. It all 
adds up. I don't think it adds up at all. Mr. Chairman, thank 
you.
    Senator Levin. Thank you very much. Senator Coleman.
    Senator Coleman. I thank you, Mr. Chairman. I am trying to 
understand what we do about what we are learning. I think we 
have learned in certain Subcommittee investigations that 
speculation has an impact. I don't think there is much argument 
over that. The question is how much impact, but it has an 
impact.
    Let me just kind of step back a little so we are all 
operating on the same plane, because some of my colleagues have 
raised concerns about the Enron loophole. As I understand it, 
when we looked at Amaranth, the Enron loophole related to 
natural gas and ICE and not having the same transparency in the 
ICE market. In terms of oil, as I understand it, what we have 
seen with the charts of the Chairman,\1\ at least in the NYMEX 
New York market, that is regulated, and ICE, as I understand 
it, has moved the oil trading off to London. So that is also 
regulated. So I want to make clear, does the Enron loophole 
impact the trading of oil? Any of the witnesses there?
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    \1\ See Exhibits No. 1 and 3, which appear in the Appendix on pages 
118 and 120 respectively.
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    Mr. Gheit. Well, the ICE is actually the Intercontinental 
Crude Exchange and it is operated in London under the rules and 
regulation, but it is owned by a U.S. firm.
    Senator Coleman. Right, but the Enron loophole, the problem 
we had with natural gas is that there was not transparency. 
They were not regulated. At least with, as I understand it, ICE 
now has moved off to London and then those are regulated by 
London. So in other words, I am always looking to see whether 
transparency is going to make a difference here. I am trying to 
understand what transparency is. A lot of my colleagues have 
talked about the Enron loophole, but that is not the situation 
with oil.
    In terms of transparency, perhaps Dr. Verleger, what I got 
from you was an indication that perhaps we should require 
greater transparency in bilateral swaps, and I can tell you in 
regard to natural gas, a lot of folks said that would be a 
terrible thing and that would have a terrible impact on getting 
capital in the marketplace, on the ability to hedge in a proper 
way. So are you advocating that we somehow regulate bilateral 
swaps and can you tell me how we do that?
    Senator Coleman. Dr. Verleger.
    Mr. Krapels. He is much better looking than I am.
    Senator it is a critical question and it is kind of a 
lawyer's question, and I am not a lawyer but I will give it my 
best shot anyway. When Mr. Veleger and I were in Vienna a year 
ago and we were discussing this issue with the OPEC members and 
with the European Union members, they had the same questions 
that you have today and what do we do about it.
    The issue of communication and harmonization of regulations 
between the United States and the United Kingdom is an 
important issue and I think the perfect world would be one in 
which both countries impose the same disclosure and margin 
requirements on all exchanges operating in the oil market. The 
British have their own views on this. I think it would be 
wonderful for the U.S. Government to reach out to the British 
Government and see if that kind of harmonization could occur.
    The fear that if the U.K. and Britain somehow teamed up and 
had effective regulation of this market, that the markets might 
go somewhere else, like Singapore, is a risk I would be willing 
to take, because the only places these markets can really work 
is in London and New York.
    Mr. Verleger. You said U.K. and Britain. Do you mean the 
U.K.----
    Mr. Krapels. I am sorry, the U.K. and the United States.
    Mr. Verleger. I think it is key in looking at this, is 
transparency. Position limits are also important. If you read 
the Amaranth report, the ability of Amaranth to act was 
limited--NYMEX was watching them. They moved their business off 
to the ICE. It has always been important in terms of commodity 
markets to have some sort of position limits and exemptions. 
Now, I spent a long time taking apart the collapse of Metall 
Gesselshaft for their side and they managed to skirt around the 
position limits and their actions actually depressed the price 
of crude oil through their trading by about $8 a barrel in 1993 
to 1994.
    So as you look at this, it is position limits, oversight by 
these regulatory bodies, and NYMEX does a great job, and the 
NYMEX is losing business because of this movement. So the 
harmonization. Those two requirements, because the light of 
day, that is what Enron didn't want, and just getting those 
things would take us a long way.
    Senator Coleman. It is your testimony that I think I heard 
about regulating bilateral swaps. I have a question with 
transparency for Dr. Verleger. Again, though, understanding 
position limits, understanding transparency, which you have in 
the NYMEX, you have somewhat in the London exchange, are you 
advocating that somehow there should be greater regulation of 
bilateral swaps?
    Mr. Krapels. Well, the ICE exchange by nature is a 
derivatives market and I think you can probably apply some sort 
of filter that says below a certain volume level, you do not 
need to regulate. But when you have these central core 
contracts like WTI and rehub [ph.], those, I think, should be 
fully disclosed.
    Senator Coleman. And then the last thing is Dr. Verleger 
raised a very ominous prospect about continuing to put sweet 
crude in the SPR. Would it make a difference, then, if 
regulation were changed so that we could use sour crude? Would 
that somehow diminish the ominous forecast that you have 
provided?
    You responded to Mr. Caruso's concern about Nigeria by 
saying, well, that goes to a different market. My sense in oil 
is that these markets are malleable, unlike gas where there are 
different markets. Wouldn't you admit that oil markets are not 
focused here or focused there? Ahmadinejad does well, whether 
we buy it from Iran or not.
    Mr. Verleger. Well, there are two things. One, in a future 
hearing, you are going to talk about the way the Chinese are 
lining up some supplies. There are at least 400 different types 
of crude. A number of these crude streams are, in fact, locked 
up under long-term contracts. That is, the oil will go to 
specific consumers, like the Algerian crude tends to all go to 
Italy. The price is set off the market. It used to be there 
were official prices. It is now tied to WTI or to Brent or to 
Dubai. But diverting the oil to a different source is hard. I 
went through and I tried to trace out where some of this 
Nigerian crude is going and I just, frankly, don't know--forget 
which of the supplies got disrupted.
    So yes, it is fungible to a certain point, but that gets 
back to the other thing. The reason light sweet crude is so 
valuable is that we have now gone to these very tight 
environmental specifications and so refiners can take the 
three-tenths percent sulfur crude and run it through a unit and 
it doesn't slow down the desulfurization units.
    The IEA has written several studies in their Monthly Oil 
Market Report that worldwide in Europe and now the United 
States, refinery utilization rates are going down because of 
these new desulfurization rules. The units don't work as well. 
Tesoro just last week reported they are having longer delays, 
and the long-term experience in California and the West Coast 
where we have had lower sulfur requirements is that we lose 
three percentage points of operation.
    In these circumstances, what I understand from people who 
run refineries, and in one way it is saying it is making 
sausage, except it is toxic, but it is that the light sweet 
crude is just very valuable because it bypasses these critical 
units and so it has become much more important.
    Now, I have read EPA's rulings and I have read the DOE 
studies on what the low-sulfur diesel rules were going to do, 
but nobody has gone back and asked the question, in fact, has 
shifting to this essentially pure diesel fuel led to a 
reduction in the rate of refinery operation rates and has that 
contributed to the price increase. One of my good friends who 
is a politician says it is not a question we want to ask 
because the answer is not going to be helpful. But that is the 
nature of the problem.
    So to answer your question, we have SPR facilities that 
have heavy sour crude and we have them that hold sweet crude. I 
would sell off the sweet crude and fill them with sour crude. 
In an emergency, if we really have to replace the crude, we can 
relax the environmental standards the way we did in Hurricane 
Katrina. I think there is a likely probability that we would be 
dealing with a much lower price of crude.
    Senator Coleman. Thank you. Thank you, Mr. Chairman.
    Senator Levin. Thank you very much. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    To follow up on this discussion about the sweet crude 
versus the sour crude, recognizing that it is the sweet crude 
that WTI looks to to set that price, and then the higher demand 
for this sweeter crude, is there an alternative benchmark that 
we could use, a suitable alternative to this sweet crude that 
might make a difference one way or the other?
    Mr. Verleger. Actually, I ought to plead guilty. I was at 
Drexel Burnham that created the NYMEX crude contract in 1983, 
and the reason they picked NYMEX at the time was there were a 
number of suppliers and a larger number of buyers, and no 
market control. Cushing was the perfect place. There is a 
second one, Brent, that has been created. It is much harder 
because you don't have as many producers or consumers.
    It is certainly possible now--Mars, a sour crude produced 
in the Gulf of Mexico, was not in production. There are other 
fields with larger production. The ideal would be a Middle East 
crude, but the Saudis have always refused to allow resale of 
their crude or sale of the crude on the open market. This 
essentially bars us from using something like that.
    But yes, one could pick a crude. That chart,\1\ presented 
by Senator Dorgan, showed the price of Saudi crude has not gone 
up as much as the price of light crude. It could be done. We 
didn't have financial settlements of futures contracts in 1983 
as we do today. One could move to a financial settlement. One 
could use the large volumes now of much more sour crude coming 
south from Canada from the tar sands because there are a number 
of producers and their pipelines are being built to bring them 
down. So there are substitutes and you could move the market.
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    \1\ See Exhibit No. 8, which appears in the Appendix on page 129.
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    Senator Murkowski. It seems to me that since 1983, we have 
seen a great deal of change. Mr. Gheit, do you want to comment 
on that?
    Mr. Gheit. Just to explain why WTI has moved up faster than 
any other type of crude and didn't come down. One of the 
reasons that you have unprecedented shutdown or unexpected 
shutdown in refinery capacity over the last 7 or 8 months, or 
even longer. Whiting in Indiana and Dixon City were shut down a 
couple of years ago, and these refineries, their conversion 
unit which is able to take heavy sour crude, convert it into 
light product, which is really where that profit is, obviously 
could not operate because of the fire and explosion and 
everything else, so they had no other choice but to operate on 
pure light sweet crude. So the demand for light sweet crude 
obviously moved up very sharply. That is why you see the 
differentiation between the oil coming from Canada and the WTI 
increased almost $30, $40 per barrel over the last few weeks.
    But the idea for us to increase the buying of light sweet 
crude into the SPR also sends the wrong message to the world 
and to the traders that we could be facing potential supply 
disruption. We are just sending the wrong message to the world 
market, saying that we are worried about the future 
availability of crude oil. That is why we have 700 million 
barrels of crude oil inventory, or SPR, but we want to increase 
it even more.
    So as I said, traders will take anything that they can get 
their hands on to exploit the situation, to make profit, to 
exaggerate the situation. A pipeline was shut down a couple of 
weeks ago, and before you know it, obviously, the traders in 
London spiked the price before we get into the office. I walked 
into my office and all of a sudden, what happened overnight? 
Well, there was an explosion. Everybody said there is going to 
be $100 oil or whatever. The fact of the matter, it was 
repaired in no time, but this is after the fact. They already 
made the money. The whole idea is that they amplify the bad 
news because----
    Senator Murkowski. How much does the fear factor really 
factor into the speculation, then?
    Mr. Gheit. I personally believe that there is at least a 
$30, $35 premium in oil prices as we speak. One of the reasons 
is that nothing has changed in the physical supply and demand 
since August of this year, yet oil prices moved up by almost 50 
percent.
    Senator Murkowski. It has gone----
    Mr. Gheit. Yes. Everything else is equal. China is going. 
We have winter, we have summer. We have driving, we have 
seasons, we have everything. Nothing was new, in my view. 
Everything else is equal, and all of a sudden, oil prices went 
from $65 to almost $98. There was no justification for it.
    Senator Murkowski. Thank you, Mr. Chairman.
    Senator Levin. Thank you very much, Senator Murkowski.
    I think I will, unless it makes a difference, I will go 
back and forth now if that will be all right. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Caruso, you run the lead Federal agency for analyzing 
information about energy prices and supply, and yet, as you 
have in the past, which is why I started the discussion an hour 
ago about you all, you have again told the Subcommittee that 
speculation is not a serious problem and it doesn't warrant a 
serious response. I disagree profoundly with it, and obviously 
my colleagues do, as well. So let me get into a few of the 
specific issues and have you tell me whether you think it is in 
the public interest to know information about areas I think are 
important.
    With respect to physical inventory, and you all issue these 
reports, you put them out, there are millions and millions of 
barrels of oil sitting in storage now. Do you think it is 
important for the public to know who the large holders are of 
those barrels of oil?
    Mr. Caruso. Yes, I think that is public information. I 
mean, the owners of inventories are the big oil companies. We 
don't publish them by company. That is confidential. But the 
fact that those companies are----
    Senator Wyden. That is what I am asking for. I think that 
the public ought to have a right to know who the large holders 
are. I don't know of anywhere where people can get that 
information. Are you saying that there is somewhere where I can 
get that information?
    Mr. Caruso. We do not publish it because we----
    Senator Wyden. But I asked you----
    Mr. Caruso [continuing]. We collect it on a pledge of 
confidentiality.
    Senator Wyden. But do you think it is in the interest? Is 
it in the public interest for our people to know who are the 
large holders? I do, because I think it goes right to the heart 
of being able to track speculative activity here. I mean, this 
is not a question of price controls or somebody introducing 
legislation. It is a question of information that I think 
people ought to have. But you don't think it is something you 
ought to be doing?
    Mr. Caruso. We collected data on a pledge of 
confidentiality, based on statutes that established the EIA in 
1977, as other statistical agencies do.
    Senator Wyden. Do you think you ought to make that 
information available to the Congress, because you have 
resisted----
    Mr. Caruso. We will do whatever is the law.
    Senator Wyden. You have resisted that in the past.
    Mr. Caruso. We comply with the law. There is a law.
    Senator Wyden. Do you think that ought to be done in the 
future?
    Mr. Caruso. I would leave that up to the policy makers----
    Senator Wyden. But I am asking you because you are the 
person who right now is on the front lines of collecting 
information about speculative practices when people like Lee 
Raymond are coming in here and telling us it is a very 
significant factor. Do you think that kind of information ought 
to be made available to the Congress so that the Congress can 
make judgments in this area? Yes or no?
    Mr. Caruso. From a statistical point of view, no, because 
it would----
    Senator Wyden. Thank you.
    Mr. Caruso [continuing]. Stifle the data collection.
    Senator Wyden. OK. Then let me ask you about the 
relationship of CFTC to the role that I think you ought to be 
performing, which is to be looking, for example, at large 
holders in matters that go to speculation. Now, the CFTC has 
issued a variety of announcements recently--a million dollar 
settlement penalty against Marathon Oil, the settlement penalty 
against a former British Petroleum gasoline trader, and 
Amaranth. We are talking about a variety of these different 
settlements. So what this all goes to is the manipulation of 
the very prices your organization is insisting can be explained 
by the laws of supply and demand. Why do you all think that you 
should sort of ignore these documented examples of market 
manipulation?
    Mr. Caruso. We don't ignore them. We work in cooperation 
with CFTC when those instances are required through the 
procedures that are already in place.
    Senator Wyden. Well, you don't collect large trader 
information on who is holding physical energy inventory. I 
mean, it seems to me you say, well, some other people are 
taking action in this area, but you have got hundreds of people 
and you can't put a few people on this particular issue of 
looking at speculation?
    Mr. Caruso. This is the role of the CFTC and the Federal 
Trade Commission and others to provide oversight and 
enforcement. We are a data collection and analysis agency. I 
think the CFTC is doing its job.
    Senator Wyden. I just think for you to say, in effect, that 
it is not your job, even though you have come up to the 
Congress and said it is really market forces. I mean, Senator 
Levin asked you about that. I have asked you about it in the 
past. You have got it in your reports. You say this is really 
not a very serious thing. So you are making a conclusion, it is 
not a serious thing, but you won't put anybody on the question 
of actually analyzing what is going on in some areas like 
finding out who the large holders are. And I think that is a 
dereliction of what the lead Federal agency ought to be doing.
    I am telling you, I am going to bird dog this until we 
change your agency's role on this. I think you are a decent 
fellow. We have talked about this in the past. But I think the 
agency is profoundly wrong with respect to sitting on the 
sidelines about speculation and I suspect, having listened to 
colleagues here this morning, we are going to have some allies 
as we try to get you all off----
    Mr. Caruso. I just want to clarify. I am not saying it is 
not a serious issue. It is a very serious issue.
    Senator Wyden. Chairman Levin had to ask you at least three 
times the question of whether you thought speculation was even 
a factor. You haven't--and that is why I quoted the reports. Do 
you want me to read them back to you? In 2006 and 2007, you 
said that it was not a serious problem, and you have dismissed 
it again. It is, and your agency is not doing what it ought to 
be doing in terms of collecting this information. I, for one, 
am going to stay at it until we get it.
    Thank you, Mr. Chairman.
    Senator Levin. Thank you. But you just said 20 seconds ago 
it is a serious problem.
    Mr. Caruso. No. I said we are not saying it is not a 
serious issue.
    Senator Levin. It is a serious issue.
    Mr. Caruso. It is a serious issue that should be looked at 
by the appropriate----
    Senator Levin. It is the first time we have heard you use 
the word ``serious'' relative to speculation, that is a serious 
issue. As often as a number of people have tried to get you to 
acknowledge that, you have been unwilling to say that.
    Mr. Caruso. Well, it may have been the different ways the 
question was worded. I am saying that the issue that is being 
discussed here, looking at the role of speculation in the 
market, is definitely a serious issue and I agree that it is 
the appropriate thing to be looked at by the Commodity Futures 
Trading Commission and others that are charged with oversight 
and enforcement.
    Senator Levin. But not by you?
    Mr. Caruso. We look at it as one of the many factors in the 
oil market analysis----
    Senator Levin. Thank you.
    Mr. Caruso. And that is the way I responded to your 
question. It is one of many factors.
    Senator Levin. Thanks. Senator Collins.
    Senator Collins. Thank you.
    Mr. Caruso, current law requires the Department of Energy 
to evaluate the impact on markets when the SPR is being filled, 
and as a result of an amendment which Senator Levin authored in 
2005 and I was his chief cosponsor, the law specifically says 
that decisions that the Department makes with regard to the 
Strategic Petroleum Reserve must be made to ``avoid incurring 
excessive cost or appreciably affecting the price of petroleum 
products for consumers.'' So the law is very specific, yet you 
have testified today that those in charge of filling the 
reserve have not consulted with you on what the impact on 
prices would be. Is that correct?
    Mr. Caruso. That is correct. We have not been asked to 
analyze the impact of----
    Let me just correct that. I was asked in late 2003 and we 
presented a memorandum to Secretary Abraham at that time.
    Senator Collins. But as we have all pointed out, we have 
had a huge jump in oil prices in the last 6 months and yet the 
Department is continuing to fill the Strategic Petroleum 
Reserve, thus taking oil off the market. So I am left at a loss 
why you have not been asked by those responsible for making the 
decisions on when and whether to fill the reserve to make those 
purchases, that you have not been asked what the impact would 
be on consumer prices, on supplies, on inventories as the law 
specifically directs that to be taken into consideration. Do 
you believe the Department of Energy is complying with the law?
    Mr. Caruso. I would have to defer to, of course, the policy 
makers in the Department, but they have other analytical 
resources--such as the Office of Fossil Energy, which is where 
the Strategic Petroleum Reserve exists----
    Senator Collins. But you have described yourself this 
morning as the agency that does data collection and analysis. 
Aren't you the logical agency within the Department for those 
making this decision to turn to?
    Mr. Caruso. Senator, as I indicated, we are certainly 
available to do what is required by the Administration or the 
Congress.
    Senator Collins. Well, back when Secretary Abraham was in 
charge of the Department, you said you were asked what the 
impact would be, correct?
    Mr. Caruso. That was correct, in 2003, I believe.
    Senator Collins. And you have not been asked since that 
time, despite the fact that we have had a huge spike in oil 
prices, which would suggest that it is the worst possible time 
to be buying oil for the reserve, is that correct?
    Mr. Caruso. I have not had any formal request to do that.
    Senator Collins. Mr. Chairman, I hope this is an issue that 
we can pursue, because it seems evident to me that the 
Department is not complying with the law that you wrote and I 
was pleased to be your principal cosponsor. The law is very 
explicit on what the standards are, and yet it appears that the 
Department is not even making the analysis necessary. So I look 
forward to----
    Senator Levin. In that regard, why don't we do this, 
Senator Collins, and thank you for pointing this out. We are 
going to ask you, Mr. Caruso, to ask the policy makers at the 
Department of Energy why it is that they have not consulted 
with you and whether or not they have complied with the 
provision that Senator Collins has identified which is law, and 
if not, why not, and report back to these two Subcommittees. 
Will you do that?
    Mr. Caruso. Yes, Senator.
    Senator Levin. Thank you.
    Senator Collins. May I ask one quick question?
    Senator Levin. Yes.
    Senator Collins. Dr. Verleger, I very much appreciated your 
testimony on the Strategic Petroleum Reserve because I, too, 
believe that was a factor that we can influence that has the 
potential to affect prices. You say in your testimony that the 
current oil price increase has not been spurred by speculation, 
and I just want to make sure I am understanding your testimony. 
It seems that you and Dr. Krapels have come to different 
conclusions, is that correct?
    Mr. Verleger. I am not exactly sure where Mr. Krapels is on 
that. One of the problems, as the CFTC noted in its paper on 
large trader activities, it is very easy to look at the same 
data and reach two different conclusions.
    What I have observed since August 18--I think I first 
followed this data in an academic article in 1985--a couple of 
things have happened. One is we have a financial crisis and as 
part of that financial crisis, we have seen people look for any 
sort of asset that is liquid that they can price, like the 
Special Investment Vehicles (SIVs), and so on. So to a certain 
extent, I think there has been downward pressure on prices. I 
think we will learn later when we get the data there is 
downward pressure on prices from speculators as financial 
organizations scramble for liquidity. This is something that 
Charles Kindleberger wrote about in ``Manics, Panics, and 
Crises'' years ago and is something many of my classmates at 
MIT have studied and I have been following.
    As I said, we have had this very big price increase and 
this is--speculation just doesn't fit with this right now 
because the people who were long oil or were long physical 
assets are desperate for cash and they are going to Treasury 
bills. So I think in this cycle, this particular time, I don't 
think we are going to find it is speculation that did it.
    There are pension funds that are buying assets, and that is 
what Dr. Krapels and I were talking about in Vienna, and those 
pension funds have continued to buy assets. Harvard has bought 
assets, and so on. They view those as a better return than, 
say, buying Exxon stock, and it is perfectly legitimate. That 
is not speculation. These are people who own stock and stay in 
that asset for long periods of time. They may have to roll 
their futures positions every month. They may choose to buy oil 
and then just every month replace the futures contract. But 
that is not speculation. That is investment and that is a new 
form of speculation.
    Senator Collins. Thank you. Dr. Krapels.
    Mr. Krapels. I completely agree with Mr. Veleger. I don't 
think we are in a different position here and I think the use 
of the word speculation tends to narrow the discussion. When a 
pension fund decides to buy a lot of oil contracts as an 
ongoing strategic acquisition of assets and intends to hold 
those contracts for years and years and just simply rolls them 
over, is that speculation? It is, but it is not a speculative 
organization that is doing it because it is likely representing 
people that you wouldn't typically associate with speculation.
    So one of the things I tried to share with you in my 
written testimony is that there are four or five different 
types of financial entities engaging in this market. It has 
created a hyper-sensitive situation. If delta hedging is having 
the effects that Mr. Velerger describes, then what we really 
have here is just a hyper-sensitive market created by the very 
size of the positions that hedgers and speculators constantly 
deal with.
    Senator Collins. Thank you. I think your final comments 
show how difficult this issue is. I am convinced that we do 
need better oversight, much more transparency. I think that is 
absolutely key. And exactly how to draft this legislation, I 
think is going to be a real challenge to us, and yet I think 
something needs to be done. Thank you for your testimony. Thank 
you, Mr. Chairman.
    Mr. Krapels. Thank you.
    Senator Levin. And we will have another round now of 
questions.
    Dr. Verleger, you indicated in this cycle, you didn't think 
that speculation was the cause of the jump. In the previous 
cycle, 1 year earlier, I believe you did feel that in that 
cycle, as I remember, $20 of the $70 price of oil in that cycle 
you felt could be attributed to speculation. You are not 
saying, as I understand it, that it is not that speculation 
doesn't impact prices, it is just that in this particular 
cycle, you don't see that is the cause of this particular 
increase?
    Mr. Verleger. I would have to go back. I think one of the 
things Mr. Krapels and I say is that when we first started 
looking at this, we both had color in our hair. I think if you 
read the history of agriculture and so on, speculation always 
gets more credit than it deserves. I think at one point, $20 
was done a couple years ago.
    Senator Levin. Let us be clear. Twenty dollars was on a $70 
barrel?
    Mr. Verleger. When the price got up to $70, yes.
    Senator Levin. That was your feeling at that time?
    Mr. Verleger. That was the feeling at the time. I probably 
wouldn't say it again today. I think if I looked at it, I would 
come to a different conclusion.
    Part of it is, as Dr. Krapels has just pointed out, 
commodity--what we have had is a move into commodities as an 
asset class. That started in 1990. I refer to a paper by two 
Yale and Penn academics, but there have been a series of them, 
and it took--very little money came for years and then a lot of 
cash started coming in around 2004 and some of that got seen as 
speculation. But essentially what it did was these firms would 
buy oil, buy other commodities. It is a diversified portfolio 
that they follow, and they follow a very rigid set of rules.
    From 2004 to 2006, we benefited because that converted 
backwardation to contango and that promoted inventory building, 
so that a year ago, Morgan Stanley was holding a great deal of 
heating oil in New York Harbor and earning a good return on 
this. This is how Cargill became famous. They buy at $20 and 
you sell forward in the futures market to $40 and earn a return 
of, if that is a year, 100 percent. Those inventories were 
available last winter and so they reduced the price of heating 
oil in Maine and Minnesota and they reduced the price of crude 
oil. The investors lost money because of the way they were 
structuring their instruments and they have changed that. And I 
think I picked up some of that was speculation.
    Senator Levin. All right. Let me go back to you, Mr. 
Caruso. In your Energy Information Administration report, which 
I have quoted before, you said that the role of these non-
commercial future market participants in recent price 
developments is ``difficult to assess.'' But then you say 
general principles favor a focus on fundamentals rather than 
consideration of alternative price drivers. You are saying that 
the reason you are not assessing them is because it is 
difficult.
    Mr. Caruso. It is difficult to actually get at a specific--
--
    Senator Levin. But now you are saying----
    Mr. Caruso [continuing]. A specific number, let us say--you 
just asked Mr. Veleger, $20 out of the $70.
    Senator Levin. Right.
    Mr. Caruso. What we are saying is that we do not believe it 
is possible to actually pinpoint the dollar amount that is 
related to speculation.
    Senator Levin. But what troubles me is that here in this 
report you are saying it is difficult to assess.
    Mr. Caruso. Yes.
    Senator Levin. Here, you are telling us it is someone 
else's job to assess it, not yours. You said CFTC assesses it.
    Mr. Caruso. No. I am saying that when one looks at what is 
the impact of speculation on the marketplace, there are other--
--
    Senator Levin. Of course. We all agree to that. It is not 
the only factor. It is one of many factors.
    Mr. Caruso. Yes.
    Senator Levin. Since it has been such an increase, a huge 
increase in speculation, we have asked you to assess it. Here 
you are saying it is difficult in your report. Therefore, you 
will look at more fundamental things.
    Mr. Caruso. Yes. Our assessment----
    Senator Levin. Yet you tell us today, well, someone else is 
assessing it, CFTC.
    Mr. Caruso. What I am saying is that our assessment is that 
we can explain most of the price increase through fundamentals 
and the other factors that are listed there. I won't go into 
all the factors again.
    Senator Levin. Right.
    Mr. Caruso. But when one looks at whether manipulation is 
the cause of the price increase----
    Senator Levin. Let us try speculation.
    Mr. Caruso. There are studies out there, such as by the 
CFTC, the IMF, your own Committee, that we look at, and after 
looking at all of the available evidence, our assessment is 
that we can explain most of the price increase through the 
fundamentals and the other geopolitical and political factors 
that are listed there.
    Senator Levin. Right, but we are interested in the part 
that is not explainable that way and we are asking you to----
    Mr. Caruso. We think it is very small.
    Senator Levin [continuing]. To do your job.
    Mr. Caruso. We think it is very small.
    Senator Levin. To do your job.
    Mr. Caruso. And we say----
    Senator Levin. But I thought it was difficult to assess. 
Now you are saying it is very small. It sounds like you have 
assessed it.
    Mr. Caruso. It is difficult to assess, and after doing our 
assessment of the fundamentals, most of it can be explained by 
those factors, those fundamental factors.
    Senator Levin. Is it CFTC's job to analyze the causes of 
oil price increases or decreases? Is that their job----
    Mr. Caruso. No.
    Senator Levin [continuing]. Or is it yours?
    Mr. Caruso. No. That is our job, and I have given you our 
best assessment of that.
    Senator Levin. Your best assessment was that you pointed to 
someone else's assessment. That is what you told us this 
morning.
    Mr. Caruso. No.
    Senator Levin. I just want to get back to----
    Mr. Caruso. That is not what I said this morning.
    Senator Levin. OK. We will let the record speak for itself.
    Mr. Gheit, you have heard Mr. Caruso here this morning. Do 
you have any reaction to the Energy Information 
Administration's position as to whether or not speculation is a 
significant factor in the price increase or not and whether or 
not they are pursuing carrying out their responsibility and 
giving us an assessment?
    Mr. Gheit. Well, what I heard is that it is very difficult 
to estimate or assess, and then I also heard it is very little. 
That means that there is a conclusion that it is not big 
enough, so----
    Senator Levin. That it is not very big?
    Mr. Gheit. Yes. On one hand, we said it is very difficult 
to assess. On the other hand, we are saying it is small. Either 
it is difficult to assess and I don't know exactly what it is, 
or it is very small and I did my homework and I can tell you 
that it is small.
    Senator Levin. And now when you have given us your opinion 
this morning about this is a significant cause of the recent 
major jump, 100 percent increase in the price of oil, are there 
studies that you point to, or is that based on experience?
    Mr. Gheit. It is, as I said before, I have been in this 
business 30 years. I have seen cycles and this is another 
cycle. This is an oil bubble. It is a classic case of oil 
bubble. You talk to people in OPEC, they cannot explain it. You 
talk to people in the industry, they cannot explain it. The 
speculators know the number of contracts outstanding. When 
people say oil prices are going to go up this Friday because of 
the expiration date, that has nothing to do with supply and 
demand fundamentals. That is the flow of paper coming into 
somebody's desk and just pushing a button and saying, buy me 
more or buy me less. So it has nothing to do--basically, we 
have a disconnection between the physical market and the 
financial market.
    Senator Levin. OK. Let me call on Senator Murkowski and I 
will come back. Thank you. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    I think if I listen or try to read between the lines here 
that everyone is at least in agreement that when you have tight 
supplies, it can lead to speculation, which can ultimately lead 
to the manipulation that we are all concerned about here. So I 
want to talk just a minute about the supply, the inventory 
aspect, and Mr. Caruso, you mentioned in your testimony, you 
stated that OPEC has altered the targets over the years. Do you 
think that OPEC has purposely created an inventory tightness 
and continues to keep its production at levels that deprive the 
markets of our ability to build inventories?
    Mr. Caruso. I think it was definitely their goal when they 
reduced quotas late in 2006 and the beginning of 2007. There 
were two reductions of OPEC targeted production levels, in the 
fall of 2006 and another one in the early part of 2007, mainly 
because they saw that inventories in the United States and 
other OECD countries were relatively high relative to the 5-
year average and they saw prices coming down. In the latter 
part of 2006 and the beginning of 2007, prices had gotten into 
the $50 to $60 range. This clearly was, in OPEC's view, a price 
that they would like to have seen increased, and that is why 
they reduced production. From the period of the fourth quarter 
of 2006 through the third quarter of 2007, OPEC production was 
reduced by about 800,000 barrels a day, leading to lower 
inventories and a tight, very tight market leading, we believe, 
to most of the price increase.
    Senator Murkowski. In the aftermath of Hurricane Katrina, 
we know that there were refineries that were offline and we 
know that there were wells in production that were taken off at 
that time. Are we at 100 percent now after Hurricane Katrina in 
terms of those wells that were producing prior to? Are we 
missing anything domestically then in terms of our ability to 
produce domestically?
    Mr. Caruso. Well, the oil and gas production in the Gulf of 
Mexico is increasing, but it is still below the level that 
would have been expected had the major hurricanes not occurred.
    Senator Murkowski. But is everything online?
    Mr. Caruso. We are a bit below. Some decisions were made 
not to bring certain wells and other facilities back online 
because the cost was believed to have been prohibitive given 
the revenues that could be earned by bringing that back online. 
The cost-benefit decision was made to leave some of that 
production offline and it delayed the new production in some 
fields, including Thunderhorse, which, of course, was damaged 
by the hurricane directly.
    Senator Murkowski. But in terms of significant amounts, 
would you describe that as being significant to what we are 
seeing in our inventories now?
    Mr. Caruso. I would say it was important, but clearly not 
nearly a major driver--about one to two hundred thousand 
barrels per day lower than it would have been.
    Senator Murkowski. Let me ask you a little bit different 
tact here. This was in your written testimony and you also 
mentioned briefly in your oral testimony here the impact of the 
U.S. dollar, recognizing that we are seeing a decline there, 
adding to continued oil consumption because oil is trading in 
U.S. dollars, making the increase in the price of oil less 
severe on foreign economies. Is it likely that oil prices might 
move from dollar pricing to being based on some other currency? 
I know that this was discussed in some recent OPEC meetings. 
You look at European nations, you look at Japan with very 
strong currencies of their own. Is that price of oil affecting 
them as we are seeing here? Just give me a little discussion on 
whether or not we will continue the direction that we are 
currently on in terms of the oil pricing.
    Mr. Caruso. The appreciation of other currencies relative 
to the dollar has meant that the costs to consumers in the Euro 
zone, in the yen in Japan and even in some other currencies, 
the full cost of the price increase is not being borne by the 
consumers in those areas. Therefore, it has contributed 
somewhat to an increase in demand because it is a lower real 
price. It has also contributed to, I believe, thinking in the 
discussions and the OPEC meetings that have been reported--that 
OPEC ministers have said their revenues, in effect, are buying 
less because of the purchasing power loss--and so it is 
certainly possible that is part of the decisionmaking process 
within OPEC, as well. Whether it would lead to a change in the 
way oil is priced, I continue to believe that it will not 
because so many of the assets held by OPEC countries are in 
dollar-denominated assets that it would be detrimental to their 
own assets.
    Senator Murkowski. Does anybody else disagree?
    Mr. Gheit. But also in OPEC, some of the countries have 
their own currency pegged to the dollar, and therefore when 
they have the revenue come in dollars and then they have to pay 
their costs with their foreign workers coming from Korea and 
elsewhere, these workers now are demanding to be paid either in 
Euro or their own country currency because the money they are 
sending home is really less than before because of the 
depreciation of the U.S. dollar. So there is tremendous 
pressure on OPEC.
    I was in Dusseldorf last week and there was a TV interview 
with the Chilean oil minister who said that I wish we had known 
about the drop in the dollar. We would have thought about 
switching to another currency before the fact. But obviously, 
if you plot the dollar against the Euro, for example, it is 
down almost 40 percent in the last couple of years here. So you 
are going to see additional pressure, upward pressure on the 
oil price as a result of the decline in the U.S. dollar.
    Senator Murkowski. Thank you, Mr. Chairman. I have no more 
questions.
    Senator Levin. Thank you. Let me get back to the NYMEX 
contract for a minute. We were talking, Senator Murkowski and 
others were talking about valid benchmarks and the benchmark 
which is used for the NYMEX price is the Cushing, Oklahoma 
price. Now, that price can be affected, I take it, when we are 
using sweet crude for the SPR. Dr. Verleger, that is basically 
the heart of your testimony, is it not?
    Mr. Verleger. Yes. Now, when they say the NYMEX contract is 
the West Texas sweet crude, it is actually light sweet crude.
    Senator Levin. Light sweet crude.
    Mr. Verleger. There are a number of crude oils that can be 
delivered against the NYMEX contract and the list has changed 
over the years with the NYMEX to expand the deliverable. For 
example, a Brent could be delivered into Houston and then piped 
up. It has to be moved into Cushing unless an alternative 
delivery procedure is agreed to by both the long and the short. 
But there are a number of crudes and they are all kind of light 
sweet. Many of them are also on the list of sweet crudes that 
qualify for submission to the DOE's West Hackberry, where they 
keep sweet crude in the Strategic Petroleum Reserve.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 20a., which appears in the Appendix on page 
208.
---------------------------------------------------------------------------
    Senator Levin. Would it be wise for the SPR to use a 
greater percentage of non-sweet, I guess sour crude, in terms 
of price?
    Mr. Verleger. That is in my testimony. Yes.
    Senator Levin. That is the heart of your testimony?
    Mr. Verleger. Yes, the heart of my testimony.
    Senator Levin. All right. Now, Mr. Caruso, why is the DOE 
not doing that?
    Mr. Caruso. My understanding, as I am not in the policy 
making business, but my understanding is the way the crudes are 
chosen is to try to have the best mix that fits our refinery 
configurations in this country and that is what the Strategic 
Petroleum Reserve Office has used as a criteria for that.
    Senator Levin. All right. So now Dr. Verleger----
    Mr. Verleger. I was at Treasury when we created this in the 
1970s. In the 1970s, we had a number of refineries that could 
only process sweet crude and so they developed a number of 
facilities. If you read the international energy programs, 
there are a number of different storage salt domes and we put 
sweet crude in those and that is 30 years ago.
    Now, we have moved to a situation where more refiners can 
process heavier crudes. We also have gone to these very tight 
environmental specifications which could in an emergency be 
relaxed, as they were after Hurricane Katrina. And yet to my 
knowledge, there has been no study as to whether the mix of 
crudes we are putting into the reserve today is appropriate 
given today's refining standards.
    Senator Levin. Or the capability of taking action if they 
are not perfectly reflective of refineries, then.
    Mr. Verleger. Right. Yes.
    Senator Levin. Either one.
    Mr. Verleger. Yes. This is----
    Senator Levin. Mr. Caruso, why doesn't the DOE make that 
change to save American consumers some money?
    Mr. Caruso. I am not aware why they have not. I do know 
that the current mix of fill is one-third light sweet and two-
thirds heavy sour.
    Senator Levin. We set in law, we know that, but that is 
apparently the way it has been for some time. Has it changed 
that mix?
    Mr. Verleger. Well, next June, the material the 
Subcommittee staff provided me said that it is going to be two-
thirds sweet crude, one-third sour crude in the first half of 
this next year.
    Senator Levin. Now, why is that being done?
    Mr. Caruso. I would have to answer that for the record 
because it is a decision made by the office within DOE that 
runs the Strategic Petroleum Reserve.
    Senator Levin. Yes. Would you find that out?
    Mr. Caruso. Yes, sir, I will be happy to.
    Senator Levin. We have been pressing this point. We have a 
law which says that you have got to fill the reserve in a way 
that minimizes the cost. It looks to me like the DOE is 
ignoring the law, as Senator Collins pointed out, but also 
ignoring the pocketbook of Americans. This is a reserve. This 
isn't oil that we are going to have to refine. It is oil that 
someday we may have to refine, and we may have to waive 
environmental laws to refine it. But if an emergency is such 
that we have to take oil out of the reserve, why would the DOE 
ignore the law, but ignore the pocketbooks of Americans?
    Mr. Caruso. I will take that question back to the 
Department, Senator.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 20b., which appears in the Appendix on page 
209.
---------------------------------------------------------------------------
    Senator Levin. There is a chart that is up there.\2\ This 
is the price of oil at Cushing and this shows the relationship, 
at least at Cushing, of supply and demand, and we show here 
that when the demand goes up and when the supply goes down, the 
price goes up. It relates inventories to price. Mr. Caruso, can 
you see that chart?
---------------------------------------------------------------------------
    \2\ See Exhibit No. 4, which appears in the Appendix on page 121.
---------------------------------------------------------------------------
    Mr. Caruso. Yes, sir.
    Senator Levin. Does it make sense for us to be decreasing 
the supply at Cushing of sweet crude by putting that sweet 
crude in the SPR when the direct effect of what we are doing is 
increasing the price at Cushing, Oklahoma, which has a direct 
impact on the NYMEX price, which has a direct impact on future 
contracts? Does that make sense to you, or do you disagree with 
that?
    Mr. Caruso. Well, the facts are the facts. I mean, those 
are the facts that are on the chart. I don't disagree with the 
facts of the----
    Senator Levin. You believe that supply and demand is the 
thing that is the most controlling in terms of the cost of oil. 
We have argued this morning about ignoring the impact of 
speculation. But here at one location where there is not 
speculation, there is direct supply and direct demand, we see 
the relationship of price to supply. You are a big believer in 
that as being the cause instead of speculation in the general 
market. Why in the name of heaven would the DOE not follow the 
law to reduce that cost to Americans? Why would it want to 
increase the price of oil at Cushing, Oklahoma?
    I know you are going to take it for the record. You are an 
expert at this. You make assessments of energy prices. Can you 
give us any idea from your perspective why they would do that?
    Mr. Caruso. Well, obviously, a decision was made based on a 
number of factors----
    Senator Levin. But why would that decision be made? Do you 
know? Do you have any idea?
    Mr. Caruso. I can't answer that question.
    Senator Levin. We will get off that. Senator Murkowski.
    Senator Murkowski. Go ahead, Mr. Chairman. I am finished 
with my questions.
    Senator Levin. OK. All right. Should we, and I can ask all 
of you or most of you this question, should we encourage the 
NYMEX--which does a terrific job, I think most people concede--
should we encourage them to broaden what their benchmark is? 
This is something also Senator Murkowski asked. Should we 
encourage them to not just look at Cushing, Oklahoma, but 
broaden it? I guess the main determiner of that price, which 
has got such a huge impact on the future contract prices, is 
Cushing, Oklahoma. Dr. Krapels, let me start with you.
    Mr. Krapels. Creating a successful futures market is really 
difficult, and I think they have tried again and again and 
again to create a benchmark sour crude contract and have 
failed. There is simply that alchemy that they have somehow got 
the WTI to get working in the 1980s has never repeated itself 
in any other crude contract other than Brent, which looks like 
and smells like WTI.
    I am not sure Mr. Veleger would agree with this, but there 
has recently been an effort to create a sour crude futures 
market in the Middle East. I don't think it is going to 
succeed. The reasons for it, we would probably need a whole new 
set of hearings to discuss it. It is extremely difficult to 
create a successful futures market.
    Senator Levin. A different benchmark.
    Mr. Verleger. I agree.
    Senator Levin. All right.
    Mr. Verleger. But part of it is a delivery location. 
Futures markets work best when you have a number of producers 
and a number of consumers and there is really no choke point, 
and Cushing is unique in that it is where a number of pipelines 
come together and there were a number of storage companies, and 
since NYMEX has been there, they have built more tanks.
    I think that there is some hope as pipeline reversals are 
finished and sour crudes are coming down from Canada, one may 
be able to move it, move and create a contract tied to the 
Alberta contracts. The big problem, though, is that you have so 
much financial interest now tied. You now have over 2 million 
NYMEX plus ICE look-alike contracts, and that is just momentum 
and that is just--one of the things they will tell you if you 
are marketing futures contracts is the first exchange to be 
successful wins.
    Senator Levin. Would it be possible to broaden the delivery 
points? Isn't that what you were suggesting?
    Mr. Verleger. I was going to change the kind of crude----
    Senator Levin. Well, we can't change the crude.
    Mr. Verleger. Well, no, if you deliver south so you could 
change it to a sour contract in Cushing, which would change 
things. There are a number of delivery points available on 
this.
    The other thing is to go to a cash-settled contract. Brent 
is cash settled with no delivery point, and it wouldn't have 
worked in 1983 because no one believed energy was a commodity. 
Now, that is not a problem, so you could go to a cash-settled 
contract off of a series of indices and that would work very 
well and that would take some of the distortions that were 
identified here out.
    Senator Levin. Let me go back to you, Dr. Gheit. You make 
reference in your testimony to raising the current margin 
requirement. What is the current margin requirement for these 
contracts?
    Mr. Gheit. It is all over the lot. The trends are about 8 
to 12 percent.
    Senator Levin. Eight to 12 percent?
    Mr. Gheit. Right.
    Senator Levin. And what is the margin requirement for stock 
that the SEC has set?
    Mr. Gheit. Fifty percent.
    Senator Levin. Fifty percent for stock?
    Mr. Gheit. Right.
    Senator Levin. This is 8 to 12 percent here.
    Mr. Gheit. Correct.
    Senator Levin. Does that affect the amount of speculation?
    Mr. Gheit. Absolutely. What we are trying to do here is to 
slow down the traffic and to put a speed limit, because we 
don't want people to get hurt. We are not saying that we should 
block the traffic. We should allow it to proceed, but in a safe 
manner----
    Senator Levin. Now, the stock market has a lot of traffic, 
does it not?
    Mr. Gheit. Absolutely.
    Senator Levin. Even though it has got a margin requirement.
    Mr. Gheit. Absolutely.
    Senator Levin. So we don't want to--we obviously want to 
have some traffic, as you say, Mr. Gheit. Would you have a 
problem, Dr. Krapels, with increasing the margin requirements?
    Mr. Krapels. I would not. I think it is an overdue idea.
    Senator Levin. Could you comment on that?
    Mr. Krapels. Well, I think for exactly the reasons Mr. 
Gheit has mentioned. We tend to get over-leveraged in these 
markets. Big traders, especially speculative hedge funds, using 
the amount of leverage that they use, it magnifies their impact 
on price. I am not sure 50 percent is the right number, but 
something well north of where we are right now seems to me like 
good public policy.
    Senator Levin. Anyone else?
    Mr. Verleger. It seems to me that both Mr. Krapels and Mr. 
Gheit are right. The one point to add is that all these passive 
investors that are coming in that have bought into this market 
essential have a 100 percent margin because they set aside, 
when they buy a commodity contract, they set aside. So the 
liquidity is there in the market already, and I think in terms 
of reducing speculation, there is a longstanding history in 
financial markets where you raise the margins and you reduce 
the speculation. Whether it changes the behavior of prices, I 
am not sure.
    Senator Levin. OK.
    Mr. Gheit. But also if we change, if the dynamics were to 
switch into other types of crude, I do believe that will have a 
negative impact on WTI and will just pull it down sharply. We 
need to burst the bubble. Whether it is going to come from 
economic slowdown or government action, but I feel that this is 
like 24/7 open gambling hole that people are saying that nobody 
will get hurt, but with the subprime, that with the S&L and all 
these things, a lot of people were saying it is going to be a 
win/win. There will be no casualties here.
    The fact of the matter, it is different and I don't believe 
that this party will last forever. It will come to an end, and 
I think the sooner the better, because the longer it stays, it 
is really going to distort and disrupt future capital spending, 
because right now, a lot of oil companies will end up throwing 
in the towel, believing that oil prices of $100 are here to 
stay, and they will make investment decisions that we will 
regret sooner or later. And that is obviously going to hurt the 
oil industry. It is going to hurt the supply-demand situation. 
So speculators are making money, but at a huge cost in the 
future to the economy, to the oil industry, to everybody. So a 
few people will make a lot of money at the expense of a very 
large number of people.
    Senator Levin. Many Members of this panel believe in that 
very deeply, not all of us perhaps. I can't speak for anybody 
else, but it is obvious that many of us think that this 
speculation has run wild. The chart on the amount of 
speculation demonstrates it.\1\ I think you all either think 
that speculation has an impact on prices, obviously, or 
clearly, or in the case of Mr. Caruso, a begrudging perhaps. 
But nonetheless, that has been the subject of this hearing 
today and----
---------------------------------------------------------------------------
    \1\ See Exhibit No. 3, which appears in the Appendix on page 120.
---------------------------------------------------------------------------
    Senator Murkowski. Mr. Chairman, can I----
    Senator Levin. Please. Senator Murkowski.
    Senator Murkowski. Before we wrap up, I am trying to get a 
better handle in my mind on how we define what a speculator is. 
You have a speculator that can affect prices and then you have 
a speculator that can manipulate prices. Tell me how we 
determine the difference, because I think it was you, Mr. 
Gheit, or maybe it was Dr. Krapels mentioned when we were 
talking about the pension funds and if you hold these for 20 
years, is it speculation? Well, yes it is, but for a different 
purpose than one whose intent is to manipulate the markets. And 
I think this is where so many of my colleagues get so upset and 
pound the table and say, we need to do something about it, when 
we are actually manipulating the market. How do we define or 
make that distinction?
    Mr. Gheit. It is a very gray area. The speculation and 
manipulation go hand in hand. You are not going to get an oil 
trader coming on television saying that he thinks oil prices 
will go down. Why? They are intimate. Everybody is in it now. 
It is like if you can't beat them, join them. And it is almost 
a self-fulfilling prophecy. When somebody says oil prices will 
be $100 before the year end, everybody is pushing for oil 
prices to cross the $100 mark.
    Senator Murkowski. So are there any good speculators?
    Mr. Krapels. There are many good speculators, and I think 
you have asked a pivotal question, Senator. I don't think you 
need to answer it. I think the one weakness of the report on 
Amaranth is that it is titled ``Excessive Speculation.'' Now, 
there is a clear case for excessive speculation in the case of 
Amaranth, but it is so much on the margin of common practice 
that I think the solution to the problem that we are talking 
about, excessive volatility, tremendous hyper-sensitivity to 
prices, could be substantially addressed with higher margin 
requirements and much more information disclosure. If people 
knew what was going on, we wouldn't have the conspiracy 
theories that we have running around today. So a lot can be 
fixed just with those two elements of the law--of the 
proposals.
    Senator Levin. Let me give the definition from the CFTC, 
and I happen to agree with what you have said about 
difficulties of defining, but this is what the effort is by the 
CFTC. A speculator does not produce or use the commodity, but 
risks his or her own capital trading futures in that commodity 
in the hopes of making a profit on price changes. So I think 
the key to it is someone who isn't producing or using a 
commodity, but it is somebody who is buying and selling a piece 
of paper with no intent to use or produce it, is that----
    Mr. Krapels. But millions of our citizens do it, so----
    Senator Levin. Of course. No.
    Mr. Verleger. There is no difference, really, between my 
purchase of General Motors stock, because I don't intend to use 
or make General Motors products----
    Senator Levin. But you do intend to keep it, the stock, 
presumably, unless you are----
    Mr. Verleger. But I also have a passive investment through 
a fund in futures and they hold oil. Now, some of them hold oil 
in the ground and some just buy futures and they just hold 
claims on oil. It is a perfectly legitimate academic, or 
financial definition. They buy the oil and they just hold the 
position and then it matures, they sell the position because 
they have to and they take another long position. They stay 
steadily there. It is an investment. It is serving a very 
useful purpose because it promotes investment, and it doesn't 
cause this volatility.
    Senator Levin. Let me ask a couple other of you about a 
couple other suggestions here of Mr. Gheit. Current margin 
requirements, you commented on that. Setting limits on the 
number of oil contracts by each account is another one of the 
suggestions at the end of your testimony, Mr. Gheit. Dr. 
Krapels.
    Mr. Krapels. I absolutely agree. I think looking at not 
just the prompt month but the out months, as well, where 
Amaranth did a lot of its mischief. I think looking at the 
positions of individual traders as the CFTC does today, 
applying that to ICE and monitoring it and enforcing rules is 
part of what----
    Senator Levin. OK, and Dr. Verleger?
    Mr. Verleger. Absolutely.
    Senator Levin. All right. So we have a third suggestion. 
Now, establishing a minimum holding period. Mr. Gheit suggested 
a minimum. This gets to the question of the teachers' pension 
funds or something. They intend to hold that for a while.
    Mr. Verleger. They hold it. They roll the positions 
forward----
    Senator Levin. But the fund that they are investing in 
doesn't intend to hold it for a particular period of time. They 
could buy and sell tomorrow or the next day constantly. But 
does that have as much appeal to either of you as it does to 
Mr. Gheit?
    Mr. Verleger. The Goldman Sachs and the Dow Jones and these 
other funds actually continue holding it. Based on the number 
of dollars, they hold that number of contracts and they keep on 
holding it. The holding period, when I heard Mr. Gheit say it 
the first time, I said, that is a good idea. The problem is 
that somebody who is speculating could take other offsetting 
positions. I think that is a regulation that is probably 
impossible to enforce.
    Senator Levin. OK. Dr. Krapels.
    Mr. Krapels. I agree.
    Senator Levin. Now, preventing conflict of interest by 
financial institutions is another of Mr. Gheit's suggestions. 
Give us an example, if you would, of----
    Mr. Gheit. Well, basically have the dozen or so largest 
investment banks in the world, they are all involved heavily in 
oil trading. But they are also clearinghouses. They also make 
investments in their own account. So basically, they can see 
your cards, you don't see theirs, so they can see the traffic, 
whether it is going north or south, and they can put their 
money either with or ahead of the people who are putting orders 
through and they can manipulate the price the way they want to 
see it.
    Senator Levin. With their own holdings?
    Mr. Gheit. With their own holdings, because they have a 
position. They can basically move the market their way if they 
want, and then it is in momentum and all of a sudden you see 
everybody doing the same. Their program changes. They are all 
the same.
    But what I have noticed looking at what is happening, you 
read a statement in London and all of a sudden you see the 
reaction here in New York. It is almost fanning the flames. And 
again, a self-fulfilling prophecy. You say oil prices--one 
large investment bank not long ago said although we still think 
oil prices are still going to go higher, but we advise some of 
you might wish to take money off the table. Guess what? Oil 
prices dropped by $4 in 1 day. There was no change in supply 
and demand. The following day, oil prices regained the entire 
amount.
    Senator Levin. OK. Dr. Krapels.
    Mr. Krapels. No, I don't like that idea.
    Senator Levin. OK.
    Mr. Verleger. I don't like it. I think it is impractical--
--
    Senator Levin. On the conflict of interest issue?
    Mr. Verleger. Conflict of interest, yes. It is--not given 
the structure of our financial markets today.
    Senator Levin. Can't do it, OK. The other one, stiff 
penalties on violators----
    Mr. Krapels. Yes.
    Senator Levin. I will leave that one go.
    Thank you all. You have been a terrific panel. We 
appreciate it all. This has been a long hearing and we will 
stand adjourned.
    [Whereupon, at 1 p.m., the Subcommittees were adjourned.]
                            A P P E N D I X

                              ----------                              


               OPENING STATEMENT OF SENATOR JEFF BINGAMAN
    I want to begin by thanking the witnesses, as well as Senators 
Levin and Dorgan for chairing today's joint subcommittee hearing. 
Today's session promises lively discussion on a topic we have been 
debating in Congress for a number of years now: whether increased 
speculation in financial energy markets is contributing to recent, 
record-setting oil prices.
    Certainly, there is a broad recognition that--in the long-term--
rising demand in developing economies such as China and India pose a 
challenge. Political uncertainties in oil producing regions of the 
world provide another source of grave concern.
    But in addition to these factors, there have been a number of 
important developments in financial energy markets in recent years. 
These trends include a dramatic increase in the volume of trading in 
oil derivative markets, and the participation of new classes of traders 
in those markets.
    According to a Government Accountability Office (GAO) report issued 
in October of this year, the average daily contract volume for crude 
oil traded on the New York Mercantile Exchange (NYMEX) increased by 90 
percent between 2001 and 2006. Additionally, GAO noted that the average 
daily number of noncommercial participants in crude oil markets--
including hedge funds and large institutional investors--more than 
doubled from 2003 to 2006.
    Finally, there has also been an increasing amount of trading 
occurring outside of futures exchanges--characterized by former Federal 
Reserve Chairman Allen Greenspan (in testimony last year before the 
Senate Foreign Relations Committee) as ``a major upsurge in over-the-
counter trading of oil futures and other commodity derivatives.''
    Taken together, it seems to me that just as the demand for physical 
barrels of oil has grown with the global economy, there is an 
increasing demand for oil purely as a financial asset.
    Untangling whether and how these dual sources of demand may be 
operating in concert--and potentially impacting oil prices--is 
certainly a complicated task. To my mind, it is a task made more 
difficult to the extent policymakers are confronted with a lack of 
reliable or comprehensive data across these markets.
    As it relates to the fundamentals of the physical market, this 
includes a notable lack of reliable information with respect to global 
oil reserves. As for trading in oil and other energy-related 
derivatives, I remain troubled by the lack of transparency related to 
the over-the-counter markets.
    It seems to me that markets operate best on the basis of complete 
and reliable information. In the absence of such information, I would 
suggest that the probability increases for prevailing market prices to 
become untethered from their fundamentals.
    Today, we have a distinguished panel with us, and I think this 
hearing offers us an opportunity to more fully consider a number of 
these complicated issues. So again, I thank Senator Levin and Senator 
Dorgan, and look forward to the testimony of our witnesses.
                               __________
                OPENING STATEMENT OF SENATOR KEN SALAZAR
    Thank you Chairman Dorgan and Chairman Levin as well as Ranking 
Members Murkowski and Coleman for holding today's joint hearing on 
crude oil markets. Today's hearing should shed light on the economic 
and market forces that determine the price of oil. Global demand for 
this resource grows stronger daily. Ensuring a rational and open crude 
oil market is a matter of national and economic security.
    The Enron scandal provided us with an object lesson in the 
manipulation of electronic commodity exchanges, and I am sure that each 
member of our two Committees takes that lesson to heart.
    As oil nearly hit $100 a barrel recently, some analysts suggested 
that speculation in the crude oil market played a role in this price 
surge. Energy derivatives have become extremely popular as a financial 
tool, and have attracted numerous non-commercial entities into the 
crude oil market. Today we seek your views on whether these changes 
have made the market more vulnerable to manipulation.
    Because of strong leadership from this Congress, our country is on 
the verge of a clean energy revolution. Our nation is extremely rich in 
renewable energy resources and I am hopeful that we will one day 
achieve true energy independence.
    However, as we continue to rely on foreign oil in our 
transportation sector, it is imperative for us to understand the 
constraints we face in the marketplace. For this reason, I am pleased 
that this hearing was organized and I look forward to hearing the 
insight that our witnesses will share with us here today.
    Thank you.
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