[Senate Hearing 110-768]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-768
 
  ENERGY INFORMATION ADMINISTRATION'S FORECASTS FOR OIL AND GASOLINE 
                                 PRICES

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                     JUNE 25, 2008--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html


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                               __________
                      COMMITTEE ON APPROPRIATIONS

                ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont            TED STEVENS, Alaska
TOM HARKIN, Iowa                     ARLEN SPECTER, Pennsylvania
BARBARA A. MIKULSKI, Maryland        PETE V. DOMENICI, New Mexico
HERB KOHL, Wisconsin                 CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington             MITCH McCONNELL, Kentucky
BYRON L. DORGAN, North Dakota        RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California         JUDD GREGG, New Hampshire
RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island              SAM BROWNBACK, Kansas
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
BEN NELSON, Nebraska                 LAMAR ALEXANDER, Tennessee

                    Charles Kieffer, Staff Director
                  Bruce Evans, Minority Staff Director
                                 ------                                

              Subcommittee on Energy and Water Development

                BYRON L. DORGAN, North Dakota, Chairman
ROBERT C. BYRD, West Virginia        PETE V. DOMENICI, New Mexico
PATTY MURRAY, Washington             THAD COCHRAN, Mississippi
DIANNE FEINSTEIN, California         MITCH McCONNELL, Kentucky
TIM JOHNSON, South Dakota            ROBERT F. BENNETT, Utah
MARY L. LANDRIEU, Louisiana          LARRY CRAIG, Idaho
DANIEL K. INOUYE, Hawaii             CHRISTOPHER S. BOND, Missouri
JACK REED, Rhode Island              KAY BAILEY HUTCHISON, Texas
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado

                           Professional Staff

                               Doug Clapp
                             Roger Cockrell
                         Franz Wuerfmannsdobler
                        Scott O'Malia (Minority)
                         Brad Fuller (Minority)

                         Administrative Support

                              Michael Bain


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Byron L. Dorgan.....................     1
Opening Statement of Senator Pete V. Domenici....................     3
Statement of Senator Patty Murray................................     5
    Prepared Statement...........................................     6
Statement of Senator Wayne Allard................................     6
Statement of Senator Robert F. Bennett...........................     8
Statement of Guy Caruso, Administrator, Energy Information 
  Administration, Department of Energy...........................    10
    Prepared Statement...........................................    12
EIA's Current Oil and Gasoline Price Forecast and Market Analysis    13
Analytical Methods...............................................    14
Market Fundamentals..............................................    16
Financial Markets and Oil Prices.................................    18
Outer Continental Shelf..........................................    30
OCS Production...................................................    39
Additional Committee Questions...................................    43
Questions Submitted by Senator Dianne Feinstein..................    43


  ENERGY INFORMATION ADMINISTRATION'S FORECASTS FOR OIL AND GASOLINE 
                                 PRICES

                              ----------                              


                        WEDNESDAY, JUNE 25, 2008

                               U.S. Senate,
      Subcommittee on Energy and Water Development,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:35 p.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Byron L. Dorgan (chairman) 
presiding.
    Present: Senators Dorgan, Murray, Feinstein, Domenici, 
Bennett, Craig, and Allard.


              opening statement of senator byron l. dorgan


    Senator Dorgan. I am going to call the hearing to order. 
This is a hearing of the Appropriations Subcommittee on Energy 
and Water Development, an oversight hearing on the Energy 
Information Administration's fiscal year 2009 budget request, 
as well as a discussion of forecasts on oil and gasoline 
prices.
    Mr. Caruso, the Administrator, we appreciate your being 
here. I know that from watching the news reports, you have been 
in Saudi Arabia for the meeting called by the Saudis that was 
held, involving people from around the world. We know that you 
have traveled a lot of miles recently and are perhaps weary, 
but we appreciate, nonetheless, your coming to this discussion.
    The Energy Information Administration is a very important 
agency and department, and the President has requested 
increased funding for the EIA. The EIA, as you know, produces 
reports and information that is quoted by sources all across 
this country on the issue of energy supply, energy demand, 
energy price, and many related matters. So what you do and say 
and think and evaluate is very important in this country. You 
make short-term forecasts of energy prices. These are 
presumably to be benchmarked as to the direction of critical 
energy resources and their relationship to our economy.
    I want to go through some charts today. The purpose of 
calling you here is not to pass judgment on your agency. I 
think your agency is enormously valuable and important. I will 
say to you, Mr. Caruso, we have had the opportunity to sit 
across the dais from each other in the Energy Committee at 
hearings you have attended, and I know what you think, by and 
large, of what is happening in the marketplace. You know what I 
think.
    But I want to go through a series of charts, and I am going 
to ask questions of you following your statement and the 
recognition of others who will wish to make statements. But I 
do that because, as we begin a discussion about the EIA and 
what has happened at the EIA recently, I want to describe the 
at least beginning point for me of what I try to understand is 
happening in the marketplace.
    The price of oil and gas has skyrocketed. The last 12-14 
months, the price of oil has doubled. I cannot see anything in 
the fundamentals of supply and demand or the acknowledgement of 
what might or might not happen or be necessary in the future 
with respect to India and China, two large potential consumers 
in the future. I see nothing that has fundamentally changed or 
altered things sufficiently so that it would justify a doubling 
of the price of oil.
    That being the case, I want to go through a few charts, and 
I will do this very briefly. This chart describes in graphic 
form what has happened to the price of oil, as it has nearly 
doubled in a year. It is pretty startling when you think about 
it, that the price of oil would double in a year. And the 
question is what has happened in the construct of this graph--
what has happened in the middle of that that would encourage or 
support, from a fundamentals standpoint, the doubling of the 
price of oil?
    We will go on to the next one. This is a chart. I went back 
and took a look at what the EIA has predicted in each case, and 
this is a very interesting chart. It is not meant to say I told 
you so at all, but it is, based on what I could find, what the 
EIA has predicted would happen.
    In May 2007, last year, oil was about $65, and that line on 
the bottom is where you thought oil would go. July 7, that is 
where you thought oil would go. September that is where you 
thought it would go. And you go right up the line.
    And in fact, take a look at the red line which is where the 
price of oil has actually gone, and we will see that for 
whatever reason--I assume the EIA is looking at the 
fundamentals, supply, demand, all kinds of things in the 
marketplace and evaluating what you think would justify what 
price. So you make a projection. But what has happened here is 
the projection is way, way, way off, not even close because the 
price of oil has gone up like a Roman candle.
    So I am going to save that chart because we will talk about 
that more.
    But I was interested in another chart as well that I put 
together. It is a chart that shows the projection of Goldman 
Sachs. Now, that is a big, old player in this marketplace. And 
they evaluated where they thought--and they would make public 
pronouncements where they thought the price of oil would go. 
Those gray areas represent their range. Interestingly enough, 
they came a lot closer because they were in the marketplace and 
had some ability to figure out where this was going or maybe 
even the ability to help make it go to where they were 
projecting. But those gray areas are where they were predicting 
the price to be. And the last gray area is a new announcement 
by Mr. Murdy from Goldman Sachs, the possibility of $150 to 
$200 a barrel for oil, very different projections from a very 
big player in the marketplace.
    Why are they hitting their gray areas even after they 
announce them and their projections are so very different than 
the EIA?
    Let me go on, if I might, to a study that was done by the 
House of Representatives released a couple days ago. It said 
the explosive growth of speculation in the oil futures market--
2,037 percent of the activity in that market was by 
speculators. In 2008, 71 percent, that was a House Subcommittee 
on Oversight and Investigations, so a dramatic growth in 
speculation in the futures market.
    Next, this month, the past month, Secretary Bodman said the 
reason we are looking at these very high prices for oil is 
strictly supply and demand.
    The next quote is from you, Mr. Caruso. ``Our view is that 
fundamentals are pulling the market along and the investors are 
looking at the same factors we are and saying they think this 
market has more up-side potential.''
    Finally, this past week in Saudi Arabia, Secretary Bodman 
says, ``There is no evidence that we can find that speculators 
are driving futures prices for oil.''
    Now, I describe all that to you because I happen to think 
most of it is inaccurate, and the EIA is especially important 
to this country. The work you do is important. The work your 
employees do is important to this country. And I am hoping that 
we can have a discussion today not only about your budget, but 
also about the fundamentals and what is happening with the 
prices.
    My own view is very different than yours, I think, and also 
Secretary Bodman's. My view is that there is no other 
explanation, no other conceivable explanation in the last 12 to 
14 months that would justify a doubling of the price of oil. 
Fourteen months ago, was there an expectation that the Chinese 
would like to drive more cars? Sure. People from India would 
like to drive more vehicles? Sure. Are they going to need gas 
stations? You bet. We knew all of those things 14 months ago.
    In fact, over the last 14 months, people have been driving 
less in this country. We are prodigious users of energy, but 
people are driving less. You have seen the reports, 4.5-5 
billion fewer miles, and therefore there is less gasoline going 
through the carburetors. Demand is down, and for the first 5 
months of this year, crude oil inventories were up. So if 
supply is up, and demand is down, one would expect prices to 
moderate. In fact, prices continued to go up.
    The Saudis announced that they are going to produce 700 
million barrels or maybe even 800 million additional barrels of 
oil per day for a period. One would expect if supply goes up, 
prices come down. Yet, prices go up instead.
    There is a lot happening here that I think is attributable 
to unbelievable excess speculation occurring in the 
marketplace, and I am trying to understand it. Others are, and 
some people strongly say that's not the case. I believe 
strongly it is. And I am hoping we can have a discussion about 
that, Mr. Caruso, today.
    Let me call on my colleague, the ranking member, Senator 
Domenici.


             OPENING STATEMENT OF SENATOR PETE V. DOMENICI


    Senator Domenici. Well, thank you very much, Mr. Chairman.
    I think you know how much I respect you and how much I 
appreciate the ability to work with you after you took over and 
we still continue down the same steps, for the most part, and 
walk up the same steps. And we seem to be hitting on the same 
wavelengths more times than not.
    But I too have been thinking that what you are trying to 
express here may be the case, but I can tell you I have come to 
the opposite conclusion. I wish you well, but I do not believe 
that there is any body of experience or authority out there 
that would say that speculation and speculators have the 
biggest role or even a big role in the price of oil as it moved 
up during the last 2 years.
    Now, I want to be careful to say that there are factors 
that are at play that are unusual for this commodity. As I see 
it, I choose to read people like Daniel Yergin--I guess you 
know of him, do you not, Mr. Caruso? And he is one of the 
foremost energy experts. I do not believe anybody has ever said 
he has any interest other than the facts. And the Energy 
Information Agency and many other experts have attributed this 
300 percent increase of crude oil since 2003 to the following 
supply and demand fundamentals in the marketplace.
    First is an increase in demand. World oil consumption 
continues to increase as a result of the double-digit economic 
growth in China and India. And this fundamental growth that 
everybody sees as the first of a number of demand fundamentals, 
that the more those people on the outside look at that, the 
more they see that the demand is going to continue and the 
demand is going to grow. And that has a very big impact on what 
they legally bid for the oil.
    Second, world surplus production capacity is at just 1.7 
million barrels a day. Surplus capacity is 1.7. This is half 
the capacity we had from 1996 through 2003. Reduced capacity 
leaves world oil markets vulnerable to supply disruptions and 
unable to effectively respond to price increases.
    My third point is geopolitical instability is one of those 
factors that must be taken into consideration, and it is very 
hard for anybody to measure that. But clearly, it has a big 
impact, positive or negative, and in this case, in the top oil-
producing countries and the instability that goes on there 
contributes to greater uncertainty and for good reason, reasons 
like the disruption in Nigeria--that was a big one, 1.4 million 
barrels a day. Iraq, 500,000 barrels a day.
    And the fourth proposition is that U.S. crude oil 
inventories are falling. You stated to the contrary, but you 
were careful to talk about a specific period of time. I am 
talking generally. Today we are below the 2007 inventory levels 
and are falling below the 5-year average as well.
    And finally, the decline in the value of the dollar has 
also had an impact on the value and price of oil. The U.S. 
dollar has fallen 30 percent against major currencies, 
increasing the price of U.S. imports, including oil.
    So it is apparent from your testimony that our national oil 
crisis is a global one. However, I believe there are things 
that the U.S. must do to increase supply and reduce demand and 
reduce our dependence. Failure to address the high price will 
have a crippling effect on our economy.
    The American people are ahead of us, and by overwhelming 
majorities, they tell us we should produce more of the energy 
that we own now. The Albuquerque Journal, a respected 
newspaper, published an editorial suggesting that we need to 
have a domestic production plan ``and self-confidence to use 
it.'' According to MMS--that is another great source of 
information and manager of large oil properties--only 2.4 
percent of the total offshore acreage is being leased and 85 
percent of the continental offshore is under moratorium and 
represents 574 million acres.
    So, Mr. Chairman, I appreciate your willingness to examine 
this issue. I know you are even interested in the offshore 
drilling situation in our country and the moratorium that 
exists. I hope that in the not too distant future we might work 
together on that problem and see what we could do.
    I would like to put the editorial from my hometown paper in 
the record. And, Mr. Chairman, I want to be very frank with 
you. I read a lot of editorials and I would be pleased to read 
any from your State. But I truly believe this editorial that I 
am going to put in the record deserves your attention when this 
hearing is over. I think it should be read by policymakers here 
in the United States Senate. They are not a political paper. 
They are not Democrat or they are not Republican. But I think 
they have come up with the role that we as policymakers ought 
to take during this crisis that we have in this country.
    As I view it, I will put it this way. We are going to move 
from the kind of economy we are now, using crude oil 
derivatives to run our transportation system, which is what is 
eating it up, to something different. It will not be run by 
crude oil, something different.
    But from now till that time comes--it may be as long as 30 
to 40 years--that is what the experts say. I call that the 
bridge, the bridge from now to that future point. And I say 
that this editorial has caught the significance of that bridge. 
If we as policymakers do not insist that as we go over that 
bridge, that we use as much of our own crude oil as possible, 
we are shirking our responsibility. In other words, we cannot 
avoid using a certain amount of crude oil derivatives, crude 
oil, and diesel fuel, as we move over this bridge for the next 
30 or 40 years, and if we do not understand that the cost is 
going to be destructive of our economy--the costs we are paying 
will approach $500 billion a year at the current price of oil 
or slightly lower. If that stayed for a year, we will export 
$500 billion. I can stop. It is not goods. It is just dollars. 
What we get for it is nothing more than some heat out of the 
pipes of automobiles and trucks and buses. That is all we get 
for what we send across that bridge.
    I think we must relook at the inventory of assets and go 
out and get them during this intervening time because we are 
not going to solve the CO2 problem as we go across 
the bridge. We have got to cross the bridge with crude oil and 
crude oil derivatives. And we will be destroyed long before 
global warming has any impact if we do not do something about 
the demand on our side by substituting local domestic supply.
    And I thank you.
    Senator Dorgan. Senator Murray?


                   STATEMENT OF SENATOR PATTY MURRAY


    Senator Murray. Mr. Chairman, thank you. I will submit my 
statement for the record.
    Let me just say this is extremely timely. As my colleagues 
know, I go home to Washington State every week, and I am 
shocked at the rising price that I pay. I paid $4.45 on Sunday 
to fill up my tank. This has a huge impact on our neighbors as 
they see more and more of their paycheck going to pay for their 
gas to get to work, go to the grocery store, or to do their 
chores. It is taking a bite out of all our small business 
budgets, our trucker budgets, and our school districts which 
are paying more for gas for their buses. Our farmers are 
telling us that they are paying as much as $500 a day. That is 
up 60 percent from last year on diesel fuel alone. We are going 
to be heading into the winter months and the price of natural 
gas and heating oil is going to be hitting those pocketbooks 
again.


                           PREPARED STATEMENT


    I appreciate your having this hearing. I think it is very 
important that we understand this issue from a variety of 
different perspectives, and I hope we can all learn something 
from today, thank you.
    [The statement follows:]

               Prepared Statement of Senator Patty Murray

    Mr. Chairman, I want to thank you for calling this hearing today. I 
think it is very timely. I go home on the weekends, and the price of 
gas at the local station just keeps rising. It was $4.45 for a gallon 
of regular unleaded last weekend. Now, I fill up my tank when I'm home 
and I know that $4.45 a gallon is substantially higher than the 
national average. And when it takes $50 to fill the tank on even a 
small, fuel-efficient car, its clear that hard-working Americans are 
being confronted with difficult choices to make ends meet.
    But these skyrocketing fuel prices are not just affecting 
consumers. I am hearing from many small businesses and family farmers 
in my State. I am hearing from my State's farmers, some of whom are 
spending $500 per day--up about 60 percent from last year--on diesel 
costs alone. And as we enter the harvest season, those costs are only 
going to go up. And this is on top of other rising costs that they must 
put into their crops.
    And Mr. Chairman, I'm concerned about the rising cost of natural 
gas as well. During these hot summer months, many folks aren't thinking 
about how much it will cost to heat their homes this winter. If natural 
gas prices continue on this upward trend, millions of Americans--
particularly low-income families and seniors--could face a double 
whammy of high gas prices and high heating costs this winter.
    When you combine this with the rising cost of food and health care, 
declining home values and overall economic uncertainty, many are simply 
finding it impossible to make ends meet.
    That is why it's so important that we're meeting today to hear from 
the Energy Information Administration about its forecasts for oil and 
natural gas prices, and what it sees moving forward.

    Senator Dorgan. Senator Murray, thank you very much.
    Senator Allard, do you have a statement?

                   STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, I do.
    First of all, I would like to thank you for holding this 
hearing today. This is very timely. I agree that we are dealing 
with an issue that impacts everybody in this country. It is 
going to affect the services, whether you are in the service 
industry. It is going to affect product development, whether 
you are in manufacturing or not. And I think that we have an 
obligation as a part of this legislative body to at least try 
and understand the problem and see if we cannot come up with a 
solution based on the facts.
    I believe that we need to take steps that are necessary to 
move us out of this problem as quickly as possible. I am of the 
view personally that we simply should not take any of our 
options off the table for the consumer. I mean, we should not 
try and put all our eggs in the renewable energy basket. As 
Senator Domenici pointed out, we are through a bridge time. 
Obviously, the future--we do not know what kind of energy is 
going to be available, but right now, what we have most 
available is the hydrocarbons, oil and gas and coal. And 
hopefully at some point, maybe we can redevelop our nuclear 
energy sources.
    But I would like to just take a moment to talk about this 
issue as to whether there is speculation in the market. So in 
order to better understand the facts, I have gone to another 
agency that keeps track of what is happening in the markets, 
and that is the CFTC, Commodity Futures Trading Commission. If 
you look at this chart here, there does not show any evidence 
based on their records of speculators driving the futures 
prices. If you look at that, that is pretty much a straight 
line. You can see where speculation, in 2002 when gasoline 
prices were relatively stable, was at a higher level than it is 
now. So the fact is there was a lot of variation in the year 
2002.
    Then you get into 2003. The highest point probably was 
between 2004 and 2005. If you look at that, it is a relatively 
stable fluctuation curve. Now this is on crude oil futures.
    Then if we go to the next chart that I brought up, again, 
this is CFTC, Commodity Futures Trading Commission. 
Speculators, they do not think, are driving up spot prices 
because they do not have any records that show what has 
happened. In fact, they show that commercial inventories have 
declined indicating no speculative hoarding. And I think that 
is the key word, ``speculative hoarding.'' Now, there may be 
hoarding in other sectors. You know, if I was a farmer or 
rancher today and I had crops to put up in August, I think I 
would fill my diesel tank right now as full as I possibly can, 
anticipating the thing. So there is no record of that 
happening.
    And there is no record of what is happening in the foreign 
markets. I mean, this is more than just a domestic market. It 
includes worldwide markets. We do not have records of what is 
happening in Japan and what is happening in China, whether they 
are hoarding fuel or not in their plan.
    So this is one agency that we were able to get some 
information from. I think it needs to be a part of our 
discussion.
    And so I compliment you for this hearing to give us an 
opportunity to kind of look at what is happening throughout the 
world and this country. And whatever we come up with as a 
solution should be based on facts. I think transparency is 
important. I think understanding, getting the records available 
out there--and that is what this hearing is all about--is very 
important so that we can make the right decision. So we need to 
make sure that we can get the facts, one way or the other, as 
best we possibly can, where we can get them. Obviously, there 
are limits as to what we can require of foreign countries 
because they have their sovereignty issues and whatnot, but at 
least make our best guess based on the facts.
    Thank you, Mr. Chairman.
    Senator Dorgan. Thank you very much.
    Senator Bennett?

                 STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you very much, Mr. Chairman.
    This is the second such hearing I have been to today. This 
morning, under the chairmanship of Chuck Schumer, in the Joint 
Economic Committee, we had a hearing on exactly the same 
subject with a different panel of witnesses. And I will not 
rehearse everything that came out of there but share with you 
several things that I learned at that hearing that added to my 
understanding of this.
    You made reference in your opening statement, Mr. Chairman, 
about, gee, we knew this was coming or we knew these 
circumstances would be in place. One of the witnesses this 
morning said--and I had not focused on this--when Nigeria went 
down as a result of the activities that occurred with the 
insurgents or terrorists or whatever we call them, they cut the 
amount of world oil supply as much as the Saudis raised it, so 
that everything the Saudis put on the market to try to lower 
the price was offset by taking Nigeria off line. And he said 
one of the things you could do, if you are talking about trying 
to bring the world price down, would be diplomatic efforts to 
try to get Nigeria back on. And he used that as an example to 
demonstrate how uncertainties in the world oil market were a 
major reason why we see these prices being paid.
    I had known and they stressed the fact that per capita 
consumption in the United States has come down dramatically 
since the 1970s and the oil shock that occurred with OPEC's 
boycott. That means that consumption in the United States 
percentage-wise has less an effect on the world market than it 
used to. If our per capita consumption is coming down--yes, our 
total number of population is going up. So the national 
consumption of oil is going up but very slightly compared to 
other countries and particularly compared to China, which means 
American leverage on the overall market is continuing to 
shrink. I found that to be an interesting thing to think about.
    Now, the one that I had not thought of, although I guess I 
really understood it, was the impact of the lack of people and 
equipment. One of the witnesses stressed that we cannot get the 
people to man the ships to go out to offshore drilling. We 
cannot get people to do much of the work. There is a labor 
shortage in this field. And as a consequence, we also do not 
have equipment in many, many places. That resonated with me 
because we have oil being produced right now in eastern Utah 
that is not being refined, and the reason it is not being 
refined--it is just growing in inventory--is that there is not 
any refinery capacity to deal with it.
    Now, we have refineries in Salt Lake City that are going 
absolutely full blast. What are they doing? They are refining 
Canadian crude. As the Canadians increase their production out 
of tar sands, the easiest way for the refineries in Salt Lake 
to get crude to refine--it is cheaper and easier to have it 
come down by a pipeline from Canada than it is to bring it 
where there is no pipeline from eastern Utah. So producers in 
eastern Utah are producing oil that is growing in the inventory 
without the refining capacity, and this one witness said a 
large part of the bottleneck is not overall production. 
Although he did agree that worldwide you needed more 
production. He said it is the inability to turn it into usable 
product because of a shortage of both people and equipment.
    And I thought I would share with you that insight that came 
out of this morning's hearings. And I look forward with great 
interest to what we are going to learn this afternoon.
    Senator Dorgan. Senator Bennett, thank you very much.
    This will be an interesting hearing, frankly. I would 
observe you can put together whatever hearing you like. 
Actually I could fill the table with experts, I would say to 
Senator Domenici. There are experts who have testified before 
the Senate Energy Committee and in other committees who have 
worked in this industry for 30 years who say that there is an 
unbelievable amount of speculation, that the price of oil 
should not be above $60 or $70 a barrel at this point. The 
market is broken. It is not working. So I could fill these 
chairs with experts on that side of the issue, and you all 
could fill chairs with people who say what speculation, are you 
kidding me?
    So we have chosen instead to have Administrator Caruso who 
represents the agency, the Energy Information Administration 
that works on these issues for us. Mr. Administrator, thank you 
for coming. We will recognize you for a statement, after which 
I think we will have an interesting occasion to discuss these 
issues.
    Senator Domenici. Mr. Chairman?
    Senator Dorgan. Senator Domenici?
    Senator Domenici. Before you proceed, could I just--would 
you permit me an observation? You just indicated that on this 
side would be those who say there is no speculation. On that 
side, there would be those who say there is. I would hope that 
you would not do that. I do not think we are on the side that 
says there is not and your side that says there is. I think we 
are genuinely trying to find out what is going on and what we 
can have an impact on. It is in that context that we look at 
speculation or no speculation.
    I could make an easy case that if we went after speculators 
and did this and this and this, we would save a whole lot of 
money for the American people. The point is I do not know how 
to do that because every time I try to find out, I am told 
there is no way, which leads me to think it is very hard to 
prove speculation. And that is all I mean when I talk on my 
side. It is hard to prove it. If it is there, I would join you. 
I would be right behind you if it is there.
    And I thank you for letting me talk. I will shut up now.
    Senator Dorgan. Well, Senator Domenici, my reference only 
was to listen to the statements, and my point was that there 
are some on this subcommittee perhaps, as there is on every 
committee, who believe very strongly that this is the cause of 
speculation, a dramatic run-up in prices. There are others who 
believe that is not the case. I think all three of you 
expressed great doubt that that is the case. And so that was my 
only reference. It was not try to separate us versus them. I 
think you know that.
    Senator Bennett. It is a matter of degree, Mr. Chairman. 
Certainly I think the hearing is well timed and the point of 
the hearing is appropriate.
    Senator Allard. And where it might be occurring.
    Senator Dorgan. Well, let us proceed to listen to 
Administrator Caruso. As I said, I think we will have an 
interesting hearing, and it is not about us versus them on any 
panel. It is about what is happening. What on earth is 
happening to the American people here, and what are its 
consequences and what are its causes? Let us spend some time 
talking about that.
    Mr. Caruso, proceed.

STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY 
            INFORMATION ADMINISTRATION, DEPARTMENT OF 
            ENERGY
    Mr. Caruso. Thank you, Mr. Chairman and members of the 
committee. I, once again, appreciate this opportunity to appear 
before you today to discuss the factors that the Energy 
Information Administration considers when making our short-term 
forecasts on crude oil and gasoline prices. I especially 
appreciate your opening remarks and the confidence in the hard-
working men and women of the Energy Information Administration.
    We are the independent statistical agency of the Department 
and we do not promote or advocate policy and do not represent 
the administration's views necessarily or the Department's, so 
I hope we can have a very open discussion.
    Since I testified before you in December 2007, crude oil 
prices have increased, as your chart indicated, from $92 per 
barrel in December to actually $133 before I left the office 
today. They were down several dollars.
    Our current forecast is for crude oil to average $122 for 
the full year of 2008 and increase a bit to $126 for 2009. So 
we are looking at continued high crude prices relative to the 
history.
    Also, regular-grade retail gasoline prices have risen from 
$3.02 in December 2007 to a national average of $4.08 last 
week. We are forecasting the price of regular gasoline to 
average $3.78 per gallon for 2008 on a national average basis, 
and, as Senator Murray pointed out, in some regions like the 
west coast, it is much higher than that. We expect prices to be 
high as well in 2009; $3.92 is our national average projection 
for 2009.
    As highlighted in our most recent monthly projections, 
several factors are combining to cause oil supply to struggle 
to keep up with the demand growth, as I am sure was discussed 
at this morning's hearing as well, thereby accounting for much 
of the upward trend in oil prices. Our analysis to date 
suggests that market fundamentals--strong demand, disappointing 
supply growth, concern over actual or perceived supply 
disruptions, relatively low inventories, and most importantly, 
very limited spare production capacity and global refining 
capacity constraints--are the primary drivers of global oil 
prices. The current very tight oil market balances and the 
possibility of further supply disruptions are causing prices to 
rise to unprecedented highs.
    Of course, we recognize that commodities markets are 
increasingly complex, as indicated by the charts that were put 
up before in the opening statements, and notwithstanding our 
views regarding the fundamentals as the dominant factors 
driving oil prices higher in today's markets, we share this 
committee's interest in exploring how information from markets 
in energy derivatives could be used to improve forecasts of 
crude oil and gasoline prices.
    One of the key challenges we face is that current measures 
that are used as proxies for speculative activity, such as the 
total open interest in the NYMEX--one chart was shown here 
today--the net long positions of noncommercial traders in the 
NYMEX futures market and investment in commodity index funds 
all have limitations. We really do not know the total size and 
nature of commodity index fund activity and speculation. The 
development of better activity measures and more transparent 
information regarding activity in markets for energy-related 
financial derivatives would facilitate additional econometric 
analysis of these issues.
    We welcome the comments from several members of the 
committee asking for greater data transparency. EIA relies on a 
number of tools to project crude oil prices, including an 
econometric model of oil production, inventories, and spare 
capacity. We also estimate how disruptions could affect prices 
and past oil forecast errors and extensive expert judgment on 
domestic and international markets are also relied upon. 
Therefore, better information, greater data transparency would 
inform all of those efforts.
    We continually strive to improve our short-term forecasts 
in the face of considerable data gaps in key countries, 
particularly those of the emerging economies, such as China and 
India. We also rely on data on changes in demand and supply 
that are not reflected in timely data, industry changes, new 
methods of estimation and forecasting, and more recently, 
financial factors that may be affecting the run-up of oil 
prices.
    Turning to gasoline prices, it is clear that crude oil 
prices are a dominant factor. A crude oil price of $135 per 
barrel alone translates into a cost of $3.20 per gallon before 
taxes or other costs and profits associated with refining, 
distribution, and marketing. In addition to the cost of crude 
oil, motor gasoline prices also include the wholesale margin, 
which is the difference between the wholesale price of a gallon 
of gasoline and a gallon of crude oil, a retail margin 
reflecting the cost and profits associated with distribution to 
and sales by retail outlets, and taxes at the State, Federal, 
and local levels. EIA's short-term forecasts also incorporate 
information on market conditions and events that cause the 
wholesale gasoline margin to vary significantly over time. For 
example, gasoline margins were high relative to historic norms 
last summer, but are much lower this summer.
    Recent experience with very high and rapidly rising oil 
prices and large deviations of actual prices from forecasts, as 
highlighted in the chairman's opening remarks, highlight the 
challenges faced by EIA and other forecasters. While EIA's 
recent forecasts have missed the mark in absolute terms, they 
have outperformed the monthly forecasts by a number of top 
consultancies in the industry over recent years. We also track 
our projections versus the New York Mercantile Exchange futures 
contract, and we have consistently been equal or better than 
the NYMEX at predicting oil prices 6 months into the future.
    As a side note, if you had replaced the EIA forecasts in 
your chart with the NYMEX futures prices for those exact same 
months, it would look almost exactly the same, just as a point 
of information, Mr. Chairman.
    EIA has already acted to improve both its short-term and 
long-term modeling capabilities. In the short-term model, for 
example, we have added more regional detail and included 
expected levels of weather-related supply disruptions based on 
NOAA's seasonal weather forecasts. Our fiscal year 2009 budget 
request proposes additional improvements in both the data 
quality used as input to models and the modeling tools 
themselves. The budget request also supports several 
initiatives mandated in the Energy Policy Act of 2005 and the 
Energy Independence and Security Act of 2007, including 
tracking and reporting of refinery outages, which I know you 
are very interested in, Mr. Chairman, and the fuller 
integration of ethanol and other biofuels in our energy data 
surveys.
    Let me conclude by placing EIA's role in the broader 
context of data collection and analysis for both physical and 
financial markets. EIA clearly has the lead role in collecting 
and analyzing data regarding physical energy markets. Our 
energy data collection programs are widely viewed as a model 
for others throughout the world in developing transparent, 
timely, and high quality data. However, as highlighted in our 
budget request, there are important needs for improvement in 
this area.
    Turning to data on energy-related financial derivatives, 
EIA does not have the lead role, but we are actively supporting 
efforts by the CFTC and other agencies to improve that data. 
EIA is a member of the CFTC's Energy Markets Advisory 
Committee, and we are staffing and advising the Department on 
the interagency policy task force. Once reliable data on energy 
derivatives become available, I would expect EIA to be a key 
user of that data as we explore ways to improve our forecasting 
activities by incorporating it alongside the energy and 
economic data we already use in our analysis activities.

                           PREPARED STATEMENT

    This completes my oral testimony, Mr. Chairman. I would be 
glad to respond to any questions that you and any other members 
of the committee may have. Thank you very much.
    [The statement follows:]

                    Prepared Statement of Guy Caruso

    Mr. Chairman and members of the committee, I appreciate the 
opportunity to appear before you today to discuss the factors the 
Energy Information Administration (EIA) considers when making our 
short-term forecasts of oil and gasoline prices.
    EIA is the independent statistical and analytical agency within the 
Department of Energy. While we do not promote, formulate, or take 
positions on policy issues, we do produce objective, timely, and 
relevant data, projections, and analyses that are meant to assist 
policymakers, help markets function efficiently, and inform the public. 
Our views are strictly those of EIA and should not be construed as 
representing those of the Department of Energy or the administration.
    As requested in your invitation letter, my testimony focuses on 
recent forecasts for oil and gasoline prices and the factors that are 
considered in making these forecasts. It also touches briefly on our 
forecasting record and elements in our fiscal year 2009 budget request 
that will contribute to better forecasting and analyses.
    To briefly summarize the main points addressed in this testimony:
  --Since I last testified on this issue in December 2007, crude oil 
        prices have increased from a monthly average of $92 per barrel 
        (December 2007) to more than $135 per barrel in June 2008. Our 
        current forecast is for crude oil prices to average $122 per 
        barrel in 2008 and $126 per barrel in 2009. In addition, 
        national average regular-grade retail gasoline prices have 
        risen from $3.02 per gallon in December 2007 to $4.08 per 
        gallon as of June 23, 2008. We are forecasting the price of 
        regular-grade gasoline to average $3.78 for 2008 and $3.92 for 
        2009.
  --As highlighted in our most recent monthly projections, several 
        factors are combining to cause oil supply to struggle to keep 
        up with demand growth, thereby accounting for much of the 
        upward trend in oil prices. Our analysis to date suggests that 
        market fundamentals--demand, supply (including actual or 
        perceived supply disruptions), inventories, and spare 
        production capacity--are the primary drivers of global oil 
        prices. The current very tight oil market balances and the 
        possibility of further supply disruptions are causing prices to 
        rise to unprecedented highs.
  --While fundamentals are the primary drivers of current oil markets, 
        we are thinking about possible ways to use information about 
        activity in the markets for energy derivatives to improve our 
        forecasts. One of the challenges we face is that current 
        measures that are used as proxies for speculative activity, 
        such as total open interest in the New York Mercantile Exchange 
        (NYMEX) futures market, net-long positions of non-commercial 
        traders in the NYMEX futures market, and investment in 
        commodity index funds, all have limitations. The development of 
        better activity measures and more transparent information in 
        these areas would facilitate our efforts.
  --EIA relies on a number of tools to project crude oil prices, 
        including an econometric model of oil production, inventories, 
        and spare capacity; estimates of how disruptions affect or 
        could affect prices; past oil price forecast errors; and 
        extensive expert judgment on domestic and international oil 
        markets.
  --We continually strive to improve our short-term forecast in the 
        face of considerable data gaps in key countries, changes in 
        demand and supply that are not reflected in timely data, 
        industry changes; new methods of estimation and forecasting; 
        and more recently, financial factors that may be affecting the 
        run-up of oil prices.
  --Crude oil prices are the dominant determinant of gasoline prices. 
        Motor gasoline prices also include the wholesale margin (the 
        difference between the wholesale price of a gallon of gasoline 
        and a gallon of crude oil), a retail margin reflecting the 
        costs and profits associated with distribution to and sales by 
        retail outlets, and taxes at the Federal, State and local 
        levels. EIA's short-term forecasts incorporate information on 
        market conditions and events that cause the wholesale gasoline 
        margin to vary significantly over time, for example, gasoline 
        margins were high relative to historical norms last summer but 
        are much lower this summer.
  --Recent experience with very high and rapidly rising oil prices and 
        large deviations of actual prices from forecast values 
        highlight the challenges faced by EIA and other forecasters. 
        While EIA's recent forecasts have missed the mark in absolute 
        terms, they have outperformed the monthly forecasts by top 
        consultancies in the industry over the past couple of years. We 
        also track our projections versus the NYMEX futures contract, 
        and we have consistently been equal or better than the Exchange 
        at predicting oil prices 6 months into the future.
  --EIA has already acted to improve both its short- and long-term 
        modeling capabilities. In the short-term model, for example, we 
        have added more regional detail and included expected levels of 
        weather-related supply disruptions based on National Oceanic 
        and Atmospheric Administration (NOAA) seasonal weather 
        forecasts. Our fiscal year 2009 budget request proposes 
        additional improvements in both the data quality used as input 
        to models and in the modeling tools themselves. The budget 
        request also supports several initiatives mandated in 2005 and 
        2007 energy legislation, including tracking and reporting of 
        refinery outages and fuller integration of ethanol and other 
        biofuels into our energy market data surveys.

   EIA'S CURRENT OIL AND GASOLINE PRICE FORECAST AND MARKET ANALYSIS

    Each month EIA produces its Short-Term Energy Outlook (STEO), which 
provides a 13-24 month projection of U.S. and, where appropriate, 
global energy supplies, energy demands, and prices. The price of oil, 
in particular, the price of West Texas Intermediate (WTI) crude oil, 
the U.S. benchmark crude oil price, is one of the prices for which we 
provide monthly projections. Since I last testified on this issue in 
December 2007, WTI prices have increased from monthly average of $92 
per barrel (December 2007) to current levels of more than $135 per 
barrel. In our June STEO, we are forecasting WTI crude oil prices to 
average $122 per barrel in 2008 and $126 per barrel in 2009. In 
addition, national average regular-grade retail gasoline prices have 
risen from $3.02 per gallon in December 2007 to $4.08 per gallon as of 
June 23, 2008. We currently are forecasting the price of regular 
gasoline to average $3.78 for 2008 and $3.92 for 2009.
    As highlighted in EIA's June STEO, several factors are combining to 
cause oil supply to struggle to keep up with demand growth, thereby 
accounting for much of the upward trend in oil prices. Based on our 
analysis to date, we believe that market fundamentals--demand, supply 
(including actual or perceived supply disruptions), inventories, and 
spare production capacity--are the primary drivers of global oil 
prices. The current very tight oil market balances, the possibility of 
further supply disruptions, and continued strong economic growth in 
emerging markets are causing prices to rise to unprecedented highs.
    In recent months, there has been growing concern about the role oil 
futures and swaps markets are playing in the increase in WTI prices. In 
particular, what is causing the increase in the volume of trades? What 
is causing increased influx of index funds in the market? Is the 
increasing participation driving oil prices higher? Or are oil prices 
increasing participation? Is the inflow of speculators an appropriate 
focus of regulatory concern? Is the oil price best described as an 
asset price bubble?
    Not surprisingly, there is a growing body of inconsistent opinion 
on the many issues surrounding futures market behavior and oil prices, 
and little systematic and comprehensive economic analysis. The 
Commodity Futures Trading Commission (CFTC), which has done extensive 
work in this area and is responsible for oversight and regulation of 
U.S. commodity futures markets, recently announced several initiatives 
to enhance the oversight of energy and agricultural futures markets, 
including creating the formation of a CFTC-led interagency task force. 
The task force, which includes representatives from the CFTC, Federal 
Reserve, Department of the Treasury, Securities and Exchange 
Commission, Department of Energy, and the Department of Agriculture, is 
examining investor practices, fundamental supply and demand factors, 
and the role of speculator and index traders in the commodity markets.
    As outlined above, EIA's view is that oil markets today are 
characterized by strong demand, limited supply growth, and low spare 
capacity and that in the near-term, both the supply and demand curves 
for oil are now near-vertical. Any small shift in demand or supply, or 
even the perception of a supply shift due to possible supply 
disruptions, will result in significant price increases. However, the 
increased inflow of funds and participants in the futures markets, 
which I discuss below, may indeed affect oil prices to some degree in 
the short run, but are more likely symptomatic of the tight market 
conditions and resulting high prices, not the cause. Additional 
analysis is clearly needed, though we suspect it will be difficult to 
isolate precisely the impacts on oil prices. We hope our forecasts, and 
more importantly the thinking behind them, help everyone better 
understand the complexities of these continuously changing markets, the 
critical need for better and more transparent supply, demand, and 
trading data, and the need to constantly test new hypothesis with good 
analytic tools.

                           ANALYTICAL METHODS

Oil Price Modeling
    At EIA, we rely on a number of tools to project WTI prices, 
including an econometric model of oil production, inventories, and 
spare capacity; estimates of how disruptions affect or could affect WTI 
prices; past oil price forecast errors; and extensive expert judgment 
on domestic and international oil markets. We continually strive to 
improve our short-term forecast in the face of considerable data gaps 
in key countries, changes in demand and supply that are not reflected 
in timely data, industry changes; new methods of estimation and 
forecasting; and more recently, financial factors that may be affecting 
the run-up of oil prices.
    Econometric Model.--EIA has developed and documented an econometric 
model that looks at the crude oil market over the past 16 years. The 
model is one part of the information used to establish the STEO crude 
price projection each month. The model is regularly updated to reflect 
changing market conditions. For example, during the 1990s, much of the 
variation in crude oil prices could be explained by fluctuations in 
Organization for Economic Cooperation and Development (OECD) petroleum 
inventories.\1\ During this time, there was the typical negative 
correlation between inventories and price (high prices, low 
inventories) in the period that ran from January 1992 through June 
1999. Following the collapse in oil prices in 1999, the Organization of 
the Petroleum Exporting Countries (OPEC) acted to reestablish control 
of the crude oil market, pulling back on production, and pushing the 
price to $30 for a barrel of crude oil. Still, the negative correlation 
with inventories persisted. However, around June 2004, this 
relationship shifted again, this time demonstrating a positive 
correlation between inventories and crude price. This implied 
additional market activity was likely not captured by the simple 
inventory-price relationship model.
---------------------------------------------------------------------------
    \1\ See for example, ``Forecasting Crude Oil Spot Price Using OECD 
Petroleum Inventory Levels,'' Ye, Zyren, Shore, International Advances 
in Economic Research (2002) 8: 324-333; ``A Monthly Crude Oil Spot 
Price Forecasting Model Using Relative Inventories,'' Ye, Zyren, Shore, 
International Journal of Forecasting (2005) 21: 491-501; and 
``Forecasting Short-Run Crude Oil Price Using High- and Low-Inventory 
Variables,'' Ye, Zyren, Shore, Energy Police (2006) 34: 2736-2743.
---------------------------------------------------------------------------
    Another market variable, excess crude oil production capacity, 
helps to explain the changing price behavior.\2\ While EIA's analysis 
of crude oil prices found that the excess capacity variable added 
little additional explanatory power during the 1990s, in recent years, 
this variable improves the explanatory power of the model.
---------------------------------------------------------------------------
    \2\ ``Short-Run Crude Oil Price and Surplus Production Capacity'', 
Ye, Zyren, Shore, International Advances in Economic Research (2006) 
12:390-394.
---------------------------------------------------------------------------
    The situation continues to change. The current crude oil market 
seems to represent a condition of unstable equilibrium. The ultimate 
price path exhibits an upward-ratcheting or see-saw pattern around the 
underlying trend, rather than a smooth trajectory. This pattern is 
typical of commodity markets under these conditions. EIA is pursuing 
further work in this area that shows that recently the relationship 
between excess capacity and price becomes asymptotic, where small 
reductions in capacity can generate large price increases.\3\ This 
behavior is well recognized in economic literature for industries in 
which large capital investment costs are required to develop new 
capacity and there is little scope for substituting other products to 
satisfy demand. For crude oil, it indicates that, somewhere in the 
range of 1 to 2 million barrels per day of spare production capacity, 
the market effectively approaches the industry's production limits, 
leaving only price to rebalance markets as demand grows.
---------------------------------------------------------------------------
    \3\ ``The Recent Disconnect in Crude Oil Price and Inventory 
Relationship'', Ye, Zyren, Shore, article to be published in upcoming 
issue of Journal of Energy and Development.
---------------------------------------------------------------------------
    The current version of the model reflects these changing market 
conditions and contains OECD industrial total petroleum inventory 
levels, excess crude oil production capacity, and a ratchet variable to 
capture recent behavior. But there is also room for improvements, and 
EIA is currently exploring ways to measure and forecast oil price 
volatility \4\ and working to better understand trader behavior and 
measure its impact on crude oil prices changes, as discussed below.
---------------------------------------------------------------------------
    \4\ See, for example, ``Volatility Relationship between Crude Oil 
and Petroleum Products,'' Lee and Zyren, Atlantic Economic Journal 
(2007), 35:97-212.
---------------------------------------------------------------------------
    Disruptions Model.--EIA uses its Disruption Impact Simulator (DIS), 
which is a spreadsheet-based tool to estimate the impact of world oil 
supply disruptions on world oil prices and on the U.S. economy, to 
inform the short-term price path. Given the size of the disruption, DIS 
is able to project changes in world oil prices, the U.S. real gross 
domestic product (GDP), the U.S. unemployment rate, and the U.S. 
inflation rate. DIS relies on parameters specified by EIA economists, 
but is flexible to allow us to alter any of the parameters used in the 
model calculation to examine a range of ``what if'' cases. The DIS 
model is used in conjunction with other models when estimating the WTI 
price path; if there are concerns about potential disruptions, the DIS 
model helps us examine the impact on oil prices, which can be 
incorporated in the forecast.
    Hurricane Assessments.--EIA also develops an annual hurricane 
assessment, which we publish along with the STEO in May. The 
assessment, using NOAA's prediction regarding storms during the 
upcoming hurricane season (June 1 to November 30), estimates the amount 
of oil and natural gas that could potentially be shut in during the 
hurricane season. These estimates are taken into consideration when 
determining our near-term price forecast.
Motor Gasoline Price Modeling
    Retail motor gasoline prices in the STEO model are forecast as a 
markup over the projected cost of crude oil. The difference between the 
pump price of gasoline and the price of crude oil is made up of three 
components: (1) the wholesale margin, which equals the gasoline 
wholesale spot price minus the refinery average cost of crude oil; (2) 
the retail margin, which reflects the costs and profits associated with 
distributing gasoline to retail outlets and selling it to consumers; 
and (3) Federal, State and local taxes.
    The wholesale margin is modeled as a U.S. average while five 
regional equations are maintained at the Petroleum Administration for 
Defense District (PADD) level for both the retail margins and taxes. 
U.S. average retail margins and taxes are calculated by weighting 
regional margins by each region's estimated share of total U.S. 
gasoline consumption. In addition, PADD region finished gasoline and 
motor gasoline blend component inventory equations are also included. 
Consequently the STEO model for gasoline prices includes 26 separate 
regression equations.
    The difference between the retail price of gasoline and the average 
refiner cost of crude over the last 5 years (January 2003 to December 
2007) has ranged from a low of $0.73 per gallon (January 2003) to a 
high of $1.68 per gallon (May 2007). The greatest source variation in 
monthly margins is in the wholesale margin and the least variation is 
in taxes (Table 1).
    The STEO model attempts to capture several market conditions and 
events that contribute to the observed variations in price margins. 
These include seasonality in demand; lags in the pass-through of crude 
oil prices to wholesale prices and from wholesale prices to retail 
prices; inventories that may be higher or lower than desired; and 
unusual one-time events that represent outliers that could bias the 
model results, e.g., 9/11, hurricanes.
    However, no model can perfectly predict future price margin 
variation as current market events unfold in ways that have never been 
observed before. For example, EIA expected the current weakness in 
gasoline consumption and growth in ethanol supply would contribute to 
lower wholesale margins than had been seen over the last two summers. 
However, this combination of events had never been observed before, and 
wholesale gasoline margins so far this summer have been even lower than 
expected.

Oil Price Forecast Errors
    Recent experience with very high and rapidly rising oil prices and 
large deviations of actual prices from forecast values highlights the 
challenges faced by EIA and other forecasters. While EIA's recent 
forecasts have definitely missed the mark in absolute terms, EIA's 
forecasts over the last couple of years have outperformed the monthly 
forecasts by top consultancies in the industry. We also track our 
projections versus the NYMEX futures contract, and we have consistently 
been equal or better than the Exchange at predicting oil prices 6 
months into the future.
    EIA, the other forecasters, and the NYMEX futures market have 
generally under-forecast the steady increase in the WTI spot price over 
the last 5 years, but EIA's average 6-month forecast error is the 
smallest. WTI forecast errors over the last 5 years have tended to 
increase for all forecasters and NYMEX as the forecast horizon 
lengthens, but EIA's forecast error compares favorably to others for 
all horizons between 6 and 24 months.

                          MARKET FUNDAMENTALS

    Supply, Demand, Inventories and Spare Capacity. In EIA's view, 
recent price increases are an extension of oil market developments 
originating in the 1990s with relatively high inventories, ample 
surplus production capacity, and oil prices fluctuating around $20 per 
barrel. When spot prices moved above or below this level, the price of 
futures contracts requiring delivery in distant months generally traded 
close to the $20 level, consistent with a market expectation that 
producers would ensure that spot prices would eventually return to that 
level.
    However, as leading OPEC member countries shifted towards a tight 
inventory policy and global oil demand recovered from the slowing 
effect of Asia's financial crisis, the global market balance tightened, 
and inventories declined sharply at the beginning of the present 
decade. Oil prices rose to $30 per barrel, in what might be seen as the 
first leg of the upward trend. By 2003, inventories were drawn down 
sufficiently such that subsequent increases in global demand stretched 
oil production to levels near capacity. The large, unexpected jump in 
world oil demand growth in 2004, fostered by strong growth in economic 
activity in Asia and the United States, reduced excess production 
capacity significantly.
    Now, in mid-2008, oil prices have increased by almost 300 percent 
since January 2003, but despite higher prices, world oil demand growth 
remains relatively strong. Since 2003, world oil consumption growth has 
averaged 1.8 percent per year (Figure 1). Non-OECD countries, 
especially China, India, and the Middle East, represent the largest 
part of this growth, while at the same time overall non-OPEC supply 
growth has slowed (Figure 2). In the past 3 years, non-OPEC supply 
growth has been well below levels seen just 4 years ago. As a result, 
the world oil market balance has tightened significantly (Figure 3). 
World oil consumption growth has simply outpaced non-OPEC supply growth 
every year since 2003. This imbalance increases reliance upon OPEC 
production and/or inventories to fill the gap.
    World surplus production capacity remains low, at an estimated 1.7 
million barrels per day for 2008, which is well below the 1996-2003 
annual average of 3.9 million barrels per day (Figure 4). This puts 
additional upward pressure on prices, leaving world oil markets 
vulnerable to supply disruptions. In addition, this surplus capacity is 
highly concentrated in a few countries, with Saudi Arabia holding 
almost all of this capacity. Without significant surplus capacity, 
market participants can no longer rely on increased production from key 
members of OPEC to offset supply disruptions and restore balance to 
avoid significant price changes, as they did in the 1990s. Industry 
recognizes the need for new capacity investments, but those additions 
are costly and come with a significant lag.
    As for inventories, OECD stocks were at record lows in 2003, 
following the strike in Venezuela. Preliminary OECD inventory data for 
the first part of 2008 show that OECD stocks have again fallen below 
the levels seen in 1996-2002. Because oil use has been growing over 
time, inventories are even tighter when considered on a ``days of 
supply'' basis. In addition, U.S. inventories for crude oil and key 
petroleum products are all relatively low. After remaining relatively 
high for much of 2006 and the first half of 2007, U.S. crude oil 
inventories have fallen towards the bottom end of the average range, 
even as refinery throughputs have been low so far this year.
    Geopolitical Uncertainty.--There is currently a high degree of 
uncertainty in world oil markets due to fears of the availability of 
oil supplies. EIA takes these factors into consideration when we 
produce the monthly STEO report.
    Current world oil supplies are highly concentrated. In 2007, the 
top ten oil producers represented about half of total world supply. In 
addition, geopolitical risk surrounds many of these top producers, 
either because of current supply disruptions (Nigeria and Iraq) or the 
perceived threat of a disruption (Iran and Venezuela). Finally, as 
previously discussed, there is very little surplus production capacity 
available to offset any disruption. In May 2008, there was an estimated 
1.4 million barrels per day of surplus production capacity, all located 
in Saudi Arabia, which represents just 2 percent of world oil demand. 
The combination of these factors means that prices react very strongly 
to any actual or perceived supply disruption (Figure 5).
    Supply disruptions are a frequent occurrence in the oil industry. 
During the past 24 months, there have been almost two dozen supply 
disruptions, lasting from a few days to many weeks, which affected 
world oil production and exports. These were caused by power failures, 
workers strikes, pipeline leaks and explosions, cyclones and 
hurricanes, saboteurs, and civil wars. Over half of these resulted in 
oil production outages of over 100,000 barrels per day. The most 
significant disruption resulted from the ongoing strife in Iraq and 
Nigeria. These disruptions have varied in size over time, with Iraq 
losing over 500,000 barrels per day of exports in March 2008 and 
Nigeria reaching over 1.4 million barrels per day of shut-in production 
at one point in April.
    While actual supply disruptions directly affect world oil markets 
due to a loss of physical barrels available to the market, much of the 
impact of supply disruptions is due to market perception of the 
situation. This situation is reinforced by the limited amount of spare 
production capacity available. As long as potential disruptions, both 
real (e.g., Iraq and Nigeria) or perceived (e.g.., concerns about the 
potential loss of supply from Iran), exceed the amount of additional 
production capacity that can be brought online quickly, geopolitical 
concerns will weigh heavily on oil markets.
    When constructing our short-term outlook, we take into 
consideration the current disruptions and the potential for additional 
disruptions, including the probability that severe weather could impact 
oil and natural U.S. production, refining, and transport operations as 
it did in 2005. The specific impacts of these effects vary from month 
to month.
    Value of the U.S. Dollar.--Between January 2007 and March 2008, the 
value of the dollar against the Euro fell by 29 percent while the price 
of WTI crude oil rose by 93 percent. Some analysts have pointed to 
these common trends as an indicator that the declining value of the 
dollar has contributed to higher oil prices. However, during other 
periods we have seen oil prices rise even as the value of the dollar 
remain unchanged or even rose. For example, between November 2004 and 
November 2006, the value of the dollar strengthened by 12 percent 
against the Euro, while the WTI spot price rose by 35 percent. Since 
early March 2008, the dollar has held its value against the Euro while 
WTI spot prices increased from $102 per barrel to a peak of over $138 
per barrel.
    Exchange rates, like oil prices, are signals that transmit 
information on underlying fundamentals. As in the international oil 
market, where changes in oil prices bring oil demand into balance with 
oil supply, changes in exchange rates are among the signals, along with 
interest rates, that equate the demand for money and credit with their 
supply.
    There has been no systematic and stable relationship between oil 
prices and exchange rates over time, which makes econometric analysis 
problematic. In the current economic environment, it is difficult to 
parse out econometrically the effects of constrained oil supply growth, 
strong world GDP growth, and the decline in expected rates of return on 
U.S. assets and their greater risk relative to foreign assets as 
reflected in the weaker dollar. Furthermore, inconsistent price signals 
caused by the global patchwork of petroleum product subsidies may limit 
the effect of high relative oil world prices on demand, particularly in 
the developing world.

                    FINANCIAL MARKETS AND OIL PRICES

    Financial investments in commodities have surged over the last few 
years as commodities are increasingly being used for portfolio 
diversification and as a hedge against inflation and the weakness of 
the U.S. economy and the dollar, in addition to their traditional roles 
as providing opportunities to hedge or speculate on price changes. 
Commodities have become attractive as financial assets because of the 
continued tight balances within many commodity markets (i.e., strong 
demand for commodities in emerging markets, sluggish supply response to 
higher prices, low inventories, and low spare capacity), leading to 
uncertainty about future prices.
    Of particular interest has been the growth in commodity index 
funds. Traditionally, commodities have been ``bought to use'' rather 
than ``bought to hold.'' In other words, a hedging company would buy or 
sell oil with the intent to make use of it in a specified time frame. A 
trader would buy or sell to later sell or buy before some specified 
time frame. An investor in equities such as a commodities index fund, 
on the other hand, will buy to hold, or even bequeath. Investors in 
equities will adjust their exposure to various risks based on a 
portfolio that changes with price, but not very directly.
    Econometric estimation of the influence of futures market 
participation or speculation on oil prices is problematic because of 
the difficulty in measuring the volume and direction of speculation. 
Current measures that are used as proxies for speculative activity, 
such as total open interest in the NYMEX futures market, net-long 
positions of non-commercial traders in the NYMEX futures market, and 
investment in commodity index funds, all have limitations. For this 
reason, we really do not know the total size and nature of commodity 
index fund activity and speculation. The development of better activity 
measures and more transparent information in these areas would 
facilitate additional analysis of these issues.
    Turning to the measures, albeit imperfect, that are available 
today, open market interest on the NYMEX for light sweet crude oil 
futures and options contracts has increased from about 666,000 
contracts (each contract is for 1,000 barrels of crude oil) on June 24, 
2003, to 3,150,000 contracts on May 13, 2008. Over this period the 
price of WTI crude oil has increased from $30 to $125 per barrel.
    One could expect the futures market to affect oil prices over the 
very short run (hours and days) through the transmission of new 
information that may be distorted through the participation of 
uninformed investors or ``herding'' behavior. However, over the longer 
run (months and years), it is not obvious that speculation or increased 
participation in the futures market ``causes'' higher prices in the 
physical market. Instead, increased futures market activity may simply 
be a response, in the same way oil prices are, to continuing tightness 
and uncertainty in the physical markets.
    Though one might expect that the level of open interest on the 
NYMEX is correlated with speculative activity, the relationship between 
total open interest and price is unclear. For example, if speculators 
entered the market expecting prices to rise, they would presumably 
attempt to take long positions on oil futures contracts, bidding up the 
price. However, if speculators entered the market expecting prices to 
fall, they would presumably attempt to take short positions on oil 
futures contracts, driving down the price. While both of these 
scenarios would increase open interest, they would each have opposite 
effects on the price of oil futures contracts.
    Because of the ambiguity of total open interest as a measure of the 
direction of speculation and its price impact, the relationship between 
long contracts and short contracts held by non-commercial traders, 
traders who do not claim to be hedging at all, has been used as a proxy 
to indicate the direction of speculative interest. When non-commercial 
traders are ``net long'' (the number of long contracts exceeds the 
number of short contracts), it is presumed that speculators are betting 
on increases in price. If a preponderance of them are making these 
bets, then the price can increase based solely on their own demand. 
However, the distinction between commercial and non-commercial traders 
is weak. For example, speculative investments in commodity index funds 
are categorized as commercial rather than non-commercial trades.
    The non-commercial net long positions in crude oil have not been 
consistently correlated with oil prices. Over the first half of 2007, 
both non-commercial net long positions in light sweet crude oil and 
crude oil prices increased. However, the number of net-long positions 
at the end of May 2008 was no higher than they were in June 2007 even 
though oil prices have almost doubled over this period. Moreover, in 
the natural gas market, between November 2006 and January 2007, non-
commercial positions fell from a net long 29,000 contracts to a net 
short 113,000 contracts while natural gas prices rose slightly.
    The third proxy for speculative activity in commodity markets is 
the total amount of money invested in commodity index funds. However, 
under the Commodity Futures Modernization Act of 2000, the total amount 
of money invested in commodity index funds is not publicly reported. 
Thus, estimates of assets under management in index funds and the share 
of those funds that are hedged on the NYMEX crude oil futures market 
vary widely, making any statistical analysis using these data suspect.

                               CONCLUSION

    Mr. Chairman and members of the subcommittee, EIA has already acted 
to improve both its short-term and long-term modeling capabilities. 
Further significant improvements in both the data used as input to 
models and modeling tools are proposed in our fiscal year 2009 budget 
request. The budget request also supports several initiatives mandated 
in 2005 and 2007 energy legislation, including tracking and reporting 
of refinery outages and fuller integration of ethanol and other 
biofuels into our energy survey systems.
    While EIA believes that fundamental factors such as strong demand 
growth, a dramatic decline in global surplus crude oil production 
capacity, and global refining capacity constraints are the major 
factors driving oil prices higher, we share your interest in exploring 
how information from markets in energy derivatives could be used to 
improve forecasts of oil and motor gasoline prices. One key challenge 
to pursuing this line of analysis is the difficulty in measuring the 
volume and direction of speculation and commodity fund activity with 
currently available proxies. We really do not know the total size and 
nature of commodity index fund activity and speculation. The 
development of better activity measures and more transparent 
information in these areas would facilitate additional econometric 
analysis of these issues.
    This concludes my testimony, Mr. Chairman and members of the 
committee. I would be glad to answer any questions you may have.

 TABLE 1.--MINIMUM AND MAXIMUM MONTHLY AVERAGE PRICE MARGINS, JAN. 2003-
                                DEC. 2007
                           [Cents per gallon]
------------------------------------------------------------------------
                                       Minimum Monthly   Maximum Monthly
                                           Margin            Margin
------------------------------------------------------------------------
Wholesale margin....................              22.0             102.8
Retail margin.......................               8.2              26.0
Taxes...............................              42.3              53.9
                                     -----------------------------------
      Total retail gasoline--crude                73.1             167.8
       oil margin...................
------------------------------------------------------------------------
The minimum and maximum margins may not sum to the total margins because
  they may occur in different months.


  
  

  
  

  
  

  
  

  
  

    Senator Dorgan. Mr. Caruso, thank you very much.
    Let me ask that the chart be put back up with respect to 
the EIA.
    Mr. Caruso, I want to ask a question about this chart, and 
I want to go to the January 2008 estimate. My understanding is 
that in your January 2008 estimate, you projected crude oil 
prices to be $87 a barrel on average this year. You predicted 
that world consumption of oil this year would be 87.4 million 
barrels a day. Six months later in June of this year, you said, 
well, our prediction is not $87. It is going to be $122 a 
barrel. So that's a $40 a barrel difference.
    The most important point is that in 6 months your estimates 
changed from $87 a barrel to $122 a barrel, but you indicated 
world consumption is going to decrease. In January, you said 
world consumption is going to be 87.47 million barrels a day. 
This month, you said consumption is going to be 86.38 million 
barrels a day.
    So, you know, I am not much of an economist. I taught a 
little economics in college. I studied enough just to be 
dangerous, I guess. But tell me how, given supply and demand 
and other circumstances, one predicts in January $87 a barrel 
and then in June you say it is going to be $122 a barrel. So it 
goes up almost $40 a barrel even as you predict that world 
consumption is going to go down this year. Tell me how that 
works. I do not understand it.
    Mr. Caruso. Well, on the consumption side, the higher 
prices are having an effect and that is----
    Senator Dorgan. No. I understand that.
    Mr. Caruso [continuing]. The main reason why the 
consumption projection is lower than it was 6 months ago, in 
addition to lower GDP.
    Senator Dorgan. I understand the relationship of 
consumption to price. A higher price will tend to have people 
using less.
    What I am asking is, as consumption decreases, why does 
your estimate of price increase?
    Mr. Caruso. Well, the reason--let me go back to why is the 
price higher. The price is higher because we have been 
disappointed, frankly, on the supply response. We are seeing 
less non-OPEC supply coming on line in 2008 than we projected 
in January of this year. So we have a tighter supply situation 
now than I would have presented to you, as I did, in December 
2007.
    Senator Dorgan. Well, let me read to you an April 2008 
Business Week article, and the numbers I have checked. Gasoline 
reserves are at the highest level since the early 1990s in the 
United States. The United States used 4 percent less petroleum 
than we did a year ago. U.S. production is expected to rise by 
3.3 percent in the second quarter, 4.1 percent in the third 
quarter, with a net result that the U.S. buffer for oil 
production against demand is up 3 million barrels in excess 
capacity.
    Even as all that existed, this line went straight up, and 
it is pretty clear to me you did not know that was going to 
happen or you would have told us it was going to happen. You 
thought something completely different was going to happen in 
every single circumstance. Yet, that surprised you because your 
analysis as an economist of supply and demand does not justify 
that line. Am I correct?
    Mr. Caruso. I think the numbers you repeated there are 
about the United States, but we looked at it, of course, in a 
global context.
    Senator Dorgan. Okay.
    Mr. Caruso. So we have, as I said, less supply coming into 
the market than we would have thought in January 2008. That is 
a big factor.
    The other one was mentioned by, I believe, Senator Bennett. 
We had----
    Senator Dorgan. Nigeria.
    Mr. Caruso [continuing]. Nigerian disruption, as well as 
unexpected declines in Mexican and North Sea production--
sharper declines. So what is going on in this global market of 
86 million or 87 million barrels a day, whichever number you 
wanted to use, whether you use the January or the June, is that 
there is insufficient spare capacity to respond to disruptions 
on the supply side or to any surprises. There are no cushions 
in the marketplace.
    Senator Dorgan. But, Mr. Caruso, you indicated that supply 
has not kept pace. I described to you that in fact consumption 
has decreased between January and June estimates, and so you 
take a look at one piece of it and say, well, here is where my 
eyesight is.
    My question is a broader question. We are spending about 
$100 million for your agency, and I am assuming you have great 
people. I do not want to tarnish or diminish the folks who work 
for you or you, for that matter.
    But I am saying this. If that red line is what the actual 
experience has been with prices and the yellow line is your 
best estimate, what on earth happened? You called it a 
deviation. Look, this is not even in the same county. I mean, 
this is not missing it by a country mile. Tell me how that red 
line happens when your best estimates on supply and demand, 
reserves, carryover, and all those issues, give you the yellow 
line every single month you make an estimate. This is 
unfathomable to me, and I am trying to understand your 
explanation.
    Mr. Caruso. The explanation is that in a market that has 
very little spare capacity or excess inventory, that any change 
in supply or demand requires a large change in price to 
rebalance the market. In economist's terms, it is very low 
short-term price elasticity. If there is no more supply 
available, a 1 percent increase in demand requires a 20 percent 
increase in the short-term price to rebalance that market.
    Senator Dorgan. Well, is there some sort of learning 
capacity here? Would you make the same mistake every month 
which you have done? I mean, every single assessment makes the 
same mistake. Are you describing the same mistake to that 
particular provision every month?
    Mr. Caruso. As new data comes in, we revise the estimates.
    Senator Dorgan. With respect to the Commodity Futures 
Trading Commission, the one observation I would have about that 
particular agency is they cannot see what they are unable to 
see, and to draw conclusions with information they do not have 
is to provide lack of informed decisions to the Congress. I am 
very distressed with what the CFTC says. I mean, they say this 
is not speculation.
    I would say, Mr. Caruso, for CFTC and for you, the only 
logical explanation for that red line has to be something that 
is happening that you do not see and have never seen or if this 
is about fundamentals that you should be able to see, then 
there is something wrong in the agency. We cannot have this. 
You have either got to be on that line or somewhere close to 
where we are--I just described that the investment bankers have 
been closer than your agency. And maybe that is because they 
are out there predicting where this is going to go because they 
are all long in contracts. I do not know. But my point is you 
cannot explain the red line to me, and that bothers me.
    I had an investment banker come in, one of the biggest 
ones, and he spoke for 45 minutes. When he finished talking, I 
was out of breath. He was one of these guys who just kept 
yakking. And the fact is he could not explain either. Before he 
left my office, he could not explain the first question I asked 
him, and that is what change in fundamentals existed in the 
last 12 months that justifies the doubling of the price. You 
have not answered it, and he could not.
    Do you want to try one more time?
    Mr. Caruso. Non-OPEC supplies failed to keep up with 
demand--the supply would be needed to meet demand in a market 
where there are no cushions. And so you have to have very sharp 
price increases to rebalance the market--that is the shortest 
explanation I could come up with.
    Senator Dorgan. My time has more than expired, but I think 
you are missing the elephant in the room. Unbelievable excess 
speculation that you and I and the Government owe the American 
people a remedy for. But we will talk more.
    Mr. Caruso. I would agree that we need more information 
about the speculative activity or really broader than that, 
really financial market activity in commodities markets. I said 
that in the testimony. And I think the CFTC is also saying that 
in their testimony as well.
    Senator Dorgan. After denying it for 5 months, they have 
finally had an epiphany over there.
    I have other questions that I will ask in a moment, but I 
will ask my colleagues to be able to proceed. Senator Domenici.
    Senator Domenici. Mr. Caruso, let me make sure that I 
understand. This price that we are talking about that you put 
up, both predicted and actual, is in dollars. Right, because 
that is what everybody agrees to use.
    Mr. Caruso. Yes, sir.
    Senator Domenici. Does China pay the same price essentially 
as we do for the oil?
    Mr. Caruso. The global price is denominated in dollars. 
Essentially everyone pays that same price.
    Senator Domenici. Does India pay the same price?
    Mr. Caruso. Yes, sir. There is a global price for crude 
oil.
    Senator Domenici. The point I am trying to get at, when I 
ask you, it sounds like a very simple question and you answered 
it very casually and cavalierly--but the point of it is if the 
speculators are taking advantage--and I hope we can find out 
who they are and what they are and what instruments they are 
using--they are doing the same thing to China and to India and 
to everybody else. Right?
    Mr. Caruso. Yes, sir.
    Senator Domenici. So if we are getting beat over the head 
and if our citizens are being denied something in this process, 
so are the millions of people in China and the hundreds of 
millions in India. And where are the other big markets in the 
world that import? India, China, America.
    Mr. Caruso. Japan and----
    Senator Domenici. Japan. Yes, all the countries that have 
vibrant economies are stuck essentially with this oil price. 
Right?
    Mr. Caruso. Yes, sir.
    Senator Domenici. Do you know right now today, as you talk 
to us--you are our only expert that I am aware of that we pay 
substantial money to maintain a vibrant agency. And I have 
supported you every time. When I was in his shoes, I put even 
more money in, and so did he, because we needed expertise.
    Is there any reason you have to suspect before this 
committee and in behalf of the American people--you are 
testifying. You are our servant. Is somebody speculating 
illegally? Is there some cheating going on that you can hardly 
help but see because the price is going up so high that you 
cannot fathom that is there, other than somebody speculating 
and doing something wrong?
    Mr. Caruso. Obviously, we are not the agency that collects 
that data, so we would not have enough information to be able 
to answer that question. That is the role of the CFTC and 
ultimately the Federal Trade Commission and the Department of 
Justice.
    Senator Domenici. Yes, I know that. But you are experts, 
and certainly if things keep coming out in a way that would 
appear to experts to be erroneous or unsubstantiated or 
dramatically unexpected, you would go back and do them over. 
Would you not? If you said, look, something is wrong with this. 
It went up too high. You would go back and take another look. 
Would you not?
    Mr. Caruso. Yes, sir. We are working with the CFTC on this 
task force, and there is a report that they are working on, 
promised by September 15, looking at the issues of whether 
there is any manipulation in the market.
    Senator Domenici. I wanted to just ask you this last 
question. Do you work collaboratively with the Commodity 
Futures Trading Commission in looking at what is going on in 
the world markets of oil and exchange information and then 
discuss various things that are going on? Do you do that?
    Mr. Caruso. Yes. We are members of their market monitoring 
committee and we are supporting the task force that the CFTC is 
heading.
    Senator Domenici. And what is that?
    Mr. Caruso. They have formed a task force among relevant 
Federal agencies really to try to answer the chairman's 
question: is there manipulation going on, what is behind the 
rapid run-up in oil prices, and whether or not they can----
    Senator Domenici. Okay. How long have you been doing this 
kind of work?
    Mr. Caruso. We have been working with them on--me 
personally?
    Senator Domenici. Yes.
    Mr. Caruso. I attended my first meeting 2 weeks ago.
    Senator Domenici. How long have you been doing the kind of 
work you do?
    Mr. Caruso. Oh, me personally? I had to admit it, 42 years.
    Senator Domenici. And how long have you been the head of an 
agency that is in charge of giving information to the American 
people and to the Government like you are now?
    Mr. Caruso. About 6 years.
    Senator Domenici. Six years. What did you do before that?
    Mr. Caruso. I was a career civil servant in the Department 
of Energy and then an energy economist at the CIA.
    Senator Domenici. All right. With all that background and 
you see this going on, do any buttons come on, or do you just 
assume that what we see is what we get?
    Mr. Caruso. I have my concerns and that is why I think we 
need more information. I am not adamant that there are no other 
non-fundamental factors. We just do not have enough 
information. What we do know is the physical data on physical 
markets, and we look at that and we try to apply the best 
economic principles and come up with--we think we can explain 
most of the price increase, but I am certainly open-minded and 
would like to see more data.
    Senator Domenici. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Murray.
    Senator Murray. Thank you, Mr. Chairman, and Mr. Caruso, 
thanks for being here.
    In your testimony and in responding to questions, you talk 
about the physical forces in the market, supply and demand, as 
being the primary drivers of these skyrocketing prices that we 
are all seeing. In March of this year, you testified before the 
Senate Energy and Natural Resources Committee that the price of 
oil, which was $112 per barrel, should have been $90 based on 
that supply and demand. So it is clear there were other forces 
in play in March and a lot of those forces are remaining in 
effect today.
    You have talked about how the EIA faces challenges in 
measuring speculative efforts, and you mentioned that your 
agency needs to develop some better measurements of these 
speculative activities, and more transparent information. I 
think we all are saying we need more transparency. Can you 
please expand on what type of information you are referring to 
and where do you plan to get that information?
    Mr. Caruso. Well, I think it is the information that the 
CFTC has requested with respect to commodity price index funds. 
There was really a lack of information about how large that 
market is because some of its activities are not regulated or 
not reported to CFTC, and that now has been requested. There is 
also more information needed on over-the-counter markets and a 
better understanding of the separation between commercial and 
noncommercial trades in the commodities markets. I think all of 
those things are being sought by the CFTC, and we did talk 
about them in the market monitoring committee, as well as the 
task force meetings.
    Senator Murray. This week, Acting CFTC Chairman Walt Lukken 
told the Homeland Security and Government Affairs Committee 
that in times like this, the opportunity for market 
manipulation is ripe. Last week he told a number of us who sit 
on the Appropriations Committee that manipulation could not be 
ruled out.
    You may remember several years ago my home State of 
Washington and other west coast States suffered through the 
western energy crisis, and for years industry representatives 
and industry regulators came and testified before all of us 
time and time again that market forces were the source of the 
skyrocketing electricity costs we were seeing. It was not until 
the tapes of those traders talking about the manipulative 
schemes at Enron were discovered that our suspicions of market 
manipulation were confirmed. So you can see my background and 
know why I look at this and want to make sure that we are 
asking the questions to know if manipulation is occurring.
    Now, the CFTC is working to monitor our markets, but can 
you tell me how EIA accounts for potential market manipulation 
when you do your forecasts and analysis?
    Mr. Caruso. We rely on their data. We would be users of any 
data that CFTC would make publicly available on that issue. 
They are obviously the lead and we would use that data, if it 
were available, in our analysis. We are analytical users of the 
data collected by CFTC and any other----
    Senator Murray. Yes, and you indicated that you had been 
doing this for a number of years. Just from your expertise 
looking at this, do you see any cause for concern for 
manipulation in the numbers you are seeing?
    Mr. Caruso. Well, I think we should be concerned and we 
should do everything we can to avoid a repeat of the very 
unfortunate experience that you referred to in the----
    Senator Murray. So we cannot rule it out.
    Mr. Caruso. I would agree with Chairman Lukken. He is 
certainly in a position to make that statement. And I certainly 
think we need to look and if we find that, make sure that the 
perpetrators are properly punished.
    Senator Murray. I appreciate that.
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    The first question I just would like to ask is in your 
testimony, you said the primary factors when making cost 
projections were demand, supply, inventories, and spare 
production capacity. And I have noted that two things were not 
in that list. One was market speculation and the other one was 
the value of the dollar. So as you saw from the chart there, 
based on the facts that they have now and the information that 
they collected, they do not believe that speculation had a 
noticeable impact on oil price. And I am not saying that it is 
not there, but right now I am saying we do not have the facts 
to state that it is definitely there.
    Do you believe that speculation, based on the facts that 
you have right now, has an impact on the price of oil?
    Mr. Caruso. We cannot see any evidence, and we, of course, 
rely on what has been provided to us by the CFTC.
    Senator Allard. But you are using the same figures that 
they are using.
    Mr. Caruso. Yes, we are using those figures, and we both 
admit, both EIA and CFTC, that we would like to see more data. 
I wanted to make that clear.
    Senator Allard. Yes, and I understand that. I think they 
are looking at information on swaps and indexes and whatnot----
    Mr. Caruso. Yes.
    Senator Allard [continuing]. Because that is not a part of 
those figures right now.
    Mr. Caruso. That is correct.
    Senator Allard. Hopefully, we will have that when we come 
into September.
    Mr. Caruso. Yes, sir.
    Senator Allard. Now, on the value of the dollar, did you 
look at the value of the dollar when you were making your 
projections?
    Mr. Caruso. Yes.
    Senator Allard. It seems to me like it has had a dramatic 
impact.
    Mr. Caruso. Well, you know, if you look at the price of oil 
and the value of the dollar, the depreciation of the dollar has 
been correlated to the price of oil. In fact, the oil price has 
gone up. The dollar has been going down.
    Senator Allard. Does that have sort of a compounding 
effect?
    Mr. Caruso. Our best economists do not think there is a 
direct causality between the dollar and oil prices. There may 
be some indirect effects, and one would be, for example, that 
countries that have had their currencies appreciate versus the 
dollar are paying less for the final product, and that 
certainly increases oil demand with a lower price in Euros, for 
example. Demand otherwise would have been higher if they had 
been paying a dollar price instead of a Euro price. So there 
may be an indirect impact, but we do not see any direct effect 
of the dollar--direct correlation and causality.
    Senator Allard. I had seen a TV show where they were trying 
to gather facts on the price of oil and they made a quote about 
what the consumer was paying for a tank of gas or a gallon of 
gas in Saudi Arabia, around 27-28 cents a gallon. But we are 
looking at in some areas over $4 a gallon. Is that heavily 
subsidized in Saudi Arabia?
    Mr. Caruso. It is heavily subsidized in all the oil-
producing countries and, as well, in many other emerging 
economies. Our best data indicates in a world of about 85 
million barrels a day of oil consumed, about 30 million of that 
is under subsidization. So the consumers of the 30 million 
barrels a day are not paying the full market price.
    Senator Allard. Now, I would like to understand. I mean, 
the chairman has an interesting bunch of facts. I am gathering 
the facts that the chairman is bringing up has to do pretty 
much with American markets, and you are talking on world 
markets.
    Mr. Caruso. Yes, sir.
    Senator Allard. Is it possible for you to get us a chart or 
facts and compare world markets versus American markets in a 
relatively short time here?
    Mr. Caruso. Yes, sir.
    Senator Allard. Maybe in a week or so?
    Mr. Caruso. Yes. We update that on a monthly basis.
    Senator Allard. I think it would be helpful to me if we 
could get a chart that compared American markets and world 
markets. I think it helps us better understand some of the 
points that the chairman is making and understand some of the 
facts.
    [The information follows:]

                         ANNUAL OIL CONSUMPTION
------------------------------------------------------------------------
            Year                China       U.S.      Other      World
------------------------------------------------------------------------
2000........................        4.8       19.7       52.2       76.7
2001........................        4.9       19.6       52.8       77.4
2002........................        5.2       19.8       53.1       78.0
2003........................        5.6       20.0       54.0       79.6
2004........................        6.4       20.7       55.2       82.3
2005........................        6.7       20.8       56.1       83.7
2006........................        7.2       20.7       56.8       84.7
2007........................        7.6       20.7       57.3       85.5
2008........................        8.0       20.3       58.1       86.4
2009........................        8.4       20.3       59.0       87.8
------------------------------------------------------------------------


                                                               
                                                               

    Mr. Caruso. There is one point that I think is relevant to 
both of your observations on that, and that is, one of the 
murky areas is we do not really have good data on China. We 
have estimates of what they are consuming. We have no good idea 
of what their inventories are.
    Senator Allard. And they are a big consumer.
    Mr. Caruso. They could be hoarding. I am not saying they 
are. They could be hoarding and we would not know it. There is 
just no data.
    Senator Allard. Okay.
    Have you done any modeling to project future supplies if 
the resources available in oil shale and the Outer Continental 
Shelf are tapped? Have you done any of that?
    Mr. Caruso. We have looked at the OCS resource 
availability. In our Annual Energy Outlook, which goes out to 
2030, in the 2007 edition we had an OCS open access case, and 
we looked at what would the additional supplies be.
    Senator Allard. Can you share the results of their modeling 
at least with the Outer Continental Shelf? You do not have 
anything similar to that on oil shale? Can that be developed?
    Mr. Caruso. We have not done that for oil shale because the 
economics of oil shale are still, even at these oil prices, 
relatively unfavorable.
    [The information follows:]

                        Outer Continental Shelf

    The EIA Annual Energy Outlook 2007 analysis on opening access to 
the currently restricted areas of the Outer Continental Shelf (OCS) is 
EIA's most recent analysis on the issue. The analysis indicates that 
cumulative domestic production of crude oil from 2012 through 2030 with 
OCS access is projected to be 1.6 percent higher than in the AEO 2007 
reference case and 3 percent higher in 2030 alone, at 5.6 million 
barrels per day. For the lower 48 OCS, annual crude oil production in 
2030 is projected to be 7 percent higher--2.4 million barrels per day 
with OCS access compared with 2.2 million barrels per day in the 
reference case.

    Senator Allard. Well, you have not gone through the rules 
and regulation process. So how do you know what your lease 
arrangement is going to be or your royalty payments?
    Mr. Caruso. Correct.
    Senator Allard. So you cannot do that until you get----
    Mr. Caruso. We know the resource is there. It is the 
economics and technology that, as you know, very directly----
    Senator Allard. I think that is the frustrating part for 
the oil producers with oil shale is that they need to get to 
the point where they can make those projections. And I see you 
have the same problem.
    Mr. Caruso. Yes, sir.
    Senator Allard. I see my time is expired. Thank you.
    Senator Dorgan. Senator Feinstein?
    Senator Feinstein. Thank you very much, Mr. Chairman.
    Mr. Caruso, I would like to refer you to the last two 
paragraphs in your written comments on page 11, if I might. 
This is, I think, the area that we are all concerned with. 
``When noncommercial traders are `net long' (the number of long 
contracts exceeds the number of short contracts), it is 
presumed that speculators are betting on increases in price.'' 
It is my understanding that that is true to 90 percent of these 
trades.
    ``If a preponderance of them are making these bets''--and 
that is the 90 percent--``then the price can increase based 
solely on their own demand. However, the distinction between 
commercial and noncommercial traders is weak.'' And we know 
that the CFTC has given the big institutional investors 
noncommercial status. So they can actually buy very long and 
very big contracts and not take receipt of anything. ``For 
example, speculative investments in commodity index funds are 
categorized as commercial rather than noncommercial.''
    Are you empowered to collect this data?
    Mr. Caruso. No. That is the----
    Senator Feinstein. CFTC?
    Mr. Caruso [continuing]. CFTC. One of the things that I 
propose or at least advocate for is to have greater 
transparency. That is one of the areas we think makes it very 
difficult to answer the chairman's question and, indeed, your 
question. We are working very hard to get that answer to you--
the letter you sent me--on what exactly can we disaggregate 
regarding the impacts of the different effects. Without that 
data, I think we really cannot do that.
    Senator Feinstein. See, I very much agree with what the 
chairman has said. And I have a real problem. Let us take a big 
institutional investor like CalPERS, you know, hundreds of 
millions of dollars. I do not understand when a commodity is 
scarce like this why these kinds of investors and why swaps 
should even be permitted. It seems to me that when a commodity 
is scarce in the futures market, it is one thing for an airline 
to do it because they receive the commodity. It is another 
thing for CalPERS or any other institutional investor to do it 
because it is just making money, and I do not see how it cannot 
affect the price because everybody is betting long. And then 
you admit that it does have a price impact in your written 
paper.
    Mr. Caruso. It could very well be having a price impact; 
like I said, if we had more data we might know. Could I respond 
to that?
    Senator Feinstein. Sure, please.
    Mr. Caruso. I think that this may be part of why we are 
having a little bit of a--not disconnect, but as the chairman 
has pointed out, how can you reconcile fundamentals versus this 
financial activity is a broader way to put it. If a financial 
institution like CalPERS decides it would like to move from 1 
percent of its portfolio in commodities to 3 percent, that is a 
big deal for a pension fund like that. When they look out 1 or 
2 years, they see nothing but up-side potential particularly in 
oil markets.
    Now, is that speculation or is that fundamentals? I 
personally think that they are looking at the fundamentals to 
make that decision. Now, perhaps----
    Senator Feinstein. Could I interrupt you? I think they are 
speculating, otherwise why would they be there?
    Mr. Caruso. Well, they are speculating----
    Senator Feinstein. They are speculating that it is going to 
go up----
    Mr. Caruso. Yes.
    Senator Feinstein [continuing]. And they are going to make 
money and everybody else is making money. So they go into it. 
And so everybody has jumped into it in unprecedented fashion. 
And I think it has really impacted the market.
    Now, what do I know? I am just a lowly Senator, but to me 
it is just common sense. So I wonder, first of all, why the 
CFTC put them in this noncommercial category, which therefore 
they have no limits as opposed to being in a commercial 
category where there is a limit. It is 20 million barrels of 
oil a contract. That is a lot. And then there is another limit, 
I guess, in the last 3 days of a contract.
    Mr. Caruso. Correct.
    Senator Feinstein. But I mean, this has created a huge 
special feeding tank for all these institutional investors, and 
I think it has pushed up the price of oil worldwide.
    Mr. Caruso. Well, certainly as I said in the testimony, we 
certainly would like to look more----
    Senator Feinstein. Yes, because we had in another committee 
every CEO of every big oil company. We asked them the question. 
You remember? Is this a supply and demand issue? The answer was 
no. The Saudis, the answer is no. The figures of the chairman 
just on consumption, the answer is no.
    Then what is the change? The change is the infusion in the 
marketplace of huge institutional investors with hundreds and 
hundreds of millions of dollars. How can that not drive up the 
price of oil? Can you answer that?
    Mr. Caruso. I think it is a combination of the fundamentals 
being there to inform the investment decisions that are being 
made, saying, hey, this looks like a no-brainer. This market is 
nothing but--you know, we've got all these supply problems. We 
do not see any new oil coming on line. The perception is that 
we are perhaps even facing peak oil. I think that certainly is 
influencing these decisions. So I think it is hard to 
disaggregate those.
    Senator Feinstein. My time is up, Mr. Chairman. Thank you.
    Senator Dorgan. We are going to have a second round if you 
are around, Senator Feinstein.
    Senator Feinstein. Okay.
    Senator Dorgan. Senator Bennett?
    Senator Bennett. Thank you very much.
    I would like to continue this conversation because one of 
the things that was said in this morning's hearing that had not 
occurred to me on this very issue was the whole question of 
describing speculators. We have an image of speculators and 
they are all basically green eyeshade types running pension 
funds that have ice water in their veins and are driven by pure 
profit. And in this morning's hearing, the comment was made 
airlines are in the marketplace in this fashion hedging. We 
think the hedge funds are terrible, but actually the airline, 
in order to protect itself against price increases, is in the 
market hedging through a hedge fund.
    Senator Feinstein. There is no problem.
    Senator Bennett. Okay, no problem. But in the aggregate of 
what we are talking about of commercial and noncommercial, this 
falls into a definition question of where is the bet being 
done. This is not an airline buying oil. This is an airline 
buying in futures to hedge against something that happens in 
the oil. So the airline is there on both sides of----
    Senator Dorgan. Senator Bennett, would you yield on that 
point----
    Senator Bennett. Sure.
    Senator Dorgan [continuing]. So that we can just clear up 
that point? The market, in my judgment, was established for the 
purpose of consumers and producers to be able to hedge risk 
with respect to a physical product.
    Senator Bennett. Sure.
    Senator Dorgan. What you have just described is a perfect 
function of the market----
    Senator Feinstein. That is right.
    Senator Dorgan [continuing]. Legitimate hedging by airlines 
which are heavy users of the product.
    Senator Bennett. Yes, and that is my point. How can we 
identify, in the name of the large-term speculators, how much 
of that is the legitimate hedging and how much of that is 
somebody who is buying the product simply to sell to somebody 
who will buy the product who has no legitimate place in the 
market?
    As I said earlier, I do not in any way, along with Senator 
Domenici, think it is appropriate to say this side is trying to 
protect speculators and that side is trying to attack 
speculators. I think we are all trying to find out, as much as 
possible. But let us find out by getting some kind of 
definition of the institutions or the people that are engaged 
in this activity so that we know what their motives are. And 
if, indeed, somebody is--a large number of people--this is 
theoretical, but nonetheless, it is historic. If a large number 
of people are buying at ever-increasing prices for the sole 
purpose of selling to someone else at an ever-higher price, 
then the market is being set up for a classic bubble.
    That is exactly what happened in the housing market. People 
bought houses not to live in them but to sell them to somebody 
else who would buy them to sell them to somebody else, and the 
housing market ultimately collapsed.
    That is what happened with dot com stocks. They did not buy 
the dot com stocks because they were expecting a dividend 
because they were going to own the company. They bought the 
stock at $20 so they could sell it to somebody at $30 who was 
buying it to sell to somebody at $40, and eventually the bubble 
burst.
    So if, indeed, that is going on to the degree that some 
people suspect, there will be a burst at some particular point. 
The bubble will burst and things will come down just the way it 
did in the housing speculation or the dot com speculation.
    Do you see any signs of that kind of buying as opposed to 
other kinds of hedging and activity?
    Mr. Caruso. Well, I think, really going back to Senator 
Feinstein, trying to get at the data that she just referred 
to--those types of investments like CalPERS versus a classic 
hedge, as you pointed out, for an airline--is exactly the type 
of data that would be useful to answer this question. We just 
do not have that data.
    Senator Bennett. We do have that data.
    That leads me to my next question. Oh, go ahead.
    Mr. Caruso. One other point on that. What is going on here 
I think is the perception that this is a no-brainer, only an 
up-side market. And the reason that is relevant is that there 
is a lack of institutions or individual investors who are 
willing to take the buy side--I am sorry--the sell side of 
this.
    Senator Bennett. Yes. So there may be a little bit of both.
    Mr. Caruso. Yes.
    Senator Bennett. And I think that is probably reality. That 
leads me to my next question.
    We obviously need more transparency. We need more 
information both at the CFTC and perhaps at your agency, and I 
would support legislation that would increase the number of 
people available to you as quickly as possible.
    Suppose--and I think this is not an unusual suppose--under 
pressure if people at CFTC or elsewhere say, okay, we are going 
to crack down, we are going to put in these kinds of 
restrictions, we are going to have all sorts of regulation, the 
trading in oil goes offshore, moves from CFTC, moves from 
America to Dubai or London. Would we not then have less 
transparency than we have now?
    Mr. Caruso. Yes.
    Senator Bennett. And would the market, therefore, not be 
more likely to get out of control under those circumstances 
than it would be now?
    Mr. Caruso. Well, I think if you take the most extreme 
hypothetical circumstance where much of the volume out of NYMEX 
moves to Dubai, we would lose a great deal of transparency. 
That is correct.
    Senator Bennett. So we need to be a little careful about 
what we do.
    Mr. Caruso. Yes.
    Senator Bennett. Okay. Thank you.
    Senator Dorgan. Senator Craig?
    Senator Craig. Thank you for being with us, Administrator 
Caruso.
    So if we have institutional buying in an up-side market and 
there is no perception of a down side, if in the process we are 
creating the bubble that Senator Bennett has spoken to, then 
let us create a down side by bursting the bubble. We can burst 
the bubble sooner than the market can if we tell the market 
that in a 1.5 percent growth market with no spare capacity, we 
are going to add capacity to the market for the foreseeable 
speculative future and we bring a few million more barrels a 
day into the market or we convince the market that we are going 
to over a fixed period of time.
    What does that do to the market if a government, this 
Government, says we are going to bring on line and make 
available to the market what are known reserves to be brought 
to the market in the time it will take to get there, and we 
will urge that by facilitating it as reasonably possible as the 
market can respond? What happens?
    Mr. Caruso. I think that if the market was really convinced 
that however we were----
    Senator Craig. And I would define convinced as everything 
we can possibly do, including the signature of a President that 
we are going to do that.
    Mr. Caruso. I think the market would respond because these 
pension funds and other financial investors have no interest in 
whether the price is up or down. They are only interested in 
being on the right side of the transaction.
    Senator Craig. Of course. That is by definition who they 
are.
    Mr. Caruso. So those long positions would very quickly 
become short positions.
    Senator Craig. And, of course, we hear the wailing of 
frustration and the gnashing of teeth at this moment that, oh, 
my goodness, that is years and years out. Everything in this 
business is years out. It is the reality of this industry. You 
do not bring on a new field overnight. But if you are out there 
drilling and discovering and the market is clearly conditioning 
you to be there by the price available in the market, at 
margins, even if they come down 30 percent, still make it a 
profitable venture, it seems to me that that begins to work.
    Now, other things can happen, and I think that we are not 
yet predicting them effectively. China last week reacted as 
only China can react. They raised their tax on fuel because 
they as a government control fuel access to their citizens. And 
they react differently because their infrastructure, while 
increasingly dependent on hydrocarbons--it is about 90 percent 
dependent--they can change because only 1 out of every 1,000 
Chinese has a car, and they can quickly discourage the second 
or third Chinese in 1,000 from buying a car by raising the 
value. We cannot do that in this country. We have no 
elasticity. We are very inelastic because we all have them. We 
not only have one, we have two, or we have three.
    And so it is interesting for me to watch everybody try to 
model the Chinese when the marketplace may be reshaping them in 
a way we have not yet figured. Especially it has become 
increasingly unpopular in this world to be a dirty producer, 
and by definition they are dirty.
    It is also fascinating to me that some are suggesting--and 
you did not suggest it. It would be fair for the record to show 
that. But there could be some hoarding going on out there. We 
were hoarders up until a few weeks ago when we shut the SPR 
off. That by definition is hoarding. We do not know if other 
countries are doing that. They are simply buying in a market 
and receiving. They may be sticking it into the ground like we 
are. If they are and if we were, that would still the market 
because that is the demand. Is that not correct?
    Mr. Caruso. That is correct.
    Senator Craig. Now, you could say it is bad or it is good 
to hoard. We said it was good to hoard because we were creating 
a security blanket during a period of crisis, but it was by 
definition hoarding. And we decided to stop it for a while. And 
the chairman helped lead the attack and we agreed with him.
    So I find it really fascinating in an environment where 
there is little to no margin left, in a demand growth of 1.5 
percent a year and no desire to produce more than that, that 
the markets would not respond and the opportunity to speculate 
within the market structure has happened.
    I do not ask you to respond to that. I know you are 
frustrated, as we all are, but we have also got to be honest 
with ourselves when we keep denying ourselves the production we 
know we have and are capable of producing. We say as an 
arrogant nation to the Arabs, you produce it because we do not 
want to. And we expect you to produce it in the volume we need. 
Now, go get at it. Turn your valves up. Drill more holes over 
there because we are not going to because we are clean, 
pristine, rich, and arrogant. And I do not know of any other 
way to define it because that is what we are doing in this 
country.
    I am fascinated at the new conversion rate of the new 
religion, and the new religion is drill at any cost, do it 
cleanly, do it environmentally soundly. Any cost does not 
define that because you are burning down my house, my 
pocketbook, and my family's security.
    So thank you for being here.
    We will proceed on. I hope, in our effort to solve a 
problem, we do not decide to destroy the market or send it 
overseas or send it to Dubai or create a lack of transparency 
for all consumers. But we have been in the state of denial for 
20 years and our denial has come home to roost and it is a very 
expensive cost. Thank you.
    Senator Dorgan. Senator Craig, thank you very much.
    I might observe on this issue, I happen to think we should 
do a lot of things, including opening up more of the eastern 
Gulf of Mexico. We need to drill more but----
    Senator Craig. And the chairman and I agree and we are on 
bills together.
    Senator Dorgan. But I might also say that the EIA has 
projected that the U.S. production will increase every year 
from now until 2016. So it is not as if we are not producing. 
We are producing some more.
    Senator Craig. Mr. Chairman, in relation to what demand? Is 
it greater than the world demand or greater than the national 
demand?
    Senator Dorgan. Well, I want to talk about that.
    Senator Craig. If it is not, the market goes up.
    Senator Dorgan. I am going to talk about the demand in a 
minute.
    I want to come back to Administrator Caruso's notion that 
this is the fundamentals, and he has indicated that he thinks 
that this line is because of change in supply issues.
    But before I do that, I brought some charts. I was not 
going to use them, but because the suggestion has been experts 
would not predict that this is speculation, I want to put up 
some thoughts from experts.
    Mr. Gheit testified up on the third floor in the Energy 
Committee. Here is what he said: ``There is no shortage of oil. 
I am convinced that oil prices should not be a dime above $55 a 
barrel.'' That was last October. But I have just called him 
recently and talked to him by telephone. He feels exactly the 
same way today. He said, ``I call it the world's largest 
gambling, all open 24/7, totally unregulated like a highway 
with no cops, no speed limit, and everybody going 120 miles an 
hour.'' This man has worked 30 to 35 years, top energy analyst 
for the Oppenheimer Company. I think he is an expert. I have 
talked to him at some length. He has testified here. I have 
talked to him on the phone. I think this qualifies as an 
expert.
    Stephen Simon, as I expect--is kind of an expert. He is the 
Senior Vice President of Exxon Mobil. I do not quote that 
company often because they are happy to deposit our money in 
their bank accounts with these prices. But he said the price of 
oil should be about $50-$55 a barrel.
    Clarence Cazalot at Marathon Oil, Chief Executive Officer, 
he is the CEO of Marathon, one of the large companies. ``$100 
oil is not justified by the physical demand in the market.''
    Let me leave it at that, but I have got six or seven more 
charts.
    I want to come back to the point you made, Administrator 
Caruso. I just went through your estimate of consumption 
worldwide and production worldwide. And you have told me that 
you think lack of production is the thing that has changed the 
fundamentals. If we can have that first chart back up.
    It occurs to me that in January of this year, you made an 
estimate. If we can point to that line, January 2008, that is 
the estimate of where EIA thought this was going to go. Now, I 
have looked at what you proposed as estimates for production 
and consumption, and it appears to me that while production is, 
in fact, down just a bit, consumption is actually down just a 
bit more in 2009 and down just about equal to the decline in 
production. So, in fact, there is virtually no difference in 
fundamentals that could justify anything on that line. I just 
went through this as I got the information.
    I am trying to understand what you are saying to me. You 
are saying to me there are--you know, I understand Nigeria and 
all the daily stuff that goes on, but I am talking about the 
things that you saw every time you tried to make an estimate 
with your best economists, best lawyers. I hope you have got 
some M.B.A.'s, by the way, because that would be best your bet.
    Mr. Caruso. Not enough.
    Senator Dorgan. Okay. You need M.B.A.'s down there.
    Mr. Caruso. Yes, sir.
    Senator Dorgan. So every time you tried to make an 
estimate, you not only just missed it, you just were not even 
on the chart. And I think what you are telling me today is 
there is some speculation, but mostly it is fundamentals and 
mostly it relates to world supply. And as I have just looked, 
world demand/consumption has gone down slightly more than the 
supply reduction. So, your answer does not add up to me.
    Mr. Caruso. Well, we take into account everything, not only 
the facts, as you have mentioned--supply, demand, and 
inventories and productive capacity. I cannot remember which 
Senator referred to it, but the perception of where the future 
is headed informs or at least influences decisions being made 
in the marketplace, what people are willing to pay for the 
price of oil. If you believe that you are not going to have 
enough supply in 2009, you would pay more in 2008. So I think 
there is a combination of factors here. Supply, demand, 
inventories, productive capacity, and perceptions of where we 
are headed are influencing this market.
    And as I said, I am not saying that this--obviously, I am 
not going to say it has been perfect.
    Senator Dorgan. Well, less than that. I mean, that is a far 
cry from perfect. And you know, look. Maybe I would have made 
the same mistake, but the fact is if I were looking at that 
chart and sitting in the witness chair, I would think how on 
earth would I explain this. How could I explain missing it? The 
red line is what has happened. The yellow line is what you 
thought would happen every single month.
    My point is I think you are missing something big. I do not 
know whether you are reluctant to explain it because Secretary 
Bodman has said there is no speculation. The President has got 
another narrative about drilling. I mean, I do not understand 
it.
    But I have not been able to figure out today--I thought you 
told me in the first round that the purpose of this or the 
reason for this, the reason you missed it and apparently each 
time missed it by a mile is worldwide production. And what I 
have just described is consumption is actually decreased 
slightly more than production has decreased. So that seems to 
me that your answer does not fit here. It does not work here.
    And I am not trying to brow beat you, Administrator Caruso, 
because I like you and I like your agency. But I do not like 
this, and I do not like the fact that a whole lot of people are 
saying, you know what? If it looks like a duck and quacks like 
a duck and walks like a duck, it is obviously a pig. There is 
clearly speculation here and experts that have testified before 
our committee, it seems to me, know this business pretty well. 
Many of them have said there is an unbelievable drum beat of 
speculation.
    Mr. Caruso. Well, I would like to see more data to be able 
to make that judgment, sir.
    Senator Dorgan. Do you think that data would ever exist to 
allow you to make that judgment?
    Mr. Caruso. I think so.
    Senator Dorgan. You said before the Energy Committee you 
thought this speculation--after I questioned you at some 
length, you said you thought speculation might contribute 10 
percent to the current price of oil.
    Mr. Caruso. Yes. I think in any given day or short term, it 
could easily be that. Yes. I am just saying that over the 
longer time frame, the fundamentals can explain most of it.
    Senator Dorgan. I will ask one more question. Thank you, 
Administrator Caruso.
    Senator Feinstein?
    Senator Feinstein. Why has the Saudi addition of 700,000 
barrels a day not lowered oil prices?
    Mr. Caruso. Well, I think it is very hard to get a real 
handle on what the addition actually has been. As best we can 
tell, it is probably closer to 300,000 barrels a day. Based on 
the information we have, they went from 9.4 million barrels a 
day to 9.7 million barrels a day from May to June of this year. 
As has been pointed out here, during that same month, we had a 
decline in Nigerian production, as a result of some rebels who 
attacked an offshore drilling rig, and I believe it was Shell 
had to shut it down. That was about 300,000----
    Senator Feinstein. Yes, but that might be, but the trend 
line has been so dominant that even when additional oil is 
added, it does not make any difference at all.
    In your 2007 Annual Energy Outlook, you stated this, and I 
would like to quote. ``The projections in the OCS access case 
indicate that access to the Pacific, Atlantic, and eastern gulf 
regions would not have a significant impact on domestic crude 
oil and natural gas production or prices before 2030. Leasing 
would begin no sooner than 2012, and production would not be 
expected to start before 2017. Total domestic production of 
crude oil from 2012 to 2030 in the OCS access case is projected 
to be 1.6 percent higher than in the reference case and 3 
percent higher in 2030 alone at 5.6 million barrels per day.''
    Now, in essence, do you stand by that statement today?
    Mr. Caruso. That is our best analysis, Senator Feinstein.
    Senator Feinstein. So you are saying drilling in the Outer 
Continental Shelf effectively will do nothing with respect to 
price, at least to 2030.
    Mr. Caruso. It will have a small effect, yes, only a small 
effect.
    Senator Feinstein. What is that small effect?
    Mr. Caruso. Oh, I think--I cannot remember precise numbers. 
I could provide them for the record, but I believe it was less 
than $1 a barrel.
    Senator Feinstein. All right, if you would provide that for 
the record.
    Mr. Caruso. Yes, I will.
    Senator Feinstein. I would appreciate that.
    [The information follows:]

                             OCS Production

    EIA's Annual Energy Outlook 2007 analysis of expanding Outer 
Continental Shelf (OCS) access projected that the impact on the 
domestic oil wellhead price in 2030 would be a reduction of 
approximately $0.14 (0.3 percent), from $51.25 in 2005 dollars to 
$51.11. EIA expects that, while the impact in a higher world oil price 
environment would be greater, the price impact would remain 1 percent 
or less. Key reasons for the small differences are that oil prices are 
largely determined on the international market and development of these 
resources would require considerable time and investment dollars, so 
greater impacts are not anticipated until after 2030.

    Senator Feinstein. I mean, Senator Dorgan asked--you have 
got to, I think, look for the one thing that is different in 
all of this. And the one thing that has always appeared to me 
recently to be different in the marketplace is rampant 
speculation, one way or another.
    One of the things that we learned in the West during the 
Enron crisis were the depths to which energy traders would go 
to make a buck, the lack of any kind of a moral compass in that 
trading community.
    And now you have this huge anschluss of hundreds of 
millions of dollars in the institutional investment community, 
and that is the only thing I know of that is different.
    Do you know of anything else that is different?
    Mr. Caruso. Compared to--I mean, I think in the last 5 
years, there is no doubt that there has been a very significant 
surge in financial capital movement out of equities and other 
instruments into commodities. Everyone agrees with that. There 
is a clear correlation. What I think is still missing is the 
causality, whether we can actually pin it down, and that is 
where I think, hopefully, the CFTC study that we are working on 
will shed some light on that.
    Senator Feinstein. But you cannot tell me any other major 
significant thing that has happened other than this, nor can 
anybody else. And yet, many other people just like you say, oh, 
it cannot have that kind of price effect, but it is. And it 
seems to me to debunk it when you do not know--I mean; to me it 
is just sort of clear like looking at you is clear. This is the 
elephant in the room that was not in the room before.
    Mr. Caruso. I think another thing that really changed is 
that in 2004 we had the largest increase in world oil demand 
that we have experienced since we have been collecting data, 
and that really limited the amount of spare capacity in the 
world. That is definitely a change and we still have not 
recovered from that. So if you wanted to point to a fundamental 
factor--I am not debunking. What I am saying is I look at what 
I know and----
    Senator Feinstein. It was the incentive for these futures 
markets to go very long and they did. I do not think anybody 
expected this kind of effect, whether it is an aberration or 
not. I have got to believe there is a causal implication.
    Mr. Caruso. And that I hope we can prove.
    Senator Feinstein. I hope you can and I think it is really 
important that you look at it. I think, you know, like Senator 
Bennett--well, he wants to look at something else. I would like 
to have staff really look at this, Mr. Chairman, and come back 
to us. I wrote a letter, I think, on May 22 asking some of 
these questions, and Mr. Caruso referred to it. I hope I will 
get a response soon.
    Mr. Caruso. Yes. We hope to get that to you by the end of 
next week.
    Senator Feinstein. Thank you very much. I Appreciate that.
    Senator Dorgan. Senator Feinstein, thank you.
    The point that Senator Feinstein made about west coast 
electricity with the Enron Corporation strikes a nerve. I 
chaired the hearings here in the Senate over in the Commerce 
Committee. Ken Lay came to my committee, took the oath. We 
swore him in. He took the Fifth Amendment to all of my 
questions. He has, of course, since died. But we know that it 
was a criminal enterprise. A number of his colleagues are now 
in prison.
    And you know it is interesting. Senator Feinstein was in 
the hearings that I was in leading up to all of that when the 
wholesale electricity prices went up like Roman candles and we 
had the regulators from the Government sitting at these tables. 
There is nothing going on. Vice President Cheney derided 
anybody that thought there was some speculation, some 
manipulation. He was derisive of those of us who were talking 
about it.
    Senator Feinstein. That is right.
    Senator Dorgan. There is nothing going on. This is the way 
the market works. Yes, there is an upward climb that is 
dramatic. That is the way the market works.
    We later found out it was criminal behavior, unbelievable 
criminal behavior. And the fact is about $10 billion to $15 
billion was taken out of people's pockets on the west coast by 
that criminal behavior.
    Senator Feinstein. Forty billion dollars was the cost to 
California alone of that.
    Senator Dorgan. I mean it is pretty unbelievable.
    So I tell you that not because I think there is criminal 
behavior, not because I am alleging anything here. It is just 
that I am suspicious when agencies come and tell us, well, we 
see this big line go up, but everything is fine.
    The CFTC Chairman came to our committee recently. You know, 
for 4 or 5 months, he has been saying wherever he could speak 
that this is just fundamentals. Now, as I said, he had some 
epiphany after having had a long night's sleep and he woke up 
and said we have been investigating it for 7 months. Well, 
which one is true? That you were unconcerned, or was it the 
fundamentals all this while you have been investigating? I have 
minimum--minimum--confidence in the Chairman of the CFTC to get 
to the bottom of anything, let alone this, because he is 
predisposed to how he already answered it, despite the fact he 
cannot see what he should know in order to make informed 
conclusions.
    Having said that, I want to go back to one more point, 
Administrator Caruso. At every point on this run-up--you all 
make monthly projections. At every point what has happened is 
we have seen a substantial what you term deviation between what 
happened and what you expected to happen. Are you saying to me 
today that in every case it was because there was a change in 
worldwide production? Because that is what you have largely 
said, on the production side.
    Something obviously happened in every case. What do you 
think happened in every case to make this so inaccurate in 
every case?
    Mr. Caruso. Well, I would have to go back and take a look 
at it, but every month we take a look at every aspect of the 
fundamentals that we have all been discussing here, seeing 
whether or not we got it wrong last month, how can we adjust 
that, have there been any changes in actual data that would 
change our view, including activities with respect to 
geopolitical events. So it would be very hard for me, off the 
top of my head, now to tell you what changed every month, but--
--
    Senator Dorgan. Have you seen a chart like this before?
    Mr. Caruso. Oh, yes.
    Senator Dorgan. If I had that chart--have you gone back to 
your agency and said, hey, guys, what's up? Are you kidding me? 
We are paying a lot of money to a lot of people to see if we 
can make projections as best we can and look at what is 
happening. And I am wondering if you do not have people that 
say, well, I will tell you what's up, Mr. Administrator. We 
look at all this data. We see worldwide demand. We see what is 
happening in terms of consumption. We see the data. That is why 
we made the projections, but there is something else going on, 
Mr. Administrator. Do you have anybody inside your agency that 
says that if you asked them what's up?
    Mr. Caruso. Well, they are looking as hard as they can for 
what's up, and they are trying to do the best they can every 
month.
    Senator Dorgan. Would you give me the names of the people 
that are searching for what's up? I mean, you get my point. I 
do not mean to be a wise guy.
    Mr. Caruso. Sure. The person who is in charge of----
    Senator Dorgan. All right. Well, they are good-looking 
people. And if one of you is in charge of what's up, I am 
anxious to get periodic reports.
    My point is that I would think having studied economics and 
business and all these issues--I know you do not want this to 
happen. You are a good agency. This country is advised by your 
agency. A lot of things happen every month based on your 
judgment about what is going to happen. And so we need you to 
get this right. And I do not think it is your fault because 
something is happening that clearly you do not understand based 
on this line and probably I do not understand it and Senator 
Feinstein does not understand it. But I think I know what it 
is. I do not know the dimensions of it because most of it 
happens in the dark.
    It is called dark money because the CFTC decided of its own 
volition there are a lot of things happening that they do not 
want to see. So they do no action letters to say to the 
Intercontinental Exchange you can trade these commodities to a 
London-based exchange owned by U.S. companies. You can trade 
them. In fact, we will let you trade them in Atlanta, Georgia 
off computer terminals in this country, and we will decide we 
should not see them. That is unbelievable in my judgment.
    But my sense is this is a mistake that you make pretty 
honestly because it is the way you study economics. 
Fundamentals should drive price, and it does not have any 
relationship to price right here. Do you not think that is the 
case?
    Mr. Caruso. Well, if it is, we definitely are going to do 
our best to ask you or whoever the proper authority is to give 
the authority to increase the data collected by the proper 
people, which in this case is the CFTC, and improve our 
modeling because bad data, no matter how good the model is, 
yields bad results.
    Senator Dorgan. Well, Senator Feinstein, I appreciate your 
being here.
    Mr. Caruso, let me say, as I said at the start, you are a 
good person. You run a good agency. Again, I think any 
qualified person looking at fundamentals would probably come up 
with the estimates you have come up with, and that is what I 
regret because there is dark money out there that no one can 
understand. So I am just trying to get, as best I can, some 
notion of what is happening. And I have called you here. My 
colleagues, I think, have asked good questions.
    And I know, as I said, you have traveled around the world 
with the Secretary to Saudi Arabia. You are weary and tired. 
Neither you nor your agency probably wanted to come here. Your 
workers do not want to come here.
    I do not mean in any way ever to make fun of your agency, 
although I do mean to say this line is a far cry from the 
estimates. But that is because I think something is happening 
that you cannot see and I cannot see. And I want to find out 
who is looking for it, and I would like to have a loud 
amplifier when somebody finds it to be able to hear what they 
have found.
    Mr. Administrator, thank you very much for you time today. 
I have not talked about your budget so much. As you know, the 
President has sent us a budget recommendation. We are working 
on that, but I very much appreciate your time.
    Mr. Caruso. I appreciate your confidence, sir.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Dorgan. At this time I would ask the members of the 
committee to submit for the record any additional questions 
they have for the witnesses.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

            Questions Submitted by Senator Dianne Feinstein

    Question. On May 22, I wrote to request that EIA analyze oil prices 
over the past 2 to 4 years in an effort to estimate the impact of the 
major factors now believed to influence the price of oil, including 
specifically:
  --Changes in geopolitical stability;
  --The strength of the dollar;
  --Increased oil market speculation;
  --The emergence of index fund investments; and
  --Market fundamentals such as oil supply, demand, and storage.
    EIA models and predicts the future price of oil as one of its 
primary functions. This analysis will inform Congress as it works to 
alleviate the burden that currently faces the American people. 
Considering its great urgency, I am very disappointed that I have not 
yet received a response. What progress has EIA made in determining the 
role speculation, the depreciating dollar, and geopolitical instability 
have played in recent increases in the price of oil?
    Answer. On July 2, 2008, the Energy Information Administration 
(EIA) provided a response to your letter dated May 22, 2008. In short, 
our analysis to date suggests that market fundamentals--strong demand, 
disappointing supply growth, concern over actual and perceived supply 
disruptions, low inventories, very limited spare production capacity, 
and global refining capacity constraints--are the primary drivers of 
global oil prices. The current very tight oil market balances and the 
possibility of further supply disruptions are causing prices to rise to 
unprecedented highs. Changes in the geopolitical stability of key 
producers and producing regions--one of the factors cited in your 
letter--in a supply environment that is already tight also suggest that 
fear of supply disruptions due to instability is also a fundamental in 
today's oil market.
    Exchange rates are another factor identified in your letter. We 
find that there has been no systematic and stable relationship between 
oil prices and exchange rates over time. For example, between January 
2007 and March 2008, the value of the dollar against the Euro fell by 
29 percent while the price of West Texas Intermediate (WTI) crude oil 
rose by 93 percent. However, between November 2004 and November 2006, 
the value of the dollar strengthened by 12 percent against the Euro, 
while the WTI spot price rose by 35 percent.
    Increased oil market speculation and the emergence of index fund 
investments are the other factors mentioned in your letter. The 
increased inflow of funds and participants into the futures markets may 
affect oil prices to some degree in the short run, but it could also be 
a symptom of the tight market conditions and resulting high prices, 
rather than a cause.
    Additional analysis is clearly needed, though we suspect it will 
not be possible to precisely isolate the impacts of various factors 
affecting oil prices. Notwithstanding our views regarding the role of 
fundamentals as the dominant factors driving prices higher in today's 
oil markets, we share your interest in exploring how information from 
markets in energy derivatives could be used to improve forecasts of oil 
prices.
    Question. In your testimony before the subcommittee, you told me 
that you are awaiting data from Commodity Futures Trading Commission 
(CTCF) in order to answer my May 22 letter and that you also stated 
that you wanted more powers to collect data on your own. Exactly what 
power are you requesting, does it require legislation, and if so, are 
you willing to submit draft legislation language?
    Answer. In our July 2 response to your letter, we indicated that 
the increased inflow of funds and participants in the futures markets 
could affect oil prices to some degree, but also that it might be 
difficult to precisely isolate the impacts on oil prices. Nevertheless, 
given its possible use, we are exploring how energy-derivatives trading 
information could be used to improve oil price forecasts. As I said at 
the hearing, a challenge we face is that current measures used as 
proxies for speculative activity, such as total open interest in the 
New York Mercantile Exchange (NYMEX) futures market, net-long positions 
of ``non-commercial'' traders in the NYMEX futures market, and 
investment in commodity index funds, all have limitations. Ultimately, 
we really can't quantify the total size and nature of commodity index 
fund activity, as well as other forms of speculation today. It is our 
belief that the development of better activity measures and more 
transparent information regarding activity in markets for energy-
related financial derivatives would facilitate execution of a robust 
econometric analysis responsive to your May 22 letter.
    The recently released Interim Report on Crude Oil from the 
Interagency Task Force (ITF) on Commodity Markets attempted to break 
down its analysis in more detail, using categories where information is 
currently available to the CFTC but not publicly reported on a regular 
basis. That information, though more detailed, still does not break 
down positions in ways that would allow effective analysis of the index 
speculation; and so the CFTC has established a ``Special Call'' for 
more comprehensive position information from commodity swap dealers and 
commodity index traders. The ITF indicated in its Interim Report that 
it expects to add information from the Special Call to its final 
report. We hope that that additional information and its analysis will 
allow us to better develop our efforts to incorporate speculative 
trading information into our forecasts.
    However, EIA, which is striving to improve the quality and 
transparency of physical energy market data, does not have the lead 
role on derivatives data. Instead, we are actively supporting efforts 
by the CFTC, the regulator of this activity, to improve the collection 
of that data. I would expect EIA to be a key user of that data as we 
explore ways to improve our forecasting activities by incorporating it 
alongside the energy and economic data we already use in our analysis 
activities. I do not foresee any difficulty in arranging for 
appropriate EIA access to such data, nor the need to collect it 
independently from the CFTC, and consequently, see no need for 
additional legislation at this time.
    Question. In your testimony before the subcommittee, you asserted 
that increasing speculation may reflect market fundamentals, as 
investors bet that further shortages will drive up oil prices. However, 
by definition, institutional traders are long in the oil markets 
regardless of the market fundamentals because they are using the 
commodities markets as a hedge against risk in other investments. Why 
don't you believe that billions of dollars of new investment, all 
betting that the price will go up could drive up the price? Please 
explain what effect it's having.
    Answer. One of the key challenges we face in answering this 
question is that current measures that are used as proxies for 
speculative activity, such as total open interest in the New York 
Mercantile Exchange (NYMEX) futures market, net-long and net-short 
positions of non-commercial traders in the NYMEX futures market, and 
investment in commodity index funds, all have limitations. We really do 
not know the total size and nature of commodity index fund activity and 
speculation. The development of better activity measures and more 
transparent information regarding activity in markets for energy-
related financial derivatives would facilitate our analysis of this 
question. EIA, which is striving to improve the quality and 
transparency of physical energy market data, does not have the lead 
role on derivatives data, but we are actively supporting efforts by 
other agencies such as the Commodity Futures Trading Commission to 
improve that data. Once such data become available, I would expect EIA 
to be a user of it as we explore ways to improve our forecasting 
activities by incorporating it alongside the energy and economic data 
we already use in our analysis activities.
    Question. Do you agree that institutional investors and index 
traders who never take delivery of oil but own millions of barrels of 
oil on paper are ``speculators?''
    Answer. According to the Commodity Futures Trading Commission 
(CFTC), the distinction between hedging and speculation in futures 
markets is less clear than it may appear. Traditionally, those with a 
commercial interest in or an exposure to a physical commodity have been 
called hedgers, while those without a physical position to offset have 
been called speculators. In practice, however, hedgers may be ``taking 
a view'' on the price of a commodity, and even those who are not 
participating in the futures market despite having an exposure to the 
commodity could be considered speculators.
    Traditional speculators enter into futures contracts with the 
intention of reversing their positions before they would be required to 
deliver (in the case of short positions) or to accept (in the case of 
long positions) physical delivery of a commodity. Traditional 
speculators could further be differentiated depending on the time 
horizons at which they operate. Speculators known as scalpers or market 
makers operate at the shortest time horizon--sometimes trading within 
seconds. These traders typically do not trade with a view as to where 
prices are going and will usually offset their positions soon after 
entering into them. They typically buy contracts at a slightly lower 
price than the current market price and sell them at a slightly higher 
price, perhaps at only a fraction of a cent profit on each contract. 
Other types of speculators take longer-term positions based on their 
view of where prices may be headed. Speculators known as ``day 
traders'' establish positions based on their views of where prices 
might be moving in the next minutes or hours, while ``trend followers'' 
take positions based on price expectations over a period of days, weeks 
or months. Through their efforts to gather information on underlying 
commodities, the activity of these traders serves to bring information 
to the markets and aids in price discovery.
    While hedging and speculation are often considered very different 
activities, both can promote price discovery in futures markets. In 
essence, futures prices are a reflection of the opinions of all those 
entering the market. Moreover, the actions of those who can, but choose 
not to, enter the futures market are also quite important for price 
discovery. For example, a commercial trader holding physical inventory, 
but choosing not to hedge it in the futures market (by taking a short 
position), will not only withhold a downward pressure on the price, but 
may also send a signal that prices are expected to rise in the future.
    To provide the public with information on the activity of traders 
in the futures and options markets, the CFTC publishes a weekly 
Commitments of Traders (COT) report. Traders are classified either as 
``commercial'' or ``non-commercial'' based on CFTC Regulations. In 
classifying traders as commercial or non-commercial rather than hedgers 
and non-hedgers, the CFTC recognizes that the ultimate motivations of 
traders cannot be observed from the data. That is, while a commercial 
trader may be matching a futures position against a cash-market price 
risk, it is not known whether such a trader is doing so on a routine 
basis in order to minimize ongoing price risks or doing so selectively 
based on specific market expectations. Thus, some of the trading 
information captured by the commercial trading category may reflect 
activity that could be characterized more as speculative rather than 
hedging.
    Question. I have introduced legislation, the Oil Speculation 
Control Act, to put position limits on institutional investments in oil 
markets. Please analyze the economic impact of the legislation on oil 
markets.
    Answer. EIA is not in a position to analyze how enforcing limits on 
commodity market participants would affect trading volumes and/or 
trading positions. This type of technical analysis is best suited to 
the Commodity Futures Trading Commission (CFTC), which has the data and 
expertise needed to address how proposed changes in trading 
requirements affect market behavior.
    Question. In its 2007 Annual Energy Outlook, EIA forecast that 
``the average world crude oil price declines slowly . . . from a 2006 
average of more than $69 per barrel to just under $50 per barrel in 
2014 as new supplies enter the market.'' Did your forecast consider the 
role of speculation in the energy markets? If not, why not?
    Answer. To the extent that trading activity in the forward markets 
reflects trader expectations about future oil supply and demand 
fundamentals, EIA's reference price case is intended to capture those 
factors. The Annual Energy Outlook (AEO) explicitly states that the 
reference case projection should not be considered a forecast, and the 
full AEO includes both high and low oil price cases to illustrate the 
sensitivity of the projection to alternative prices. There are many 
factors on both the supply and demand sides of the market that affect 
the price of oil in the short term and the long term. In the short 
term, unexpected shortfalls of oil due to labor strikes or civil 
strife, damage to pipelines, changes in inventory behavior, and 
unexpected increases in demand can all affect near-term oil prices. In 
developing the out-year prices for the AEO, EIA generally looks at the 
long-term (to 2030) fundamentals of oil supply and demand. These 
fundamental factors include the demand for liquid fuels, the expected 
level of conventional oil production by countries that are not members 
of the Organization of the Petroleum Exporting Countries (OPEC), the 
growth of unconventional oil supply, and the expected production 
decisions of the members of OPEC. It is also worth remembering that the 
oil price cases for AEO2007 were developed in mid-2006, when spot and 
futures market oil prices were very different than today's prices. We 
did not explicitly consider the role of ``speculation'' in developing 
the three long-term oil price cases used in AEO2008, since it is very 
unlikely that forward-market trading activity will affect oil prices 
over a 20-plus-year time frame.
    Question. Does supply and demand explain the rise is oil prices?
    Answer. As we stated in our July 2 response to your May 22 letter, 
and discussed in our answer to your first question, our analysis to 
date suggests that market fundamentals--strong demand, disappointing 
supply growth, concern over actual and perceived supply disruptions, 
low inventories, very limited spare production capacity, and global 
refining capacity constraints--are the primary drivers of global oil 
prices. The current very tight oil market balances and the possibility 
of further supply disruptions are causing prices to rise to 
unprecedented highs. Changes in the geopolitical stability of key 
producers and producing regions in a supply environment that is already 
tight also suggest that fear of supply disruptions due to instability 
is also a fundamental in today's oil market. The increased inflow of 
funds and participants in the futures markets may affect oil prices to 
some degree in the short run, but it could also be a symptom of the 
tight market conditions and resulting high prices, rather than a cause. 
We agree that additional analysis is clearly needed, though we suspect 
it will not be possible to precisely isolate the impacts of various 
factors affecting oil prices.
    Question. EIA's Annual Energy Outlook 2008 forecasts that crude oil 
prices will decline gradually from current levels to $57 per barrel in 
2016 ($68 per barrel in nominal dollars), as expanded investment in 
exploration and development brings new supplies to world markets. In 
developing its oil price outlook, EIA explicitly considered growing 
world consumption, the outlook for oil production, and OPEC behavior. 
Did EIA consider changes in geopolitical stability, the strength of the 
dollar, increased oil market speculation, or the emergence of index 
fund investments in oil futures markets?
    Answer. EIA considered these factors differently in the short-term 
than in the long-term portions of its AEO2008 reference case oil price 
path. In the first few years of the projection, EIA gives weight to 
current geopolitical conditions, including the effects of civil unrest 
and expectations that national oil companies may chose to restrain 
their investments in oil production capacity. In the longer term, EIA 
gives increased weight to underlying economics of undeveloped oil 
resources and allows them to be produced more rapidly than current 
conditions might allow. EIA also includes projections for lower and 
higher oil price cases in all editions of the AEO, including AEO2008. 
One of the major determinants of expected world consumption of liquids 
is the expected level of economic activity reflected in each country or 
region's gross domestic product (GDP). In developing the outlook for 
GDP, the expected strength of the dollar over the projection period and 
its implications are considered. To the extent that trading activity in 
the forward markets reflects trader expectations about future oil 
supply and demand fundamentals, EIA's reference price case is intended 
to capture those factors. As noted in the answer to a prior question, 
our reference price case does not capture the extent to which forward 
markets rise or fall based on other considerations.
    Question. The Ten-in-Ten Fuel Economy Act required NHTSA to set 
fuel economy standards at the ``maximum feasible'' level from model 
year 2011 to 2019. To determine the maximum feasible level, NHTSA 
considers the consumer savings of reduced fuel use and the social 
benefit of reducing air pollution. Unfortunately, the price of gasoline 
NHTSA used to calculate its recently released draft CAFE standard was 
$2.26 per gallon in 2016 and $2.51 per gallon in 2030--far below what 
consumers are paying at the pump today--based on EIA's estimate. You 
recently told a House Committee that NHTSA should be using the EIA's 
high gas price scenario, which estimates prices will range from $3.14 
in 2016 to $3.74 in 2030, when it sets its fuel economy standards. Will 
you write to NHTSA to make this recommendation?
    Answer. As I stated at the June 11, 2008, hearing before the House 
Select Committee on Energy Independence and Global Warming, NHTSA has 
our high oil price case from the Annual Energy Outlook 2008; and it is 
the prerogative of that agency as to which price case--reference case 
or high price case--it chooses to use in its rulemaking. As noted in 
your question, I also stated that since the market is on a higher oil 
price path now, I would recommend use of our high price case. 
Subsequent to the hearing, my office has discussed this issue with 
Department of Transportation staff.
    Question. When will EIA update its Energy Outlook to more 
accurately reflect changes in the oil markets that have occurred in 
2008?
    Answer. The Annual Energy Outlook is an annual publication, with 
the early release (only the reference case) typically posted on the EIA 
Web site in December and the complete version released in March. The 
full AEO takes between 6 and 8 months to complete. The oil price cases 
for the AEO are developed at the beginning of the process, so the three 
oil price paths considered in the AEO2008 were developed in the summer 
of 2007. Given the lengthy gestation period for each edition of the 
AEO, there are no midyear updates of the AEO oil price paths. However, 
we do update the oil price forecast in the Short-Term Energy Outlook 
(STEO) on a monthly basis. Unlike the STEO, the AEO provides users with 
several alternative oil price paths.
    Question. When will EIA release an updated high cost estimate?
    Answer. In addition to EIA's longer term energy projections, EIA 
releases a monthly Short Term Energy Outlook (STEO). Our most recent 
STEO, released on July 8, 2008, stated that global supply 
uncertainties, combined with significant demand growth in China, the 
Middle East, and Latin America, are expected to continue to pressure 
oil markets. We projected that West Texas Intermediate crude prices, 
which averaged $72 per barrel in 2007, will average $127 per barrel in 
2008 and $133 per barrel in 2009. The oil price paths (low, reference, 
and high) for AEO2009 are currently under development. The AEO2009 
reference case is scheduled for release in December 2008, with the 
other cases scheduled for release in March 2009.
    Question. In every EIA estimate since 2005, EIA has forecast that 
the price of oil has peaked and should soon drop:
  --In 2005, EIA estimated that oil prices would decline to $46.90 per 
        barrel in 2014;
  --In 2006, EIA estimated that oil prices would decline to $46.90 per 
        barrel in 2014;
  --In 2007, EIA forecast that oil prices would decline to just under 
        $50 per barrel in 2014; and
  --This year's forecast predicts that oil prices will fall to $58 per 
        barrel in 2016.
    To me, this suggests that your analysts, who look at supply and 
demand, cannot explain why the price of oil keeps going up. Is it 
possible that EIA's analysis is so consistently wrong because it fails 
to consider the price of speculation in the marketplace?
    Answer. Three points ought to be noted about the observations in 
the first four bullets above. First, the oil prices quoted for 2014 and 
2016 are in real, not nominal, terms. It is true EIA's reference case 
oil price projections showed a peaking, in real terms, but this was not 
the case for the nominal price of oil of these outlooks. Second, the 
upward reassessment of the real oil price by 2014 (and 2016) in the 
reference case is evidence of the fact that EIA continues to monitor 
the world oil market, which is rapidly evolving due to changes in 
geopolitical and fundamental economic factors. The AEO2008 oil price 
cases were developed during the summer of 2007, when world oil prices 
in spot and futures markets were much lower than they are today. Third, 
2014 and 2016 are several years in the future and thus it is not 
possible to assess the projection accuracy of EIA's outlook for those 
years. Lastly, the high oil price and the low oil price cases are 
presented in both the Annual Energy Outlook and International Energy 
Outlook to take into account the uncertainties surrounding these 
factors, particularly the outlook for oil production and OPEC behavior.
    Question. On June 22, 2008, Red Cavaney, President & CEO of the 
American Petroleum Institute, told ABC News that ``Every single 
available drilling rig, drill ship is in use--being used right now. You 
can't go and drill when you don't have equipment. We are not magicians 
as an industry.'' According to data compiled for ODS-Petrodata's 
monthly World Rig Forecast--Short-Term Trends report, worldwide demand 
for mobile offshore drilling units will continue to grow throughout the 
next 12 months, resulting in drilling programs being postponed. If 
every oil drilling ship and every rig is already in use, would you 
agree that oil companies already have more access to offshore areas 
than they have equipment to exploit?
    Answer. EIA does not track the availability of drilling ships or 
rigs. Over time, we would expect the number of onshore and offshore 
drilling rigs to change in a manner that depends on the relationship 
between the rental rates and capital costs of the equipment in 
question.
    Question. Would you agree that opening new areas of the outer 
continental shelf would not increase the amount of exploration?
    Answer. The opening of new areas of the outer continental shelf 
(OCS) to Federal oil and gas leasing is not expected to increase the 
amount of exploration in the near-term, but would likely increase the 
amount over the longer term. The opening of Federal offshore moratoria 
areas provides oil and gas companies more options for exploration and 
production projects than would otherwise be the case if these moratoria 
regions remained unavailable. There is a significant volume of 
undiscovered, technically recoverable oil and natural gas resources in 
the Pacific, Atlantic, and Eastern Gulf Coast OCS moratoria areas; 
however, conversion of those resources to production would require both 
time and money. Another factor slowing development is that the average 
field size in the Pacific and Atlantic regions tends to be smaller than 
the average in the Gulf of Mexico, implying that a significant portion 
of the additional resource would not be as economically attractive to 
develop. Oil and gas companies are constrained by a number of factors 
that restrict their ability to fund and develop the number of oil and 
gas exploration and production projects in any particular year, 
including the number of onshore and offshore drilling rigs that are 
currently available in the United States and the limited pool of 
trained personnel.
    Over the longer term, it is expected that opening these areas would 
expand the size of the industry with resultant increases in the number 
of rigs and personnel. This would result in additional exploration that 
would eventually increase domestic oil and gas production.

                         CONCLUSION OF HEARING

    Senator Dorgan. This hearing is recessed.
    [Whereupon, at 4:18 p.m., Wednesday, June 25, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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