[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
RUNNING ON EMPTY: THE EFFECTS OF HIGH GASOLINE PRICES ON SMALL
BUSINESSES
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MAY 9, 2012
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 112-067
Available via the GPO Website: www.fdsys.gov
----------
U.S. GOVERNMENT PRINTING OFFICE
76-473 PDF WASHINGTON : 2012
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
CHUCK FLEISCHMANN, Tennessee
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, General Counsel
Michael Day, Minority Staff Director
C O N T E N T S
----------
OPENING STATEMENTS
Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Robert McNally, President, The Rapidan Group, LLC, Bethesda, MD.. 3
Jamie Smith, Franchisee, Mr. Rooter Plumbing, Baltimore, MD...... 5
Ms. C. Cookie Driscoll, Owner, C. Cookie Driscoll, Inc.,
Fairfield, PA.................................................. 6
Michael Greenberger, Law School Professor and Director,
University of Maryland Center for Health and Homeland Security,
Baltimore, MD.................................................. 8
APPENDIX
Prepared Statements:
Robert McNally, President, The Rapidan Group, LLC, Bethesda,
MD......................................................... 23
Jamie Smith, Franchisee, Mr. Rooter Plumbing, Baltimore, MD.. 32
Ms. C. Cookie Driscoll, Owner, C. Cookie Driscoll, Inc.
Fairfield, PA.............................................. 34
Michael Greenberger, Law School Professor and Director,
University of Maryland Center for Health and Homeland
Security, Baltimore, MD.................................... 40
Questions for the Record:
Questions for Robert McNally................................. 57
Answers for the Record:
Answers from Robert McNally.................................. 58
Additional Materials for the Record:
National Small Business Association.......................... 59
Foreign Affairs: A Crude Predicament by Robert McNally and
Michael Levi............................................... 60
RUNNING ON EMPTY: THE EFFECTS OF HIGH GASOLINE PRICES ON SMALL
BUSINESSES
----------
WEDNESDAY, MAY 9, 2012
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1 p.m., in room
2360, Rayburn House Office Building. Hon. Sam Graves [chairman
of the Committee] presiding.
Present: Representatives Graves, Chabot, Tipton, Ellmers,
Walsh, Barletta, Velazquez, Schrader, Cicilline, and Hahn.
Chairman Graves. We will call the hearing to order. Good
afternoon, everyone. I want to thank you all for joining us for
this hearing and I want to thank our witnesses for appearing
today and agreeing to testify on an issue that just will not
seem to go away, and that is higher fuel prices.
Few things have such broad effects on consumers, the
economy, and small businesses as high fuel prices. The price of
gasoline often determines where and when consumers are going to
shop and what it costs a small business to deliver products and
services and the costs of purchasing materials and other inputs
necessary from business operations. When consumers have less
money to spend and small businesses are forced to shift
resources to fuel purchases or pay higher prices for inputs,
weaker economic growth is often the result.
Last Friday, the Department of Labor reported that the
unemployment rate remains above eight percent and the economy
has created far fewer jobs than expected. This figure does not
even count the millions of long-term unemployed Americans who
have given up trying to find work. That is not included in
official statistics, nor does it account for the millions of
underemployed Americans.
While there are many factors to explain the weak economy
and job growth, high fuel prices are a contributing factor. And
given the importance of energy prices to the health of small
businesses and the economy, this Committee has taken particular
interest in the effects of high fuel prices on small businesses
and the role they can play in helping solve the problem of high
energy prices, create jobs, and enhance our nation's energy
security.
This hearing continues that trend and we are fortunate to
have with us today a panel of witnesses who can provide the
Committee with important insight into the causes of high fuel
prices and how they affect small businesses. With that I will
turn to Ranking Member Velazquez for her opening statement.
Ms. Velazquez. Thank you, Mr. Chairman. As our economic
recovery gains steam, this Committee must focus on removing
obstacles to small business growth. One key hurdle is
volatility in gas prices. With prices for petroleum and
gasoline rising one day and plummeting the next, it can be very
difficult for small firms to plan and make prudent investment
decisions. In particular, when there is a rapid run-up in gas
prices, small firms feel the pinch. Indeed, three-quarters of
small businesses note that rising energy prices will have a
negative impact on their businesses. There have been even
estimates that for every $10 increase in the price of a bottle
of oil, $29 billion is sucked out of the economy. That is money
which could have gone toward growth and job creation. When
energy prices are high, small firms face tough choices. Do they
raise prices for their products to upset gasoline costs? Or do
they alternatively postpone hiring in order to compensate for
rising expenses? None of these are good options. It is my hope
that the Committee can explore solutions for the effects energy
costs have on entrepreneurs.
When it comes to gas prices there is not just one reason
that can be solely blamed for the volatility; instead, a range
of factors feed into this unpredictability. Instability in all
regions can result in significant supply disruption as we have
seen with recent events in the Middle East and North Africa.
Oil supply disruptions can be further compounded by a reduction
in refinery capacity, meaning that even when oil supplies
remain steady, less gasoline is available on the market and
prices remain high.
These supply-based factors certainly contribute to rising
gas prices. However, there is also strong argument to be made
that excessive speculation is also to blame. Certainly, energy
futures markets play a valuable role by enabling energy
consumers like airlines or railroads to hedge against price
fluctuations. However, today the largest actors in these
markets are no longer energy consumers. Instead, market
activity is dominated by players concerned only with betting on
whether prices rise or fall. When these speculators hold such
influence that they can single-handedly affect overall pricing,
then it is questionable whether the future markets are
functioning correctly or serving as a consumer with consumers
and small businesses paying for bad bets.
Just as a range of factors are driving up gasoline prices,
there is no single solution that will solve the problem alone.
Instead, we need a multi-prong approach that addresses supply,
consumption, and speculation. We can start by leaving in place
the Wall Street Reform Law that was enacted last Congress. By
giving the Commodity Futures Trading Commission more power to
prevent unscrupulative behavior, this law will stop some of the
deceptive practices we have previously seen. Other short-term
steps might include releasing oil from the strategic petroleum
reserve, instituting a gasoline tax holiday, and expanding the
use of oil shale. All of these ideas have drawbacks and
advantages and all of them merit further discussion.
Over the long term we need to reduce demand and boost
supply. Helping small businesses become more energy efficient
should be a priority. Achieving that goal makes businesses more
profitable while lowering energy prices for everyone. There
will also need to be discussions about expanding our energy
supply through either fossil fuel exploration or expansion of
renewable fuels. Entrepreneurs have always been on the cutting
edge of developing new energy sources, and they should have a
voice on how we proceed in this area as well.
As consumers prepare for another summertime driving season,
we can expect gas prices to remain volatile. For small
businesses, unpredictable fuel costs can at best stunt job
growth and at worse result in layoffs. It is my hope that
today's discussion yields insight on how to help small business
firms overcome these problems now while laying the groundwork
for long-term energy security.
And with that I want to take this opportunity to thank all
the witnesses for being here today. I yield back. Thank you,
Mr. Chairman.
Chairman Graves. With that we will hear from our witnesses.
You each have five minutes. The way the lights work is it is
green and when you have a minute left it turns yellow and then
red when time is up.
STATEMENTS OF ROBERT McNALLY, PRESIDENT, THE RAPIDAN GROUP,
LLC; JAMIE SMITH, FRANCHISEE, MR. ROOTER PLUMBING, BALTIMORE,
MARYLAND, TESTIFYING ON BEHALF OF THE INTERNATIONAL FRANCHISE
ASSOCIATION; C. COOKIE DRISCOLL, OWNER, C. COOKIE DRISCOLL,
INC., FAIRFIELD, PENNSYLVANIA, TESTIFYING ON BEHALF OF THE
NATIONAL SMALL BUSINESS ASSOCIATION; MICHAEL GREENBERGER, LAW
PROFESSOR AND DIRECTOR, UNIVERSITY OF MARYLAND CENTER FOR
HEALTH AND HOMELAND SECURITY, BALTIMORE, MARYLAND
Chairman Graves. And our first witness is Bob McNally. He
is the founder and president of the Rapidan Group, an
independent energy and consulting market advisory firm. And
prior to forming the Rapidan Group, Bob served on both the
White House Council of Economic Advisors and the National
Security Council during the Bush Administration.
Mr. McNally, I appreciate you being here and look forward
to your testimony.
STATEMENT OF ROBERT McNALLY
Mr. McNally. Thank you, sir. Chairman Graves, Ranking
Member Velazquez, Members of the Committee, thank you for the
opportunity to testify. I have spent the bulk of my career
analyzing energy oil markets and economic policymaking and as
was mentioned, served in the White House NIC and NSC. I
currently run a small businesses called the Rapidan Group. I do
not represent any entity. The views are entirely my own.
The subject of today's hearing is gasoline prices which
have risen sharply now six years out of seven and pose a
special burden for our country's small businesses. But before
then, gasoline as pretty boring. If you think about it, from
the 70's until recently, if it was a Disneyland ride, the pump
price is sort of like It's a Small World--gentle, uneventful,
not really noticeable. But since 2005, it has been It is a
Small World. Excuse me, Space Mountain. Gut wrenchingly
volatile, scary. And today, as pump prices resume their ascent,
Americans, especially small businesses, are wondering why are
we on Space Mountain and how are we going to get off?
Let me come right to the point. Gasoline prices are driven
by crude oil prices. Crude oil prices are driven by a global
market. Official data reports show that global market is tight.
Demand is historically high and strong in the global market--
not in the United States, in the global market. Supply is
disappointingly small. Commercial inventories outside of North
America are low. Numerous supply interruptions as was mentioned
have occurred and OPEC's spare capacity which we will talk
about today is much lower than estimated a few months ago and
too low for comfort.
And earlier this year a rash of refinery closures in the
Northeast, the U.S. Virgin Islands and Europe and tensions
surrounding Iran's nuclear program contributed to a risk
premium or a fear premium on the price of crude.
It is crucial to understand that crude oil prices are
naturally very volatile. To help suppress this natural
volatility throughout history since the mid-1800s, late 1800s,
producers have held back spare production capacity to temper
down that volatility. Spare capacity is supply from fields that
can be quickly tapped to act as a shock absorber when demand is
strong and disruptions occur, avoiding the otherwise normal
large swings in prices we would see.
Since the late 1980s, OPEC has used spare capacity to try
and stabilize prices, but over the last seven years or so,
OPEC's spare capacity is showing that red line on that chart
has fallen and remains much too low to stabilize the market,
especially given geopolitical risks. The reason is a mix of
voracious, relentless demand growth in fast growing Asia and
the Middle East on the one hand and disappointingly small net
supply growth on the other. While experts differ, many see this
strong demand, weak production, tight spare capacity
predicament lasting for the foreseeable future. And if so, oil
prices are going to keep on gyrating and so are fuel prices.
There is no short-term silver bullet for our predicament.
Using the SPR to smooth gasoline prices absent the severe
supply disruption would be deeply unwise and counterproductive.
The SPR and Department of Energy are not well suited to
stabilize global oil prices. Reserves are too small relative to
market flows. Information is too poor, and the SPR
interventions have and would be politicized. If Washington sold
SPR crude every time gasoline prices rose, we will end up with
no SPR, more volatile prices, and less protection when a severe
supply interruption occurs.
It would also be a mistake to misdiagnose the problem of
gyrating oil prices as one of manipulation, distortion, or
undue influence of financial market participants. Officials
have repeatedly investigated the role of the financial market
participants in recent oil price behavior and concluded that
supply and demand fundamentals played a major role. This
includes an interim interagency report headed by the CFTC in
2008. Leading academics also note there is no compelling data
or analysis that shows the actions of financial market
participants have caused the major price swings we have seen in
recent years.
In the future, small businesses will need to hedge more in
response to gyrating oil prices. They will need access to
bigger and deeper financial markets where producers and
consumers can transfer price risk to those willing to take it.
We are now seven years into the Space Mountain era of gasoline
prices. It is time to get beyond blame games and on with
solutions. OPEC oil companies, industry, investors, EPA,
consumers, geopolitical trends, central banks, poor data, all
this play a role. But the real reason is we have a tidal wave
of demand, humanity's largest ever demand, humanity's largest
ever demand, surge for oil is colliding with a supply
constraint. We may not like the laws of economics but we will
have to live with them. It is past time to enact easy common
sense steps like improving data to bolder ones such as vastly
increasing domestic and international supply, moderating
demand, and strengthening a resilience to price gyrations. We
should act quickly and resolutely as if the vitality of our
small businesses, our standard of living, and our national
security depended on our success. Thank you.
Chairman Graves. Our next witness is Jamie Smith. Mr. Smith
owns and operates a small 10-employee Mr. Rooter Plumbing
franchise located in Baltimore, Maryland. He is testifying
today on behalf of the International Franchise Association. Mr.
Smith, I appreciate you being here. Thank you.
STATEMENT OF JAMIE SMITH
Mr. Smith. Thank you. Chairman Graves, Ranking Member
Velazquez, and members of the Committee, thank you for your
invitation to testify today at today's hearing on the effects
of gasoline prices on small businesses.
My name is Jamie Smith. I am a franchisee of the Mr. Rooter
Plumbing Corporation. I am the owner and general manager of Mr.
Rooter Plumbing of Greater Baltimore and a member of the
International Franchise Association.
I believe my experience as a small business owner and my
struggles with rising fuel prices are representative of the
small business community today. Many businesses are struggling
to incorporate these increased costs into business plans that
are already strained by decreased revenues due to the slow
economic recovery. My business offers heating and plumbing
solutions to the Greater Baltimore and Maryland area and I
employ 10 plumbing and office professionals.
My current fleet of five service vehicles uses an average
of 1,200 gallons per month of gasoline, and the cost of this
fuel equals approximately 10 percent of my total revenue.
Since opening my operation in 2010, I have seen a 29
percent increase in my fuel costs at a time when my revenues
have declined. In an effort to offset rising fuel prices, I
have added an $11 fuel surcharge to all of my service calls;
however, many customers have refused to pay this charge and
several potential customers disapproved so vehemently of this
practice that they refuse to consider Mr. Rooter of Baltimore
for their future plumbing and heating needs.
My other option is to absorb these increased fuel costs
which directly affects my bottom-line while my business is
trying to stay competitive in a challenging economic
environment. Being a small business owner I cannot leverage
economies of scale to keep costs down like larger businesses
can. My company services several counties with only five
vehicles as opposed to larger competitors who have 30-plus
vehicles and smaller, more defined territories that require
less travel.
All the extra travel required for my company makes fuel
prices a risky exposure for my business. Policy members at all
levels of government should be focused on reducing and
stabilizing the cost of gasoline and other fuels, not through
taxes and disincentives to consume fuel but through increased
production and efficiency.
I recently wrote to my governor, Martin O'Malley, to
protest his proposal to make gasoline subject to the Maryland
state sales tax. This would obviously increase the cost of
gasoline and have an immediate and severe impact on small
businesses such as mine. I think that a focus on new taxes,
especially when it comes to energy consumption, is the wrong
approach. Small businesses are desperate for government action
to alleviate the burden of this drastic cost increase, and I
ask that policymakers invest our tax dollars on strategies that
would increase domestic energy production, conserve our
existing resources, and promote safe and efficient alternative
energy sources.
I support projects that would lower the cost of gasoline
while adding jobs and improving the economy. I enjoy having the
freedom to own and operate my franchise business and to provide
a fulfilling place for my fantastic team of Mr. Rooter
employees to work. However, if policymakers do not begin to
embrace new energy policies, I believe the country will see an
increase in small business failures. Meeting obligations such
as payroll and other overhead expenses while continuing to
endorse soaring energy costs and diminishing profits is
unsustainable for any business. I ask that state and federal
policymakers take immediate and decisive action to help small
businesses do what they do best--create jobs and drive the
American economy.
Thank you for the opportunity to testify before the
Committee, and I look forward to answering any questions you
may have. Thank you.
Chairman Graves. Thank you very much, Mr. Smith.
Our next witness is Cookie Driscoll. Ms. Driscoll has owned
and operated her horse farm in Fairfield, Pennsylvania, for
more than 18 years. And she will be testifying on behalf of the
National Small Business Association. Ms. Driscoll, thank you
for being here.
STATEMENT OF C. COOKIE DRISCOLL
Ms. Driscoll. Thank you, Chairman Graves, Ranking Member
Velazquez, and members of the Committee.
My name is C. Cookie Driscoll and I am the owner of two
small businesses. Whodathunkit Farm and C. Cookie Driscoll,
Inc., both of which are located in Fairfield, Pennsylvania,
just across the Maryland state line in Adams County. My farm is
a full care boarding and learning facility, and my other
business offers a line of gift items targeted toward the
equestrian and pet industries, as well as promotional products,
like pens and mugs, embroidered shirts. I am also on the board
of trustees of the National Small Business Association, which
is the oldest small business advocacy organization in the
United States.
I would like to thank you for inviting me to testify today
about the effects of gasoline and diesel prices on small
businesses, particularly my farm. I am very grateful that you
are aware of and addressing the negative impact unstable and
increasing gasoline prices are having on small businesses
across the country.
My farm is on 12 acres and includes a nine stall barn,
three paddocks, and an outdoor arena for lessons and training.
I bought the farm--there has got to be a better way to say
that--I bought the farm on March 20, 1997, and began accepting
boarders and students. Because of the limited paddock area, I
feed the horses concentrated feeds which are commonly known as
oats or sweet feed, and hay pretty much year-round. Over time I
watched my expenses increase dramatically. The cost of fuel
affects every aspect of running a horse farm, no matter how big
or small. The farm equipment used to plant, spray, harvest, and
transport the feed all use diesel fuel, which is now more
costly than gasoline.
Currently, the cost of diesel fuel in our farming community
varies from 4.15 a gallon to roughly 4.39 per gallon. And
gasoline varies between 3.69 a gallon and approximately 3.9 per
gallon. These high prices and the volatility of these prices
have a significant impact on my bottom-line, including the cost
of feed which has risen exponentially over the past few years.
And if that is not bad enough, the use of corn to make fuel now
has forced the price of corn up and corn is used in almost all
feed concentrates on the farm. Of course, we feed more than the
blended concentrates that use corn and other grains. We feed a
lot of hay and again, every aspect of the price of hay is tied
into the price of fuel from planting, to cutting, raking,
baling, and now even the packaging. The big round bales are
either wrapped in a plastic mesh or in a solid plastic wrap,
both made from petroleum products.
With the unusual rain patterns that we have experienced
over the past few years, the hay crops have been adversely
affected in many areas around the country. Because of that we
often have to travel much farther to buy suitable hay, adding
transport costs to an already expensive staple on the farm.
But I do not just depend on bailed hay to feed the horses.
Hay is used as the base ingredient in the pelleted feeds that
contain the corn and oats and other grains. So no matter where
the crop fails, feed manufacturers have the added cost of
trucking the hay in to produce the concentrates we use. These
costs are then passed on to us.
And of course, after the horses have enjoyed the benefit of
the feed, the manure either has to be spread or hauled away,
again using fuel. Bedding for the horses is either usually wood
shavings or straw. My cost for packaged wood shavings went from
$2 per bale to $6 for the packed and $6.50 for the pelleted
shavings. These increases came about partly because of the
housing industry coming to a screeching halt and partly because
of the cost of fuel, again hauling the timber, milling,
collecting the shavings, and transportation uses diesel fuel
and the packaged shavings are also packaged in plastic bags. So
when the cost of fuel goes up it affects the price of bedding.
If the horses on the farm are being shown, the price of
fuel can determine how far away the owner is willing to travel
to campaign a horse and how often they will compete. The
commercial horse transportation companies have had to increase
their per mile rate significantly, which is another cost passed
on to small businesses like mine. The same goes for horses that
are racing. Breeding operations typically have to transport the
mares to the stud farms, adding expense to the operation with
no guarantees that one trip will accomplish the desired
outcome.
There just is not much about managing a horse farm that is
not affected by the price of fuel. Even the veterinarians and
farriers have to charge trip fees to cover their travel
expenses when they come to tend to the horses. But for those
enthusiasts who are determined to keep their horses, it is
worth it. If they have to, they will take a second job to cover
the cost and many do.
In addition to being a small business owner, I am also a
member of the National Small Business Association and serve in
a leadership capacity on the board. I can tell you that without
question my issues are not unique to my business or my
industry. We are all hurting from the volatile and rising gas
prices. As such, NSBA recently adopted a new energy and
environmental policy and will continue to take an active role
in advocating on behalf of small businesses in these areas and
urging lawmakers and regulators to consider the burden that any
energy or environmental policy or rule would have on small
farms.
In short, we believe that any energy or environmental
policy should have five primary objectives: (1) Ensure clean
air and water; (2) promote adequate and affordable energy; (3)
End U.S. reliance on foreign energy; (4) simplify regulatory
requirements and accelerate the approval process. And finally,
support federal and energy research dollars for small firms.
I beg of you to please keep in mind that the impact of
rising and volatile gas prices is not isolated to a horse farm.
Cattle farms, pig farms, and even poultry operations are
dramatically affected by the price of fuel just like I am.
These costs go so far beyond the cost of transporting the
livestock.
And finally, I want to thank you for allowing me to testify
on such a critical issue for America's small business
community. It was an honor to address all of you, and I welcome
any questions you might have.
Ms. Velazquez. Mr. Chairman, it is my great pleasure to
introduce Professor Michael Greenberger. Professor Greenberger
is the founder and director of the Center for Health and
Homeland Security at the University of Maryland and a professor
at the School of Law. After leaving private practice, he served
as the director of the Division of Trading and Markets at the
Commodity Futures Trading Commission. Most recently, Professor
Greenberger served as the technical advisor to the United
Nations Commission of Experts on Reforms of the International
Monetary and Financial System and the International Energy
Forums independent expert group on reducing worldwide energy
price volatility. Welcome, sir.
STATEMENT OF MICHAEL GREENBERGER
Mr. Greenberger. Thank you. Thank you, Chairman Graves.
Thank you, Ranking Member Velazquez. It is an honor to be here
and I congratulate you on holding this important meeting.
I practiced law for 25 years before I went into the
government and academia and I was very actively involved in
supporting small business efforts and considered it to be an
important part of both my professional life and interests. And
I agree that small businesses have been very badly hurt by
gasoline prices, but it is unfortunate that it is not just
small businesses; it is the economy as a whole, Chairman
Graves, as you alluded to in terms of unemployment that we see
across the board.
Chairman Graves, it is a real pleasure for me to see you
today because, you may relieve me of this view, but I have
viewed you as a champion in the kinds of things that I have
been concerned about. I remember when natural gas was at a
world record high of $15 per million BTU in December 2005. You
stepped to the floor of the House of Representatives and added
a provision with Congressman Barrow on the Democratic side to
assist the CFTC in controlling excessive speculation in the
natural gas markets. Congress gave the Federal Energy
Regulatory Commission, and I know Congressman Joe Barton, then
chair of the Energy Committee, had a large role in this. The
Federal Energy Regulatory Commission was given strong anti-
manipulation authority in the natural gas markets. They have
used it vigorously. They had used it up until about a month ago
and natural gas was recently at a ten-year low.
I want to make it clear I do not discount supply-demand as
being an important factor and I agree that we have to search
for ways to increase supply and reduce demand. And clearly,
there are different market fundamentals at work in natural gas.
But with natural gas going down, when it was at $15 per million
BTU down to $1.70 four or five weeks ago is really quite
remarkable. You may attribute that partly to supply-demand. I
attribute it to your efforts to get the Federal Energy
Regulatory Commission to be a cop on the beat beating back
speculators in these markets.
Now, the price of oil, which, as has been explained, is a
key determinant of the gas, was at $65, July 2007; $147, July
2008; $30, December 2008; $75, July 2007; and, when according
to my testimony the CFTC was unable to cobble together enough
votes to employ the anti-speculation efforts of Dodd-Frank.
January 2011, the price went from 85 to 110. President Obama
then convened an anti-manipulation interagency task force and
it dropped from 110 to 75. The task force was found not to be
doing its work and it goes back up to 110.
And recently, with the uncovering of the Chesapeake
situation, where the CEO of Chesapeake was not only producing
oil and gas but running a hedge fund betting on the price of
oil and gas, that is a ripe situation where the hedge fund can
be manipulating prices with its parallel corporate institution,
the company, and involve itself in wash trades which are
felonious conduct. Now, I am not saying that happened, but it
certainly is an avenue for investigation.
My principal point is I am not offering you a silver bullet
to bring gas prices way down, but I think there is a silver
bullet and a risk-free process to attempt to bring the price
down, what has been conservatively estimated by Goldman Sachs
with analytics by Forbes Magazine about 50-some cents a gallon
of gas. I personally believe it will go down a lot more. The
key problem here is that there are betting vehicles in this
market. There is an estimated half trillion dollars being
passively bet by hedge funds, mutual funds, private equity,
pension funds on the upward direction of commodity staples. The
purveyors of those funds, principally Goldman Sachs and Morgan
Stanley, then turn around and go into the futures market and
offset their betting exposure. They only want to make money on
the transaction fees. They do not want to take bets on the
price direction, so they may hold, in the futures markets, many
times, many times the actual supply of oil in the world. Now,
how do they do that? They have contracts that promise to supply
and deliver. They let them expire. They convert them. That is
called the ``Goldman Roll.'' And just continue this process
down the road.
So it is this gambling that they are offering, a casino,
with a preemption in the statute against state gaming laws that
puts a half trillion dollars in not to production, not to
owning the underlying commodity, but to bet on the upward
direction of the price. The casino goes into the real market
and buys exorbitant amounts of long futures contracts that send
a false demand signal into the market. My view is the casino,
the gambling, should be stopped. If I am wrong about this, all
we will have lost are casinos. If I am wrong about this, the
$500 billion will be put into production and ownership of
commodity. I am not against speculation. I think speculation is
fine. I am against passive gambling. And we have an estimated
half a trillion dollars gambling going on and that has real
impact in these markets. It should be stopped. There is
legislation that is being prepared in the House and will be
prepared in the Senate to stop the gambling.
As I pointed out in my testimony, there has been on this
issue substantial bipartisan concern about speculation. I point
to several 2008 votes taken in the House that are bipartisan in
nature. One is 402 to 19; one is 288 to 133. I think that we
can in a bipartisan way approach a solution which will not
completely solve the problem, but which will afford important
relief to the American consumer. Thank you.
Chairman Graves. Thank you very much, Professor
Greenberger.
For my opponents out there who say that I have not done
anything in Congress, I appreciate what you said about my
legislation being what caused natural gas prices to go down. I
wish that I could say the same. I think it is extraordinarily--
I do not know what the word is--I think that is a huge
overstatement on your part.
Mr. Greenberger. So you are disabusing me of my admiration?
Chairman Graves. But I am glad I got that on record and I
will put it in my next commercial. I appreciate that.
Mr. Greenberger. I will be happy to help you.
Chairman Graves. Now, I am a supply and demand guy. That is
what I am. And the fact of the matter is when you have
speculators in the market that obviously take opposite
positions and when you have a futures market and oil, natural
gas, whatever the case may be is a commodity just like corn and
soybeans which I have the majority of my experience in, wheat.
You know, when you have consumers or you have even suppliers
that are hedging, trying to lock in whatever price that they
want, you also have to have an opposite position on that which
the speculators usually tend to fill that position. But my
point is, too, speculators make money whether the price is
going up or down. They bid on the trend. And I do not believe
that they drive the price. Now, I do believe that speculation
is the cause of volatility, which is what my legislation seeked
to address, has tried to slow down volatility. In fact, I tried
to put price stops in just like we have in farm commodities.
That ended up being a part of it to try to slow down
volatility.
But supply and demand, the fact of the matter is supply and
demand is what drives the market. And while I would like to
claim credit for gas prices, natural gas prices being so low, I
do believe it is the fact of we had an extraordinarily mild
winter and so demand was very low. And we have some of the
largest production given some of the new areas that we have
found. We have a huge supply right now of natural gas. And I
think that is what contributes to long-term pricing structure.
Now, when it comes to crude oil, which is what the intent
of this hearing is, again, I am a supply and demand guy and I
believe in supply and demand. And when you increase supply, and
if we can increase supply in the United States, it is going to
have a dramatic effect. Even if that supply is not going to
come to fruition for 10 years, you talk about how you start
opening up those regions, it is going to have a huge impact on
the supply issue out there and it is going to drive prices
down. But I think it is very, very--and I would very much be
interested in your comments on, you know, on what I have to say
about in terms of, you know, the volatility. Speculation
contributes to volatility. But it does not contribute to
overall price trends. And the fact of the matter is, and I
would like your comments on that, too, speculators make money
whether the price is going up or going down. They bet on that
trend.
Mr. Greenberger. Chairman Graves, the crude oil market
today, the futures market, is 80 percent speculative, 20
percent commercial. When it said to small businesses you go in
and hedge, they are not going in to hedge. Farmers I am sure in
your constituency will tell you it is too volatile to hedge.
You control a contract with four to seven percent of the value.
On about Labor Day 2008, I believe the price of oil went up
about $19 one day and down about $18 the next. You cannot hold
that contract on four percent margin. The commercials, and you
should talk to people in the Commodity Market Oversight
Coalition made up of heating oil dealers, the New England Fuel
Institute, Petroleum Marketers Association, the airlines, the
truckers, they all believe that when you have a futures market
that is 80 percent speculation and 20 percent commercial, you
are not having those speculators help the commercial. They are
counterparties to each other.
Now, you say they make money when the price goes up or the
price goes down. They offer $500 billion of bets. You can only
bet the price will go up. To offset those bets they have to buy
long. Now, the fact that there is an opposite side to that bet,
it is like there is an opposite side to the stock market bets,
too. But stock market prices just do not go flat; they can be
volatile. When there are more people trying to buy it than sell
it, yes, people will sell it but the price goes up. If you took
that $500 billion out of this futures market, it would decrease
not only the price of crude oil because the betting is on a
basket of commodities. Natural gas, by the way, is only four
percent of it. Oil products are a huge percent of it, but so
are farm prices. And you go talk to farmers or related
industries and they will tell you, small farmers, they cannot
use futures as a hedging vehicle. The market has passed them
by. They are not hedging. And what does that mean?
Chairman Graves. I completely disagree with you. Absolutely
emphatically disagree.
Mr. Greenberger. Well, I appreciate that.
Chairman Graves. And in every futures transaction you have
to have an opposite position. If an option is exercised, you
have to have an opposite position.
Mr. Greenberger. For every stock sale you have to have an
opposite position, but stocks go up and down. And if people are
buying Apple----
Chairman Graves. We are not talking about the stock market.
Mr. Greenberger. Well, it is the same market fundamental in
futures contracts.
Chairman Graves. Mr. McNally, I would appreciate your
comments.
Mr. McNally. As I said, since the late 1800s, producers and
consumers have understood that oil prices tend towards wild
gyrations. And we should differentiate here between volatility
day-to-day, week-to-week, and then gyrations, huge swings.
Economists call it low price elasticity of supply and demand in
the short run. Plain English, you have got to use oil. If the
price of chicken goes you, you buy meat. If the price of
gasoline goes up, you still buy gasoline. So you need big price
changes to effectuate little changes in demand.
And that is why throughout history there have been three
groups that have tried to suppress this volatility on the
producer side. Rockefeller and standard oil in the late 1800s,
which we busted up in 1911, and then we were the most effective
OPEC. We, the United States, the Texas Railroad Commission,
Seven Sisters locked up, stabilized the price of oil for 30
years. We handed it over to OPEC in 1972. The chairman of the
Texas Railroad Commission, they met every month to set
production quotas just like OPEC has, and he called it a damned
historic occasion. Why? Because for the first time in 30 years
the U.S. did not hold any spare back. We let it all go because
demand was outstripping our net supply growth and OPEC took
over. In 2008, it was the first time we saw since March of 1972
the spare capacity holder, now Saudi Arabia, no longer Texas
Railroad Commission, run out of spare capacity in peacetime.
You can read the DOE reports from earlier this year. If we are
looking at a very tight market with a very low shock absorbing
buffer with Iran possibly for the summer a risk that is being
alluded to by comments from senior officials such as Secretary
Panetta, people are going to speculate on prices going a lot
higher. And I think it is important to differentiate and define
speculation very carefully. If I am having a picnic near the
railroad tracks on a sunny day with my family and I see two
train cars coming down that railroad track heading towards each
other, I am going to speculate on a train wreck. I am not
causing the train wreck but I will speculate with high
conviction we are about to have a train wreck and I want to
move my family away from the railroad tracks.
And that similarly goes into price formation and oil. Oil
prices are driven by supply and demand as you said in terms of
data and the best we can perceive them. There is a lot of work
to do to improve that I think we would all agree. But also
expectations of future supply and demand and supply risk. And
we are in a tight and fearful market. And as long as this
market remains tight and fearful we are going to see high
volatility, or as I prefer to call it, gyrations in prices.
Thank you.
Chairman Graves. Ms. Velazquez.
Ms. Velazquez. Mr. McNally, renewable fuels are becoming
more popular, not only because they are environmentally
friendly but also because they are becoming more cost
competitive when you consider the rising prices of petroleum.
How does the fact that oil is over $100 a barrel affect the
buyability of renewable fuels as a solution to our problems?
Mr. McNally. Ranking Member Velazquez, the main renewable
fuel that competes with oil we thought would be corn. And then
we were hoping cellulosic ethanol. And as my colleague on the
panel mentioned, for various reasons we think that maybe the
boom in driving corn into our gasoline pool may have
contributed to rising food prices and has other unintended
consequences. But corn ethanol is competitive at $100 and more.
The problem is, and this is the problem with the price
gyrations which I think we all would agree are a horrible
thing. At $100 it makes sense to burn corn and ethanol, and it
may make sense to invest in cellulosic ethanol and other more
advanced and less--more environmentally friendly forms of
renewable energy. The problem is when we go as we did from 147
in the middle of 2008 to $30 a barrel, you do not know what to
do. At $30 a barrel, at $40 a barrel, corn ethanol probably
does not make sense. Certainly, cellulosic does not. So it is
those wild gyrations in prices which keep people from deciding
whether to buy an F-350 truck or a Leaf or invest in cellulosic
or buy oil in the ground.
Ms. Velazquez. So what is your message then, expanded
domestic energy production?
Mr. McNally. The comprehensive answer, that would be a very
important part of it.
Ms. Velazquez. But it has been found that it could take up
to between five to 10 years. Right?
Mr. McNally. Right.
Ms. Velazquez. So what then relief will small businesses
have if they have to wait 10 years to get the relief?
Mr. McNally. As we all said, and my colleagues said, there
is no short-term solution, unfortunately. I wish I had a magic
wand to wave. There is no short-term solution.
Ms. Velazquez. So what you are telling me is that expanded
domestic energy production is not the sole answer.
Mr. McNally. Not the sole answer. A very important part of
the answer but not the sole answer.
Ms. Velazquez. Mr. Greenberger, do you have any comments?
Mr. Greenberger. Look, as I said before, I agree with
Chairman Graves that supply-demand has some relevance here. The
CEO of Exxon Mobil has said the market fundamentals mean that
the price should be between $60-70. Goldman Sachs has said
there is a 56 cent speculative premium here per gallon. It is
fine for people to move away from a running train. There are
plenty of speculative avenues. You can buy oil production
companies. You can buy the oil itself. You can buy futures
contracts on oil. But what you cannot do is open a casino and
have people passively bet that the price will go up, and then
like a bookie, lay off your risk in the real futures market.
What I am saying is even if I am wrong, those who say yes, we
want to keep the casinos going, we want gambling, we want to
preempt state gaming laws, why do you not meet me halfway and
let state gaming laws apply to this? It is pure passive
gambling. It has no productive result. It is destroying the
economy.
And as to the Saudis, I was an advisor to the International
Energy Forum. Twenty oil producing countries, including the
Saudis, and 20 oil consuming countries, Western Europe and the
United States. There was virtual uniform agreement that the
market had become financialized. In March, the Saudi king and
oil minister said they would increase production by 25 percent
to offset potential interference with the Strait of Hormuz. The
price went up the next day. The president threatened to release
strategic----
Ms. Velazquez. All right. And the prices went down.
Mr. Greenberger. And the price went up. The more supply we
are offering, the price goes up. In July 2008, the Saudis, at
the request of Vice President Cheney, increased production. The
price went up $5 the next day. That is not market fundamentals.
That is not speculation. It is betting and gambling. If you
want to leave the status quo, you have to tell your
constituents I approve of people passively gambling on the
upward price direction and the casinos then affecting the bets
by swamping the market with long crude oil contracts, 10 times
the size of the world's----
Ms. Velazquez. Let me follow up with another question to
Mr. McNally. The St. Louis Federal Reserve recently released a
report indicating speculation was the second largest
contributor to oil prices accounting for nearly 15 percent of
the rice. So how do you reconcile what you said before with
this report?
Mr. McNally. I do it by noting we have sort of a battle of
the Federal Reserve Banks. The Federal Reserve Bank of Dallas
also issued a report looking at the data and refuted that and
came to a different conclusion and said there is a very little
role from financial market participants. So we can probably
spend all day arguing about those reports but I would just
point out the commodity futures trading commission in 2008 led
an interagency task force composed of the Departments of
Treasury, Energy, Agricultural, Federal Reserve, Federal Trade
Commission, and the SEC. And they looked at 2008, the period we
have talked about, and concluded the price behavior was due to
supply and demand fundamentals. And I could read to you from
Department of Energy Reports and international agency reports
from earlier this year ad nauseam showing that it is really
supply and demand and not financial market participants that
are responsible for the price behavior.
Ms. Velazquez. Thank you. Professor Greenberger, do you
think it is merely a coincidence that the unprecedented growth
in commodity index trading occurred at the same time as a boom
in commodity prices?
Mr. Greenberger. No, I do not think it is a coincidence,
and there have been three bipartisan reports from the Senate
Permanent Subcommittee on Investigations on crude oil, natural
gas, red wheat, each of which concluded that the commodity
index business, which started in 2004 at $13 billion and is now
estimated to be $500 billion, if you look at charts, that is
where the bubble started. And yes, the bubble bursts from time
to time. And by the way, when it bursts, all these small
businesses who were advised to hedge; Goldman and Morgan were
telling airlines when the oil was at 150 to hedge against the
price of 200. At the end of the year the price was 30. Those
airlines took a beating and small businesses do not hedge
anymore because of those kinds of beatings.
Ms. Velazquez. Thank you, Mr. Chairman. Thank you.
Chairman Graves. Mr. Walsh.
Mr. Walsh. Thank you, Mr. Chairman. Thanks for calling this
hearing.
This is a big issue and we are forgetting about you two
rock bones right there in the middle, the small businesses who
are impacted by this. We are engaged in an important policy
discussion but you are living this. And so I apologize if you
two get shunned a little bit today but I very much appreciated
your testimony because you, small business men and women will
turn this country around. And we here in Washington make it too
darn difficult for you to do that.
I get so tired of hearing this line that, you know, if we
only increase supply, our domestic supply could take five to 10
years. We said that five to 10 years ago. We said that 10 to 15
years ago. We said that 20 to 25 years ago. And Mr.
Greenberger, respectively, I hear your argument on speculation.
I respect it to a large degree, but you so dismiss----
Mr. Greenberger. That is not true.
Mr. Walsh. But you so dismiss basic supply and demand. It
is like we look for a bad guy in every debate we have up here
and the other side tends to demonize big bad oil, not
understanding that 95 percent of the oil produced in this
country comes from independent oil companies. This
administration does not have an energy policy. And so he again,
the president again clearly a few months ago made up his mind,
Professor Greenberger, that he was going to jump on that bad
guys and go after speculators to make up for an utter lack of a
policy.
Mr. McNally, this notion of we cannot start drilling
tomorrow all over the place because we have an abundance of
areas where we could impact supply, but we may not see the
effects of that for three or four or five or six or ten years.
Is that true? If this country aggressively and energetically
decided to snap their fingers and go after all of the supplies,
all of the oil supplies we have, could you see some more short-
term impact on prices?
Mr. McNally. Short-term I think market participants would
want to see real barrels show up. So I would be cautious in
expecting too much of a price decrease even if we were to waive
a wand and open up everything in the very, very short-term.
Unfortunately, I wish it were not the case but unfortunately in
the short term there is very little we can do. However, what I
described, we are living with the consequences of five to 10
years of bad dreams, if you will, bad surprises. Two billion
people want to drive. We are not increasing supply as we used
to. The Persian Gulf is a mess. We are living with that now.
What we do know with our own resources under the ground, we can
start creating good surprises so that in the next three to five
to seven years maybe we can find ways to increase production to
diversify further out of the Persian Gulf, to find ways to
scale up a cellulosic or maybe other ways, make battery cars
work better. So we live with the consequences of surprises and
trends that develop over the previous five to seven to 10
years. We absolutely need to right now work on making the next
three to five to seven years ones where the surprises are good
ones.
Mr. Walsh. Professor Greenberger refers to this difference
between speculators and gamblers. How do you see that
distinction? Do you see a distinction?
Mr. McNally. Yeah, I do not see that at all. What we have
are the oil price and oil markets, exchange markets and the
derivatives markets are composed of physical consumers and
producers of oil who want to transfer their price risk to those
willing to bear it, which include speculators. What Mr.
Greenberger is also talking about though are these passive long
only investors. These are folks, pension funds, university
endowments, you and me, where we want to put a part of our
portfolio into commodities, a basket of commodities that
includes oil. Now, the CFTC has looked at this very closely
because there is no question this money has come into the
market, that is for sure. But the CFTC has looked into it and
they have disaggregated careful data and they show, for
example, in early 2008, as oil prices were lurching up to that
$147 high, passive investors were actually selling their oil
futures. And I would be happy to point that out for the record
in that CFTC report.
So the folk who try to figure out if it is the rooster
causing the sun to rise or the rooster just sort of crowing,
you know, in coincidence with the sun rising, looking at
Granger causality tests and all kinds of math and speaking
Greek and everything, the folks who poured into that who were
unbiased, who have the information, have not yet said or not
concluded that these investors, whether it is these passive
long-only folks just buying and holding, or speculators who buy
and sell have distorted or manipulated or influenced the price
of oil.
Mr. Walsh. And Mr. Chairman, let me just close with this.
Ms. Driscoll and Mr. Smith, it is our job here to make life
easier for you so that you can be productive and profitable and
grow businesses and hire people. There is not a lot we can or
should do here. Often, the things we do here make things worse.
We have an abundance of oil on our land and around our shores.
It makes sense for us, I think, and I hope you agree, to go
after those resources in as sensitive and as reasonable a way
as we can to make life easier for you two. Thank you for
coming.
Thank you, Mr. Chairman.
Chairman Graves. Mr. Barletta.
Mr. Barletta. Thank you, Mr. Chairman.
Mr. Greenberger, one of the biggest national security
concerns is our dependency on foreign oil obviously. Many
scientists have argued that our nation has more natural gas
than Saudi Arabia has oil. And in my home state of
Pennsylvania----
Mr. Greenberger. My home state, too.
Mr. Barletta. It is a very exciting opportunity where our
state could be, I believe a leader in solving some of America's
energy concerns.
A 2010 Penn State study found that Marcellus shale could
generate nearly $19 billion in economic value per year and
200,000 jobs by 2020 in Pennsylvania alone. Could you comment
on a potential impact of natural gas from Marcellus shale and
helping small businesses decrease their energy costs and the
impact of an energy policy, whether it be natural gas--and I am
talking about transportation fuel--natural gas, automobiles, or
natural gas to liquid fuel?
Mr. Greenberger. Well, I agree with your premise and before
Mr. Walsh leaves I just want to say for the fourth time I do
not discount supply-demand. I have made that clear several
times. What I am talking about is a premium over supply-demand.
Mr. Walsh. Do me a favor, before you leave today make sure
you expound upon what we can do when it comes to supply and
demand.
Mr. Greenberger. I will definitely----
Mr. Walsh. What we control.
Mr. Greenberger. I can definitely do that. And I think that
the Pennsylvania situation is a prime example with the natural
gas resources.
Now, I will tell you something. What I am not an expert on
is the environmental concerns. I know there are many
environmental concerns, but I have got to tell you, I grew up
in Scranton, Pennsylvania. Do you know Scranton, Pennsylvania?
Mr. Barletta. It is in my district.
Mr. Greenberger. Really? Great. Are you from Hazelton?
Mr. Barletta. I am.
Mr. Greenberger. Okay.
Mr. Barletta. Former mayor.
Mr. Greenberger. Okay. Well, you know that area. And
anything that would make that area more productive, we
depended, as you know, on hard coal, anthracite coal, and I
grew up--when I was born, Scranton had 150,000 people. It now
has about 50,000 people. I definitely believe that these
resources--North Dakota is the same thing--need to be explored
and developed. They are being explored and developed. On my
theory of supply and demand, I do not think the price going
from $15 per million BTU down to $1.70 is unrelated to supply-
demand. Those kind of experiences have an effect. But it is not
completely explained by supply-demand. You cannot go from $15
to $1.70 and having the FERC bringing manipulation cases
collecting $200 million against the Amaranth. Thirty million
dollars against the Amaranth director and that not affect the
price. We need to see that same aggressiveness in the other
commodity markets and we are not, but to me the experience that
you are talking about is one of great hope for us and again I
say I believe supply-demand is important and I would look for
every possibility. My concern and expertise is that there is at
least a 50 cent per gallon premium--I believe it is maybe even
more--that American consumers are putting into their purchase
of gasoline that is completely and totally unnecessary. The
price of oil dropped $5 in two days from 103 to 98 when it was
discovered that Chesapeake had within its corporate structure a
hedge fund that was betting on the price of oil. And by the
way, government regulators did not discover that; Reuters
discovered that. Where are the government regulators? They are
asleep.
And the final point I would make, it is said that President
Obama was slow to get on the bandwagon. I agree with that
because John McCain got on this bandwagon when he ran for
president two weeks before President Obama did. In June of
2008, McCain said the cause of the explosion in crude oil is
excessive speculation and I am tired of hearing about a 2008
CFTC report that has been discredited even by the bipartisan
House Agriculture Committee and then being told that St.
Louis's Fed's report of last week or the Dallas Fed's report is
meaningless. There are 50 studies--Princeton, Texas A&M,
Stanford, London School of Economics, Nouriel Roubini, Paul
Krugman. There are 50 studies--they are not uniform--saying
this is a gambling problem. And there is a difference between
gambling and speculating. We should stop the gambling.
Mr. Barletta. And do you feel if we explored for more
natural gas, what effect would that have on supply and demand
of oil?
Mr. Greenberger. There is obviously not a complete
crossover use. If there were you would see the price of oil go
down. But it has impacted the price of natural gas. As I said,
it has gone down from $15 per million BTU, a world record high,
to $1.70, which is a ten year low. Part of that is stopping
speculation, but it is not the main part. Part of that is the
kind of production that you were talking about in Pennsylvania
and other states which is the hope for the future of the
American economy.
Mr. Barletta. Thank you.
Chairman Graves. Mr. Tipton.
Mr. Tipton. Thank you, Mr. Chairman. I would like to start
today by being able to submit an article for the record that
ran in Monday's Washington Examiner Op-Ed column. It is a joint
op-ed that you and I wrote, Mr. Chairman, which states that red
tape is strangling America's energy supply. In the op-ed, we
point out that one in 10 business owners say energy is his or
her single largest cost ranking it ahead of wages, material,
and other investments. Additionally, another 25 percent claim
energy is its second or third largest expense. Policies by this
administration, like failing to approve the Keystone pipeline
are driving up gas prices and prohibiting us from developing
American energy.
Just last month I introduced H.R. 1381, the Planning for
American Energy Act of 2012. Under the legislation, the
nonpartisan energy information administration provides the
projected energy needs of the United States over the next 30
years to the secretary of interior and the secretary of
agriculture on what they will base for the four-year production
plans. My ``all of the above'' energy plan requires that wind,
solar, hydropower, geothermal, natural gas, oil, coal, and
shake minerals needed for energy development be included in
those plans. Enacting this plan will develop our resources here
in America and assist with lowering gas prices and lessening
our dependence on volatile foreign energy sources.
I would like to probably start out with Ms. Driscoll, since
you have not had any questions coming up, we know what is going
on in the Middle East right now. If all of a sudden we do not
have that flow of oil coming out of the Middle East, would you
expect our prices to go up in this country?
Ms. Driscoll. If I base my expectations on historical data,
yes. I should hope that we could generate enough fuels here in
the United States to meet the need but I keep hearing----
Mr. Tipton. So you and Mr. Smith, you are small business
people. I am a small businessman as well. You rely on a supply
coming in. So would it be sensible for the United States of
America, rather than continuing to say we cannot do it because
it is five to 10 years down the road, to finally take those
reins in our hands to be able to create energy certainty for
the United States of America? Would that give you a little bit
of consolation and certainty from your businesses if you knew
that that supply was not going to be cut off and as a byproduct
you are going to be creating American jobs on American soil and
developing American energy resources? Would that make sense to
you?
Ms. Driscoll. It is a start. It is a start. I would hope
that we could do it with a heavy emphasis on the safety of the
American people with the processes used to harvest that fuel.
That has got to be a primary concern that runs in conjunction.
Yes.
Mr. Smith. Absolutely. I agree. You know, we need some
stability to this at some point for American businesses. So,
you know, as a businessperson, right now I have to watch every
dollar I spend because I do not know what is coming next. And
so I have to hold off on hiring or cut back on hours that
someone is working to make sure that I can keep my overhead
down to make up for things like gasoline prices rising.
Mr. Tipton. So is it accurate, Mr. Smith, that because of
the failures of this administration to be able to develop an
energy policy for this country, you are having to direct your
resources in areas that you would rather be putting to
productive use like creating jobs, expanding your business, and
expanding your bottom-line?
Mr. Smith. I mean, you know, I truly believe that, you
know, right now with the--I think most people call it the
gridlock or the red tape--that is not happening--to make sure
that we have some sort of plan in place to, you know, help the
economy, help businesses, help families, you know, with the
rising costs of fuel and the unknown of what fuel will bring in
the future.
Mr. Tipton. I know in my district in Colorado we continue
to hear the stories of struggling families that are paying
3.80, 3.90 a gallon and they are making a choice--do they fill
up half the gas tank and buy a little bit of food or what are
they really going to do? So this is about policy. And I would
like to maybe expand this discussion just a little bit when we
are talking about the futures market because I think that we
neglect to point out the failure of this administration to be
able to stand up for the strength of the U.S. dollar. We saw
under the Reagan administration with the strong U.S. dollar we
can have economic prosperity.
Mr. McNally, on the world oil markets, is that based off of
the value of a U.S. dollar?
Mr. McNally. The role of the dollar and expectations of
future dollar exchange rates and inflation rates is one factor
that plays a role in forming oil prices.
Mr. Tipton. So the weak American dollar is actually driving
up costs to American consumers. Do we have any data to see how
that relates as opposed to some of the speculative market in
terms of the cost to consumers and businesses?
Mr. McNally. I am not aware of government studies that have
done that. I am sure banks maybe have looked at that. So that
is not something in the government sphere which I am aware of.
Mr. Tipton. I am sorry, Mr. Chairman, my time has expired.
Thank you.
Chairman Graves. Ms. Ellmers.
Ms. Ellmers. Thank you, Mr. Chairman. And my questions are
for Ms. Driscoll and Mr. Smith as well as business owners. It
is so important that we understand how the rising price of
energy is affecting our businesses and how that in turn affects
you, the community, and the cash flow of your businesses. So
what I would like to do, Ms. Driscoll, if I could start with
you and then I am going to ask a couple of questions and if
both of you could answer.
There again, you know, as fuel prices have been rising and,
of course, you know, some have come down a little bit, and of
course, I am talking about gas prices, as they have fluctuated
what did this do to the ability of your business and your cash
flow? How do you manage that?
Ms. Driscoll. The first thing I did was lay off people
which absolutely broke my heart to do that. I went from full-
time employees and I put them in a part-time situation. And I
am now doing everything. So it is really unfortunate. After I
had laid off people and then put them into part-time and no
more, then I would at least bring them along to trade shows and
work with me in that capacity or when I was showing horses I
would bring them along in that capacity to work for me for the
day. But with the fuel prices, what I pay to get to the show is
probably double what I was paying them to come along as grooms.
So it certainly affected the job market in my region.
Ms. Ellmers. Sure. You know, I would agree. Each month my
fuel bill comes in. I never want to open it. I hate to see what
that number is as it does continue to grow, you know, every
month. Even though we have had a recent decline it is still
significantly up from, you know, January 2011.
So I look at things like I have reduced hours on employees.
I have replaced employees with part-time people. So I really
have to watch the overhead portion of my business and cut back
wherever I can. So at times it means that I do not take a
paycheck. So usually that is the first cut that happens, is my
ability to make any money. And then and that point I have to
look beyond that and see what to do. And right now, while I
would love to see growth, we do not see it in the plumbing
industry. Being a part of Mr. Rooter Plumbing, we are a
national, you know, franchise. International franchise. And so
I hear of the other business owners that I speak to that are
laying off people, you know, as we speak. The past few months
they have been laying people off. And so energy is a huge
expense for us, you know, and the fuel costs.
Along that line, basically my question is how has it
affected your bottom-line? And I guess probably the easiest way
to say that is are you better off today than you were four
years ago? So Ms. Driscoll?
Ms. Driscoll. Being one to conserve words, the answer to
that is no. Absolutely not. I do not take a paycheck anymore
either. You find ways. And I truly believe that small business
owners are our own worst enemy. We find a way to get it done
anyway, and as a result it gives the impression that it is
really not that bad for us. And it is. I do not think I have
taken a paycheck in about two and a half years. It is very
frustrating and it is difficult for me to add new products to
the line. It is difficult for me to campaign a horse that
really should be out on the road being seen. I have cut back on
some of those things knowing that the end result is I am not
going to get as good sales. But you have to cut. It is a very
frustrating situation. I have to do things that I know are not
good for my business.
Ms. Ellmers. Thank you. Mr. Smith.
Mr. Smith. Yeah. And, you know, I would say in a small
business, it is like a small family. So every time we have to
lay someone off if is not a large corporation that sends in an
H.R. person; you are laying off your friend, you know, that you
have worked with for years and you know their families. So it
takes a much more enormous toll on us outside of just the
financial. We are also dealing with people, you know, and our
friends and making impacts to their lives because of decisions
we need to make to keep our business open.
Ms. Ellmers. Thank you. This is the story we keep hearing
over and over again. Back in my district last week I met with
some business owners and one of the stories which is
heartbreaking, literally, in order to keep their business open,
their small business, one of my friends has actually taken
another job to keep the doors open on the business. They have
gone through all of their savings, their retirement, selling
their home and moving into a townhouse. And this is what they
have had to do to keep those doors open. And it is what we do
as Americans. So with that, Mr. Chairman, I yield back.
Ms. Velazquez. I would just like to say, Mr. Chairman, it
is evident that, you know, one role of this Committee is to
help create a climate that is conducive to help small
businesses do what you do best. That is creating jobs. And one
area where this Congress can be effective is in the area of
energy policy and we have not acted on any comprehensive energy
bill reported out of the House of Representatives. Thank you.
Chairman Graves. I appreciate it. I want to thank you all
for coming today. And unfortunately, we lose sight a lot of
times in the debate over what causes energy prices to rise and
fall. We lose sight of what it really does to small businesses
and to consumers and to people out there. So I appreciate
everybody here coming in and testifying. We are in the middle
of a vote series so we are going to go ahead and close down the
hearing. But thank you all very much.
And I would ask unanimous consent that members have five
legislative days to submit statements and supporting materials
for the record. Without objection, so ordered.
And with that the hearing is adjourned.
[Whereupon, at 2:11 p.m., the Committee was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]