[Congressional Record (Bound Edition), Volume 154 (2008), Part 8]
[Senate]
[Pages 11319-11321]
[From the U.S. Government Publishing Office, www.gpo.gov]




                            OIL SPECULATION

  Mr. DORGAN. Mr. President, I heard my colleague on the other side of 
the aisle, from Louisiana, on the floor of the Senate, with the usual 
sharp partisan scalpel, talking about what the price of gasoline was 
when this Congress was seated, the new Congress--presumably with a 
Democratic majority was his point--and what the price of gasoline is 
now, suggesting somehow that the Congress has conspired in increasing 
the price of gasoline. In fact, nothing could be further from the 
truth. But I want to explain my concern about what is happening with 
the price of gasoline and the price of energy in this country. I also 
want to make the point while I do this that those, including perhaps my 
colleague who was speaking earlier this morning, who have always felt 
that regulation was a four-letter word, ought to understand that part 
of what we are experiencing today is regulatory agencies in the Federal 
Government taking a Rip van Winkle nap while they ought to be 
regulating, while they ought to be watching on behalf of the public 
interest what is going on.

[[Page 11320]]

  We have people who came to Government who did not like Government, 
who aspired not to do anything. A good example of that is the folks who 
were put in place prior to Enron, running roughshod on wholesale 
electricity prices--which we later found out was a criminal enterprise. 
People on the west coast were bilked out of billions and billions of 
dollars. Why? Because regulators were not watching and didn't care, 
because they were regulators who were selected by the very companies 
they were regulating. In fact, I am told that Ken Lay actually was 
conducting some interviews on behalf of the administration.
  Ken Lay is dead. He is gone. He came before my committee. I chaired 
the hearings on the Enron scandal over in the Commerce Committee. He 
came before the committee. We subpoenaed him. He raised his hand, took 
an oath, sat down and took the fifth amendment. He has now died but 
many of his colleagues in Enron are spending years at minimum security 
prisons somewhere around the country.
  Effective regulatory oversight is very important. It is unbelievably 
important. Let me explain why that is the case with respect to the 
price of gasoline and the price of oil.
  Here is what has happened to the price of gasoline. These are oil 
prices, but gasoline prices track them. This is the price of a first 
month contract on the NYMEX. You can see what is happening--up, up, and 
up.
  Is there a reason that oil prices should go up like that? Let's 
explore that a bit. Stephen Simon, senior vice president of ExxonMobil, 
testified a month and a half ago before the House of Representatives. 
Here is what he said:

       The price of oil should be about $50-55 per barrel.

  A big oil executive saying the price of oil ought to be about $50 or 
$55 a barrel.
  Here is Clarence Cazalot, the CEO of Marathon Oil. He says:

       $100 oil isn't justified by the physical demand in the 
     market.

  An oil executive saying the current price at $100--it is much higher 
now--$100 is not justified.
  During a question-and-answer period he suggested a more reasonable 
range for crude oil prices was between $55 and $60 a barrel.
  This is from the Newark Star Ledger on January 8.

       Experts, including the former head of ExxonMobil, say 
     financial speculation in the energy markets has grown so much 
     over the last 30 years that it now adds 20 to 30 percent or 
     more to the price of a barrel of oil.

  Again, an oil company executive.
  Fadel Gheit, senior energy analyst at Oppenheimer, with 30 to 35 
years experience:

       There is absolutely no shortage of oil. I'm convinced that 
     oil prices shouldn't be a dime above $55 a barrel.
       I call it the world's largest gambling hall. . . .

  He is talking about the futures market now, for oil.

       I call it the world's largest gambling hall . . . It's open 
     24/7 . . . Unfortunately, it's totally unregulated . . . This 
     is like a highway with no cops and no speed limit and 
     everybody's going 120 miles an hour.

  Fadel Gheit came and testified before our Energy subcommittee and 
said the same thing. There is no justification for the current price of 
oil.
  Then what is happening? This is what a market looks like at NYMEX. It 
is hard to see much order there, but I have actually visited that 
market. It is a bunch of traders on the floor who wear colored jackets 
and logos and have pieces of paper. It doesn't look like anybody can 
keep track of what they are doing. They apparently are doing it well. 
At any rate, in this market, which is supposed to provide liquidity for 
the price of oil--that is you have a market where you have people who 
hedge and people who buy contracts and so on--there is now an orgy of 
speculation, an unbelievable amount of speculation.
  Let me show what has happened with respect to speculation. This line 
shows the percentage of oil owned by speculators, January 1996 to April 
2008. This is oil purchased by people who do not have any interest in 
having oil. These are speculators. They buy things they will never get 
from people who never had it, expecting to make money on both sides of 
the trade.
  This market is now infested with speculators. We heard testimony 
yesterday that said the largest holder of home heating fuel in the 
Northeast, in the United States of America, is Morgan Stanley, an 
investment bank. Does anybody here think that Morgan Stanley decided as 
part of its corporate charter we aspire to gather a bunch of heating 
oil because we want to be in the heating oil business? No. It is an 
investment bank that is in the speculative business.
  Hedge funds and investment banks are deep into speculation in these 
futures markets, very deep. Investment banks for the first time, as I 
understand it, are actually buying storage capacity to take energy, 
that is heating fuel and oil, off of the market and put it in storage 
to keep it in the market. They believe it would be more valuable in the 
future than to convert it to dollars, which they think will depreciate. 
So they buy oil and store oil because they are speculating.
  The question is, What do we do about that? If, in fact, the 
fundamentals aren't at work here--and, by the way, there is no free 
market. Everybody says: What about the free market? Let the free market 
work. There is no free market. That is absurd. You have a cartel, a 
bunch of folks who represent the OPEC countries. They all have 
ministers--Mr. Minister this, Mr. Minister that. They go lock a door 
someplace and this cartel decides how much they are going to produce 
and what price point they want. You have a cartel at the front end. 
Second, you have bigger oil companies. They have all merged. They all 
like each other so they all married and the fact is nobody cared much 
how big they got and now they have two names, ExxonMobil, 
ConocoPhillips, the list goes on. So they are bigger, stronger, and 
they have more muscle in the marketplace. Cartel, bigger oil 
companies--and third and most important you have an unbelievable amount 
of speculation in a market that ought to work but doesn't work anymore 
at all.
  Who is injured? The country is damaged. Our economy is damaged. 
Everybody who drives up to a service station and wants to use a gas 
pump to fill their car with gas is now actually siphoning money right 
out of their pocketbook right into the bank account of the major oil 
companies, right into the bank account of the OPEC countries. They have 
``permagrin.'' They love this. They smile all the way to the bank 
because they are depositing our money. But it is injuring our country, 
damaging our economy, and hurting American consumers.
  So if this is not just about fundamentals, and if the fundamentals 
don't justify the current price, what then can we do? We have done at 
least a couple of little things. I introduced a bill we have now passed 
and the President has now signed it--he didn't like to sign it, but he 
signed it--that said at least stop putting 70,000 barrels a day 
underground of sweet light crude. That is a law. They have not stopped 
doing it because they are filling out the current contract until the 
end of June, but 70,000 barrels of sweet light crude will go into the 
supply line when that goes into effect at the end of this month.
  What can we do to end and wring out the speculation? Let me say, 
first, we need oil. I am not here to trash oil. We need oil. I 
understand that. We put in place in 1960 generous tax breaks that are 
permanent to say: If you are looking for oil or gas, we want to give 
you some tax incentives to do that. That is what this country did a 
long time ago.
  I was on an oil rig about 2 weeks ago in the area of our country that 
has the largest oil play, I believe. It is called the Bakkan Shale in 
western North Dakota and eastern Montana. It is fascinating what they 
are doing. The reason I say we need oil--I encourage drilling. I was 
one of four Senators who helped open up Lease 181 off the Gulf of 
Mexico. We are now going to get more oil and gas off of that area and 
still protect our environment.
  Let me talk about the sophistication of the drilling rig I visited 2 
weeks ago. They drill down 10,000 feet, make a big curve with the same 
rig, and drill out

[[Page 11321]]

10,000 feet. They are searching for a seam that is 100 feet wide called 
the shale seam. They divide that seam into three parts--the upper part, 
middle part, and lower part. They go down 2 miles with a drilling rig, 
make a big curve, go out 2 miles, and they are targeting only the 
middle part of a 100-foot seam to get oil and they end up 2 to 4 feet 
from where they expect to be with their drill bit. It is unbelievable 
technology. There is a lot going on and I commend them for it. We want 
to encourage them. We want more production, but we cannot sit around 
here, as a Congress, and say it doesn't matter what the current price 
is.
  If the price at the pump is $4, the price of a barrel of oil is $125 
or $130 or $135, it doesn't matter. It matters to the airlines that 
went belly up recently. I had a discussion yesterday with an executive 
who told me the name of an airline he thinks may well be liquidated in 
the next couple of weeks. I was flabbergasted. We have had a good many 
airlines file for bankruptcy recently. We have trucking companies all 
across this country, especially mom-and-pop truck businesses, that 
cannot afford to buy fuel and have gone belly up and many others will. 
We have people who can't afford to put gas in their tank to drive to 
work. That is unbelievable to me.
  If it were about fundamentals, I would understand this, but this has 
nothing to do with fundamentals of supply and demand or the free 
market. It has to do with an unbelievable amount of speculation. We 
have a right, in my judgment, we have a responsibility, to begin 
wringing that speculation out of those futures markets.
  There are a number of ways to do that. I have talked before about a 
piece of legislation that would increase margin requirements for those 
who want to engage in speculation. If you want to buy stock on margin, 
you have to put up 50 percent of the money. That is a requirement--50 
percent of the money. If you want to go buy an oil contract, 5 to 7 
percent. If you want to control $100,000 worth of oil, it will cost you 
$5,000 to $7,000. If you want to control $100,000 worth of stock on 
margin, it will cost you $50,000.
  It seems to me first we ought to identify a way to decide what is 
speculation and what is not and then go after a way to wring out the 
speculation from these markets. I understand markets need to work, they 
need liquidity, they need to have an opportunity for legitimate 
hedging. I understand all of that. But I also understand what has 
happened here is we have galloped into this box canyon with speculators 
making massive amounts of money.
  The other day I was on the floor and I talked about a man who has 
been involved in hedging and betting--mostly betting, not hedging--and 
has made a massive amount of money. He doesn't have any interest in 
oil. He has never had oil run through his fingers. He has probably 
never changed the oil in his car, let alone wanting to buy oil. He 
wouldn't have a place to store it if he got it. He is very interested 
in gambling on the contracts, back and forth, to make money.
  That is what Mr. Gates said. As I indicated, Mr. Gates is a fellow 
who has over 30 years' experience. I have talked to him by telephone a 
number of times. Mr. Gates says: This is the world's largest gambling 
hall. It is open 24/7, totally unregulated.
  Now, we have seen speculation and bubbles exist in our country 
before. We have seen them in history. There are books written about 
bubbles and speculation. You know when tulips were sold for $25,000 a 
piece, 400 and 500 years ago, it did not matter so much, nobody needed 
to have a tulip to do well during the day.
  But oil is different. The price of oil affects every American, every 
consumer, every business. It affects our economy. What are we going to 
do if this price keeps moving and if we do not find a way to wring the 
speculation out of this and bring it back to where supply and demand or 
where a real marketplace would render the price to be?
  How many airlines will go bankrupt? Will trucking companies be able 
to purchase fuel? What will consumers do? What will it mean to the 
economic growth potential of this country?
  I am working on a piece of legislation that does a couple things, 
that addresses this speculation in a way to free it, to wring it out of 
the futures market. The futures market should exist. It is a legitimate 
market. The futures market for oil is necessary. You need to hedge. But 
we need to find a way to have complete transparency, to be able to 
regulate both here and also on the intercontinental exchanges. We 
probably need to increase the margin requirements and say to 
speculators: Your day is over. Your day is done. This market will 
exist, but it will exist without you.
  I intend to work on that amendment with my colleagues in the coming 
days and offer it and hope we push it to a conclusion.
  I yield the floor and suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. REID. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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