[Congressional Record (Bound Edition), Volume 154 (2008), Part 9]
[Extensions of Remarks]
[Pages 12665-12666]
[From the U.S. Government Publishing Office, www.gpo.gov]




    THE INTRODUCTION OF A SENSE OF THE HOUSE RESOLUTION CONCERNING 
                    SPECULATION IN CRUDE OIL MARKETS

                                 ______
                                 

                          HON. THOMAS E. PETRI

                              of wisconsin

                    in the house of representatives

                         Tuesday, June 17, 2008

  Mr. PETRI. Madam Speaker, today, I am introducing a resolution 
calling for the U.S. Government to lead a global diplomatic initiative 
to limit the incentives for speculation in crude oil futures through 
the adoption of international standards for margin requirements on 
speculative trading in oil futures. By establishing this policy we can 
moderate surging oil prices and bring relief to consumers around the 
world.
  Margin payments are paid to an exchange when purchasing a futures 
contract. Akin to an escrow deposit in a real estate transaction, 
margin requirements are set by exchanges and not government regulation. 
On the New York Mercantile Exchange, the purchase of a standard oil 
futures contract for 1,000 barrels carries a margin requirement of just 
over $10,000, a small percentage of the value of a contract with a 
settlement price this week of $135,000 for oil priced at $135 per 
barrel.
  This relatively small amount of capital required to purchase a 
contract and reap potentially sizeable gains from the daily movements 
in the price of crude oil is an attractive invitation to speculative 
investors. Higher margin requirements would reduce this incentive by 
limiting such opportunities for gain. By removing speculative money 
from the crude oil market, we can begin to bring down oil prices and 
relieve the pain our constituents feel at the gas pump.
  Currently, there is a heated debate of whether a growth in 
speculative trading is showing up as part of a ``speculative premium'' 
built into the price of crude oil. Because so much trading in energy 
futures takes place in unregulated exchanges, there is a shortage of 
good information, and we lack the empirical evidence necessary to make 
a firm conclusion.
  In the absence of such firm data, some have argued that tight 
supplies and high demand are the only explanation for high prices. On 
the other hand, many have suggested that heightened speculation has 
resulted in adding anywhere from $10 to $35 to the price of each barrel 
of oil. The market indications cited by supporters of the market 
speculation theory are impressive and include:
  April 2008 oil stocks held by the U.S. and its fellow members of the 
Organization for Economic Cooperation and Development totaled 2.562 
million barrels, above recent averages and sufficient for 53.4 days of 
consumption.
  The president of OPEC, Chakib Khelil of Algeria, in declining to 
commit the organization's members to a production increase, noted that 
supply was exceeding demand by one-half million barrels per day.

[[Page 12666]]

  OPEC has also lowered its forecast of average daily global 
consumption of oil by 60,000 barrels, the third time this year that the 
oil cartel has reduced its estimate. This view coincides with that of 
the International Energy Agency whose monthly Oil Market Report for 
June reported that oil consumers would use 70,000 barrels less per 
month than it had previously estimated.
  An economist with WTRG Economics was quoted by MarketWatch as 
observing, ``We had another week of uncertainty, with oil trading more 
as a currency and inflation hedge than based upon the fundamentals. 
This will continue to be the case as long as the long-only index funds 
are allowed free rein in the futures market. ``
  Since 2003, investment in commodity index funds has risen from $13 
billion to $260 billion.
  National Journal has cited the writings of Anit Anand of brokerage 
firm KRChoksey in reporting the number of current energy hedge funds as 
634, up from 180 in October 2004.
  Recognizing the significance of these trends, the Commodity Futures 
Trading Commission has announced the formation of an interagency task 
force to examine investor practices, supply and demand factors, and the 
role of speculators. Additionally, on June 14, 2008, the International 
Monetary Fund, responding to a call from Group of Eight finance 
ministers, agreed to look into the role that futures trading has played 
in pushing crude oil prices ever higher.
  Certainly, other factors influence the price of oil, and it is only 
fair to examine whether any is responsible for the current situation.
  Oil prices are subject to a ``political risk premium'' caused by 
instability and the threat of violence in countries producing 
significant quantities of oil. While the political climate in these 
areas remains tense, it cannot be said to have changed appreciably for 
the worse over the past five years.
  Long term supply questions also are part of today's crude oil price. 
Yes, there are fears that supplies are diminishing, encouraged by peak 
oil theorists, but there has been no new dramatic information on this 
point that would explain the 94 percent price boost that Bloomberg 
Financial has reported over the past year.
  Finally, some point to the drop in the value of the dollar to explain 
the price pain felt by U.S. consumers. This explanation, too, falls 
short of providing a satisfactory answer. While the dollar price of 
crude oil is 4.3 times higher than it was in 2004, Europeans also are 
paying 2.7 times more for oil purchased with the much stronger euro.
  In the final analysis, it's clear that among these components of the 
price of oil, only commodities trading has seen a dramatic change of 
pace. It is hard to escape the conclusion 4 that financial trading 
plays a contributing role in having pushed crude oil prices up 94 
percent in the past year.
  We need to take action to restore the market for oil futures to its 
intended purpose--not as a speculative vehicle for energy hedge funds. 
At the same time, we need to recognize the international nature of 
energy trading and implement market reforms globally. My resolution 
calls upon the diplomatic and financial leadership of the U.S. 
government to begin this process. I urge my colleagues to support this 
resolution.

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