[Congressional Record (Bound Edition), Volume 157 (2011), Part 8]
[Extensions of Remarks]
[Pages 11969-11970]
[From the U.S. Government Publishing Office, www.gpo.gov]




MAJOR FUEL DISTRIBUTOR CALLS FOR ENFORCING DODD-FRANK ANTI-SPECULATION 
                               PROVISIONS

                                 ______
                                 

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                         Monday, July 25, 2011

  Mr. FRANK of Massachusetts. Mr. Speaker, last month, I met in my 
office with Joseph Petrowski, who is the Chief Executive Officer of the 
Cumberland Gulf Group of Companies, headquartered in the district of my 
friend and colleague, the gentleman from Massachusetts (Mr. Markey). I 
was interested in meeting with Mr. Petrowski to get his view of the 
current debate that is going on as to whether or not we should be 
taking action at the Federal level to curb speculation in the energy 
industry. As Mr. Petrowski notes in the accompanying letter, the 
Cumberland Gulf Group includes ``Gulf Oil, which distributes motor 
fuels through a network of more than 3,500 gasoline stations in over 27 
States, 12 proprietary oil terminals, and more than 70 other supply 
terminals.'' As he notes, ``Gulf Oil supplies gasoline, heating oil, 
diesel fuel, jet fuel and kerosense through its terminal network.''
  Mr. Speaker, the central point is that Mr. Petrowski, as someone who 
is in the business of selling various forms of fuel, for the ultimate 
purchase by individual consumers, rebuts those who argue that 
speculation is irrelevant to the price that is paid at the pump and 
elsewhere by consumers, as Mr. Petrowski notes in the accompanying 
letter, ``Today with price levels more volatile than ever, prices 
higher than ever, and open interest larger than ever, and both exchange 
and off exchange volume of trade a double digit multiple to physical 
usage, there is little doubt that speculation is a key determinant of 
prices and may very well be the determining factor in setting prices.''
  Mr. Speaker, this point deserves great emphasis--to repeat, because 
of the centrality of this to our policy debate, the CEO of one of the 
leading distributors of gasoline, oil and diesel fuel affirms, based on 
the experience he has had in this industry for many years and the 
current economics, ``there is little doubt that speculation is the key 
determinant of prices and may very well be the determining factor in 
setting prices.''
  Mr. Speaker, there has been a totally misguided effort here in this 
House to slash funds for the Commodity Futures Trading Commission and 
the Securities and Exchange Commission, and to suspend until late next 
year the authority given by the Financial Reform bill to Federal 
regulators to limit speculation. Mr. Petrowski makes very clear that 
the effect of this is to add to higher prices through unchecked 
speculation, and given the authority that he brings to this issue, I 
ask that his very thoughtful letter on this subject be printed here.
  I know, Mr. Speaker, that in addition to affirming the importance of 
speculation, Mr. Petrowski makes some other thoughtful suggestions 
about legislative changes and it is my intention to study these 
carefully and after that talk with my colleagues on the Financial 
Services Committee about acting on Mr. Petrowski's suggestions in some 
respects. But the key point is to affirm here what one of the leading 
voices in the fuel business thinks about speculation and the impact it 
has on the prices ultimately paid by retailers.

                                             Cumberland Gulf Group


                                                 of Companies,

                                     Framingham, MA, July 7, 2011.
     Hon. Barney Frank,
     U.S. House of Representatives, Rayburn House Office Building, 
         Washington, DC.
       Dear Representative Frank: While I understand some of the 
     criticism of the Dodd-

[[Page 11970]]

     Frank legislation, no legislation and no reform effort is 
     ever going to be perfect. All administrative oversight and 
     legislative response is a continuous process as markets and 
     technologies evolve. Dodd-Frank was not the end point of 
     financial reform but a good first step in addressing market 
     structure in a way that would improve performance. Having 
     worked in the commodities and energy business for over 35 
     years, I am well aware of how the commodity markets operate 
     and what factors determine the price of energy, food stuffs, 
     and other essential commodities. I am a strong advocate of 
     free markets but only the most naive would claim that free 
     markets can exist and flourish without parameters and a 
     framework of rules and procedures that render the process 
     fair. This has always been so but never more so than today. 
     Globalization, technology, and securitization among other 
     factors have amplified the need for effective legislative and 
     administrative oversight.
       In my current capacity, I serve as CEO of the Cumberland 
     Gulf Group. Under that umbrella sits Gulf Oil, which 
     distributes motor fuels through a network of more than 3,500 
     gasoline stations in over 27 states, 12 proprietary oil 
     terminals, and more than 70 other supply terminals. Gulf Oil 
     supplies gasoline, heating oil, diesel fuel, jet fuel and 
     kerosene through its terminal network. Before coming to Gulf 
     Oil, I served as the Chief Executive Officer and President of 
     Louis Dreyfus Energy Corp., one of the largest commodities 
     traders in the world. In both capacities, as a trader and now 
     a fuel purchaser and supplier, I am intimately familiar with 
     the inner workings of the derivatives market.
       As in any market, supply and demand play a critical role 
     for energy prices. The perception of the future pace of both 
     supply and demand are often more of a determinant of prices 
     than actual supply and demand. This can be frustrating to 
     members of the general public who sometimes see a price rise 
     or fall without any tangible change in current supply or 
     demand. Yet today with price levels more volatile than ever, 
     prices higher than ever, and open interest larger than ever, 
     and both exchange and off exchange volume of trade a double 
     digit multiple to physical usage, there is little doubt that 
     speculation is a key determinant of prices and may very well 
     be the determining factor in setting prices. And even if the 
     disproportionate increase in trade volume to physical usage 
     were not disturbing and one believed that in the end the 
     average price was still set by supply and demand forces 
     rather than financial speculation (an assertion with which I 
     would disagree), volatility induced by excess speculation is 
     not in the best interests of efficient markets, the general 
     public and industrial activity. Simply put, an oil market 
     that goes from $40/barrel to $147 per barrel and back to $32 
     per barrel in less than a year is destructive to society and 
     beneficial to only a very few.
       I should note that speculation is not necessarily a bad 
     thing--it brings liquidity to the market and allows 
     commercial entities to hedge their risk on future contracts 
     for the trade of physical goods. However, there has been a 
     rapid increase of the participation in the market by non-
     commercial entities such as hedge funds and financial 
     institutions. Those entities, depending on their behavior, 
     have the ability not only to speculate in the market but 
     manipulate the market. It is the regulation of these entities 
     that is most necessary and the Dodd-Frank Act brings 
     regulation to this market through a requirement of mandatory 
     clearing of swaps and the placement of position limits on 
     certain futures contracts, including energy. Financial 
     markets in certain aspects do resemble a casino and I am not 
     making a moral judgment on casinos but even a casino has 
     rules of engagement and enforcement that ensure a level 
     playing field. A rigged casino is certainly not good for most 
     participants and in the long run is not good for the casino 
     itself. Instruments of risk sharing and markets of financial 
     intermediation perform a vital function but they do not grow 
     spontaneously nor do they exist for long in a state of nature 
     absent oversight and rule making.
       I have set forth some preliminary thoughts below on reforms 
     we need to improve market performance set forth below and 
     would welcome the opportunity to discuss these issues in more 
     detail with you, your staff and others on the Financial 
     Services Committee.
       1. Make the exchange requirements of what it means to be a 
     ``Hedger'' much more stringent. Today, almost anyone with a 
     small and insignificant physical position can qualify as a 
     ``hedger''. Also large entities with massive financial 
     strength can qualify as a hedger, exceed the speculative 
     limits in a given index or exchange instrument, manipulate 
     that index and then trade multiple volume contracts off that 
     index in non-exchange business. We see a proliferation of 
     financial and bank entities entering the physical market for 
     no other reason but to qualify for the more generous 
     liberties afforded a ``hedger''.
       2. Raise the margin requirements for non-hedgers 
     significantly to minimize speculator-driven volatility and 
     still allow enough liquidity in the market so that entities 
     with real business purposes can transact. This will drive 
     weaker speculators out of the market. It will also 
     dramatically reduce volatility because the Variance Margin 
     buffer could be increased dramatically which would stop the 
     phenomenon of leverage that has often been at the foundation 
     of many financial train wrecks (see mortgage market). Assume 
     you are a $10/bbl balance sheet company. You buy 1 barrel of 
     oil costing $100 and you only have to post $6, the market 
     goes from $100 to $96, you are poised to sell quickly because 
     you know if it goes to $90, you are out of business, so you 
     start selling to make sure you can pull back your initial 
     margin to cover your variance margin and live to fight 
     another day (and likely lose as 90% of spec traders do). Now 
     imagine the same scenario with $30 margin requirements. The 
     market would never move enough for the trader to be concerned 
     about not having enough initial margin to pull back to cover 
     the variance. The fundamental/technical influence would shift 
     hard back towards the fundamental. I am not certain exactly 
     what the right margin increase should be (though 500% is not 
     out of the question from my perspective), but it is clear 
     that today the margin requirements are too low. The 
     phenomenon of sharp spikes in the absence of attributing 
     ``events'' is evidence of a highly leveraged market.
       3. The government should create a government-backed 
     exchange that helps long term consumers and producers hedge. 
     If a small land owner owns a 3,000 bbl/day well in middle 
     Kansas and wants to lock in his price at $95 a barrel for 5 
     years, how does he do it? Is he going to sell 5.5 million 
     barrels of futures on Nymex and post $32,000,000 in initial 
     margin? What happens if the price goes up $40 per barrel? Mr. 
     Small Producer is going to pay the exchange $220,000,000 in 
     margin and claw it back 3,000 bbls a day at a time? I think 
     not. Right now some of the banks will do that business but 
     they are enjoying ``healthy'' margins. If the government came 
     in and provided the credit umbrella (through a government 
     sponsored exchange) they would bring a lot of production to 
     the hedging market and would also incentivize both producers 
     and consumers to think long term. Users should have the 
     opportunity to lock in costs for longer durations and sellers 
     should be able to hedge out their revenue streams but credit, 
     financing costs, and other structural factors remain 
     impediments to development. While some might criticize this 
     proposal based upon the recent issues in the mortgage 
     markets, this would be an important reform to allow small 
     businesses to participate in the commodities markets. Such 
     liquidity was not the problem with mortgages, it was 
     leverage, lack of transparency, complexity, and very simply 
     in many cases dishonesty, that brought down the housing 
     market.
       In general, all markets operate best when they are 
     transparent, liquid and not over leveraged. I am hopeful that 
     Congress will allow the Commodities Futures Trading 
     Commission to proceed with the implementation of the Dodd-
     Frank Act. I strongly believe we will see positive effects 
     from this regulation on not only the price of oil but many 
     other commodities upon which our country relies.
       Sincerely,
                                              Joseph H. Petrowski,
     CEO.

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