**Mr. Sean Cota**

**Co-Owner and President, Cota & Cota, Inc.**

**President, New England Fuel Institute**

**Testimony before the**

**United States Senate**

**Committee on Energy & Natural Resources**

**Washington, DC**

**April 3, 2008**

Honorable Chairman Bingaman, Ranking Member Domenici and distinguished
members of the committee, thank you for the invitation to testify before
you today. As both a petroleum marketer and as a representative of two
respected trade groups that together represent our nation's independent
motor vehicle and heating fuel dealers, I appreciate the opportunity to
provide you with our insight on the extreme volatility and record
setting prices seen in recent months on the energy commodity markets.

I serve on the Petroleum Marketers Association of America's (PMAA)[^1]
Executive Committee and serve as PMAA's Brands Director. PMAA is a
national federation of 46 states and regional associations representing
over 8,000 independent fuel marketers that collectively account for
approximately half of the gasoline and nearly all of the distillate fuel
consumed by motor vehicles and heating equipment in the United States.

I am also President of the New England Fuel Institute (NEFI)[^2], a
60-year-old trade association representing well over 1,000 heating fuel
dealers and related services companies in the Northeastern United
States. NEFI member companies deliver over 40 percent of the nation's
home heating oil, and many market biodiesel, bioheat, propane, kerosene,
jet fuel, off-road diesel and motor vehicle fuels.

And finally, I provide you insight today as co-owner and President of
Cota &Cota, Inc. of Bellows Falls, Vermont, a third generation
family-owned and operated heating fuel provider in southeastern Vermont
and western New Hampshire. My business provides quality home heating
fuel to approximately 9,000 homes and businesses. Unlike larger energy
companies, most retail fuel dealers are small, family-run businesses.
Also unlike larger energy companies, heating oil and propane dealers
deliver product directly to the doorstep of American homes and
businesses.

Because of this close association with our customers, we have a deep
concern for their well being and the general welfare of our communities.
Not only do few recognize the small business nature of our retail
industry, but few also grasp also our deep commitment to providing the
highest quality products at the most affordable and competitive prices.
To this end, we have recently proposed an array of measures to policy
makers in Washington that can assist our industry in ensuring adequate
supply of home heating fuel and insulate the consumer from the currently
volatility and excess that dominate the commodities markets.

First, we urge members of this committee and this Congress to support
our recent and standing request to the Bush Administration release all
1.97 million barrels of the Northeast Home Heating Oil Reserves.
Contrary to statements from the administration, release of product from
the reserve need not be tied solely to a crude oil to heating oil
differential trigger mechanism.[^3] Federal law also permits a release
from the reserve under discretionary authority provided there is a
"regional supply shortage of significant scope and duration."[^4] We are
indeed in the midst of such a shortage due to: skyrocketing distillate
demand overseas; the steepest decline in refinery runs in over two
years; infrastructure limitations and pipeline partitioning due to the
current transition to lower sulfur off-road diesel fuel; and declining
interest by small bulk plants and terminals to take on high sulfur
distillates such as jet fuel and heating oil due to the backwardated
market and, as mentioned, the transition to low/ultra-low sulfur diesel.
All of these factors will only further exacerbate the already
speculation-driven, volatile futures market and record price surges seen
in recent months.

Second, we urge on Congress and the administration to implement real and
substantial reforms to existing law and federal regulation designed to
ensure fully transparent, accountable and stable energy futures markets.
For two years now, the New England Fuel Institute, the Petroleum
Marketers Association of America, and their various allies in the Energy
Market Oversight Coalition have asked for such changes and little has
been done. The consequences of inaction are now apparent and will only
continue to worsen. For the sake of all Americans and the economy at
large, you must act.

It has become apparent that excessive speculation on energy trading
facilities is the fuel that is driving this runaway train in crude oil
prices. For example, on January 3, 2008, one floor trader bought 1,000
barrels; the smallest amount permitted, and sold it immediately for
\$99.40 at a \$600 loss. The trader deliberately pushed the price of a
barrel of crude oil over the \$100 just because he wanted to tell his
grandchildren that he was the first person ever to buy crude oil over
\$100.[^5]

In addition, in times of a national crisis, excessive speculation can
also exacerbate an emergency. An example of this comes from a Wall
Street Journal article from September 2005, wherein an oil trader
bragged about his profits following Hurricane Katrina. This futures
trader bragged that some traders made enough money in one week following
Katrina that they would not have to work for the rest of the year.
Comments like these concern PMAA and NEFI members who argue that the
recent volatility in crude oil prices will force small businesses and
consumers to pay excessively high energy prices that do not reflect
supply and demand factors.

And the rise in crude oil prices in recent weeks which reached \$110.21
on March 13, 2008 has dragged with it every single refined petroleum
product, especially heating oil. In just over one month, wholesale
heating oil prices from February 11, 2008 -- March 18, 2008 have risen
from \$2.65 to \$3.31.[^6] The spike comes despite reports by the Energy
Information Administration (EIA) that heating oil inventories remain
around the five-year average.[^7] Gasoline prices have also risen
dramatically reaching as high as \$3.33 on March 17, 2008.

Many heating fuel companies like mine hedge in an effort to protect
their customers against roller-coaster-like price volatility on the
energy commodity markets. Because of our industry's hedging activities,
we strongly support open, transparent and well-managed exchanges subject
to the rule of law. In fact, it is essential to businesses like mine. My
company began offering fixed price programs to our customers twenty
years ago. We enter into New York Mercantile Exchange (NYMEX) based
futures contracts with our suppliers, who purchase contracts for future
delivery and resell these contracts to me for a profit. In this way,
companies like mine are able to financially hedge heating fuels for the
benefit of the consumer, and help protect them against uncertainty and
volatility.

However, the ability of the commodities markets to set a price based on
economic fundamentals has become less and less reliable, and as a
result, so do our hedging programs. As the influence of price-setting
functions on unregulated or under-regulated markets continues to grow,
and as trading on over-the-counter and foreign-based exchanges continues
to become the norm, American consumers are forced to ride the same
speculative roller coaster as the energy trader.

For far too long, insufficient oversight and transparency has encouraged
excessive speculation and created a trading environment that rewards
trading misdeeds, like that of Amaranth Hedge Funds and British
Petroleum. "Loopholes" in federal law have created what I call "dark
markets," or energy commodity markets engaging in futures or futures
like contracts, swaps and derivatives trades without adequate federal
oversight and regulation. Today, a vast majority of trading occurs on
these markets.[^8]

More specifically, we strongly urge Congress to take swift action to
bring light to the "dark markets" by:

1.  **Closing the notorious "Enron Loophole,**" ripped open by the
    Commodity Futures Modernization Act (CFMA)[^9] and through which
    billions of dollars have poured since it was created in 2001.
    Virtually overnight, the "Enron Loophole" freed all electronic
    markets from oversight. Congress needs to close the loophole, and
    close it for all energy commodities, thereby returning to the
    Commodity Futures Trading Commission (CFTC) the statutory authority
    that it lost in 2001. As an important first step in closing the
    Enron Loophole, Congress must: **Pass the Senate version of the CEA
    Reauthorization Act, included as an amendment to the 2007 Farm Bill,
    H.R. 2419 is currently in conference. This legislation will
    reauthorize the CFTC and bring greater transparency and
    accountability to energy trading facilities through an array of
    important policy reforms. It is stronger than the CEA
    Reauthorization language drafted by the Presidential Working Group
    and currently under consideration in the House Agriculture
    Committee. Further,** the Senate legislation gained bipartisan
    support from U.S. Senators Levin (D-MI), Feinstein (D-CA), Chambliss
    (R-GA), Snowe (R-ME), Cantwell (D-WA), Coleman (R-MN), Conrad
    (D-ND), Dorgan (D-ND), Lieberman (I-CT), Collins (R-ME), Crapo
    (R-ID), Durbin (D-IL), and Schumer (D-NY).

2.  **Investigating the CFTC's use of "no-action letters" which we
    believe equates to a loophole for foreign markets seeing to gamble
    with American energy commodities and economic interests.** Under the
    no-action letter process, the CFTC may provide regulatory exemptions
    under certain conditions to an applicable foreign board of trade
    (FBOT) offering contracts for delivery within the United
    States.[^10] The current process may fail to provide sufficient
    public notice and consultation, and may not take into account the
    full impact that these letters may have on the market. Moreover, in
    order to obtain such an exemption, the CFTC requires that a
    "comparable" regulatory authority be present in the country where
    the exchange operates. Congress should examine whether or not it
    determines such regulatory authorities to be "comparable." And
    finally, we are concerned that no-action letters may be or have been
    requested and approved for exchanges seeking to establish electronic
    platforms overseas with the intent to circumventing U.S. regulatory
    authority.

3.  **Reduce the dominance of non-physical players in the commodities
    markets:**

> The commodity-related futures markets were primarily created to
> provide industry participants with a tool to manage inventory and
> future price related risks. However, our industry's management tool
> has been dominated by investment banks and hedge funds that profit
> from price volatility. This market domination is an extremely
> significant contributor to high gasoline, natural gas, diesel and
> heating oil prices. Virtually every commodity has experienced price
> volatility, reaching record levels from gold to wheat and it seems
> that there is no end in sight.
>
> Hedge funds and investment banks are not driven to provide U.S.
> citizens the most affordable energy supplies; they are driven to
> profit from volatility. PMAA and NEFI believe that margin requirements
> for speculators who do not have the ability to take physical delivery
> of their product should be dramatically increased. Futures market
> officials could impose a physical delivery component for traders to
> qualify for reduced margins. Earlier this week, Congressman John
> Larson of Connecticut announced legislation that would eliminate the
> commodities markets as an investment tool and return the market to the
> physical players and consumers that have lost faith in its ability to
> reflect hard fundamentals.

We realize that there are several different policy recommendations
floating around Capitol Hill from an array of sources, including
legislators, commission and administration officials, futures trade
groups and the commodity exchanges themselves. We ask that your
deliberations take in to account all trading environments and all energy
commodities, not just the regulation of one commodity at the exclusion
of all others.

I thank you again, Mr. Chairman, and to your colleagues for this
opportunity to share my insight on this issue. I am open to any
questions that you might have.

**APPENDIX I. CHARTS**

You can see in this chart how everything changed in August, as
"investment" money from a number of sources started pouring into any and
all hard asset categories.

![](media/image1.wmf){width="6.291666666666667in"
height="3.5618055555555554in"}

Fig. 1

![](media/image2.wmf){width="6.303472222222222in"
height="3.7618055555555556in"}

Fig. 2

![](media/image3.wmf){width="6.2868055555555555in"
height="3.3826388888888888in"}

Fig. 3

![](media/image4.wmf){width="6.288888888888889in"
height="3.3652777777777776in"}

Fig. 4

![](media/image5.wmf){width="6.4215277777777775in"
height="3.776388888888889in"}

Fig. 5

![](media/image6.wmf){width="6.547916666666667in"
height="3.279861111111111in"}

Fig. 6

![](media/image7.wmf){width="6.420138888888889in"
height="3.7583333333333333in"}

Fig. 7

![](media/image8.wmf){width="6.420138888888889in" height="3.43125in"}

Fig 8

.

**APPENDIX II. QUOTES**

> Outgoing OPEC president the United Arab Emirates said on Monday that
> [the surge in oil prices to 100 USD a barrel had nothing to do with
> market fundamentals]{.underline}, the WAM state news agency reported.
> The surge was because of *\'speculation, investment funds (purchases),
> regional tensions and other factors unrelated to supply and demand\'*,
> it quoted UAE Energy Minister Mohammad bin Dhaen al-Hamli as saying.
> **Forbes.com, Jan. 7, 2008**
>
> Many analysts believe oil prices aren\'t justified by crude\'s
> underlying supply and demand fundamentals. While supply disruptions in
> Nigeria and the prospect of a supply cutoff from Iraq and Venezuela
> helped boost oil prices last year, [domestic oil inventories are now
> rising even as a number of forecasters are cutting their demand growth
> predictions due to the slowing economy]{.underline}. **Associated
> Press, March 3, 2008**
>
> Experts, including the former head of Exxon Mobil, 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 oi]{.underline}l. Some of that added cost reflects illegal
> manipulation, although no one knows how much because so much of the
> market operates in secret. **New Jersey Star Ledger, Jan. 6, 2008**
>
> The price of oil closed at a record \$102.72 on the NYMEX Thursday.
> Investors pounced on commodities markets, including oil, as the
> weakened US dollar encouraged speculators to move to areas with quick
> price fluctuations. **UPI Business, February 28, 2008**
>
> \"[We are in the mode where the fundamentals of supply and demand
> really don\'t drive the price,\" Lee R. Raymond, the chairman and
> chief executive of Exxon Mobil]{.underline}, the world\'s largest
> energy company, said at a meeting last week with analysts in New York.
> \"Oil is a commodity, and history tells us that commodity prices never
> stay high forever.\" **San Diego Union Tribune, March 15,
> [2005]{.underline}**
>
> [OPEC can do nothing about oil prices that hit a record high of \$100
> on Wednesday as the rise is due to geopolitics and speculation and not
> supply problems]{.underline}, Qatar\'s oil minister Abdullah
> Al-Attiyah said on Wednesday. \"I don\'t think OPEC can do anything,\"
> Al-Attiyah told newswire Reuters by telephone. \"If this was related
> to supply then we could move. But I am confident that it is
> geopolitics. Speculation has been very strong. It\'s a game for
> speculators.\" **Arabian Business, Jan. 3, 2008**
>
> Consumer advocates and energy dependent businesses getting slammed by
> higher fuel prices say [sophisticated "investors" at hedge funds and
> investment banks have used these unregulated markets to artificially
> drive up the price of commodities]{.underline}. "All we're looking for
> is the same set of ground rules to ensure that there is the same
> disclosure" across all commodities markets, said Eric DeGesero,
> executive vice president of the Fuel Merchants Association of New
> Jersey. **Fox Business News, Jan. 4, 2008**
>
> "As oil prices continue to climb, families in northern Michigan and
> across the country are being hit hard by rising fuel costs," Stupak
> said. "[People don't mind paying a fair price for a product, but a
> price that is being manipulated by speculators is not
> fair]{.underline}. These high prices are more than just supply and
> demand." **Sootoday.com, Jan. 3, 2008, Sault Ste. Marie, Ontario,
> Canada**
>
> Others analysts blame oil traders for bidding up the price of oil, a
> process being fed by a weakening dollar, which makes oil cheaper for
> those buying it with Euros or other currencies that have gained
> strength against the dollar. \"[[Wall
> Street](http://www.washingtonpost.com/ac2/related/topic/Wall+Street?tid=informline)
> greed is pushing the American family and our small businesses to the
> breaking point]{.underline},\" said Shane Sweet, chief executive of
> the New England Fuel Institute, which represents about 1,000 retailers
> of heating oil and other fuels. **Washington Post, Jan. 3, 2008**
>
> [Oil speculators, for example, have goosed the price well above what
> is justified by supply and demand]{.underline}. Fadel Gheit, a veteran
> oil
> [analyst](http://www.opco.com/public/capital_markets/analyst_bios.html)
> in New York, points out that, historically, oil prices have run
> roughly triple what it costs to physically extract the crude from the
> ground. With extraction costs now averaging \$15 to \$18 a barrel
> globally, Gheit reckons we\'re paying a \"speculative premium\" of as
> much as \$57 a barrel. **Paul Roberts, The Guardian (UK), Jan. 8,
> 2008**

[^1]: Official website www.pmaa.org.

[^2]: Official website www.nefi.com.

[^3]: 42 U.S.C. 6250b(a)(1)

[^4]: 42 U.S.C. 6250b(a)(2)

[^5]: (BBC News, 2008)

[^6]: Energy Information Administration, "U.S. No. 2 Heating Oil
    Wholesale/Resale Prices," February 11-March 17, 2008

[^7]: The EIA reported that U.S. heating oil inventories were to remain
    within the 5-year average. *See Ibid*, "Short Term Energy Outlook,"
    March 11, 2008.

[^8]: Nearly all experts agree that a majority of trading now occurs off
    of traditional exchanges like the NYMEX, and some estimate that
    number to be 75 percent or more.

[^9]: *See* 7 U.S.C. §2(h)(3), (g) (2006)

[^10]: *See* 17 CFR 140.99