**Testimony of Congressman Bart Stupak**

**U.S. House of Representatives**

**House Agriculture Committee**

**\"To review legislation amending the**

**Commodity Exchange Act\"**

**July 9, 2008**

The price of crude oil has doubled over the past year, oil is now
\$73.90 [more]{.underline} than it was at this time last year. This
spike has caused gasoline prices to increase \$1.14 a gallon more than
last year's highs, a national average of \$4.10 per gallon. Diesel
prices are up \$1.82 per gallon compared to last year, up to \$4.65 per
gallon.

As a result, industries across the country are hurting. Airlines are
eliminating service to 100 cities, laying off thousands of workers, and
projecting up to \$13 billion in losses this year due to jet fuel price
increases that cannot be passed on to consumers.

Truck drivers are going out of business, and many more are just parking
their trucks because they actually end up losing money after paying so
much for diesel. Farmers face increased costs in all stages of their
operations, from planting and harvesting to transporting their product
to market. As a result, high energy prices have caused significant
increases in the cost of food.

There is no way to justify the doubling of oil prices based on supply
and demand.

In October 2007, the Government Accountability Office (GAO) released its
report on the ability of the Commodities Futures Trading Commission
(CFTC) to properly monitor energy markets to prevent manipulation. The
GAO found that the volume of trading in energy commodities has
skyrocketed, specifically after the Enron Loophole was enacted in 2000.
The GAO also found that while trading has doubled since 2002, the number
of CFTC staff monitoring these markets has declined.

And the numbers back this up. Between September 30, 2003 and May 6,
2008, traders holding crude oil contracts jumped from 714,000 contracts
traded to more than 3 million contracts. This is a 425 percent increase
in trading of oil futures in less than five years.

Since 2003, commodity index speculation has increased 1,900 percent,
from an estimated \$13 billion to \$260 billion. Lehman Brothers
recently estimated that the crude oil price goes up about 1.5 percent
for every \$100 million in commodity index investments. 

By the Lehman Brothers estimate, the 1,900 percent increase in commodity
index speculation has inflated the price of crude oil by approximately
\$37 a barrel. Other experts estimate it could be even more.

On June 23, 2008, the Oversight and Investigations Subcommittee that I
Chair held a hearing on the effect speculators have on energy prices.
Fadel Gheit, Managing Director and Senior Oil Analyst at Oppenheimer &
Co. Inc. testified that: "I firmly believe that the current record oil
price in excess of \$135 per barrel is inflated. I believe, based on
supply and demand fundamentals, **crude oil prices should not be above
\$60 per barrel.**"

 

In 2000, physical hedgers- businesses like airlines that need to hedge
to ensure a stable price for fuel in future months- accounted for 63% of
the oil futures market.  Speculators accounted for 37%.  By April 2008,
physical hedgers only controlled 29% of the market.  What we now know is
that approximately 71% of the market has been taken over by swap dealers
and speculators, a considerable majority of whom have no physical stake
in the market.  Over the past eight years, there has been a dramatic
shift as physical hedgers continually represent a smaller and smaller
portion of the market. 

The New York Mercantile Exchange (NYMEX) has granted 117 hedging
exemptions since 2006 for West Texas Intermediate crude contracts, many
of which are for swap dealers without physical hedging positions.

This excessive speculation is a significant factor in the price
Americans are paying for gasoline, diesel and all energy products. Even
the executives of the major U.S. oil companies recognize this.

On April 1, 2008, in testimony for the Select Committee on Global
Warming, Mr. John Lowe, Executive Vice President of ConocoPhillips said,
"It is likely that the large inflow of capital into the commodity funds
is temporarily exaggerating upward oil price movements."

At the same hearing, Mr. Peter Robertson, Vice Chairman of Chevron noted
a "flight to commodities" adding that an economist was quoted in the
*Wall Street Journal* saying: "Crude futures prices have decoupled from
the forces controlling the underlying physical flows of the commodity."

In the testimony of Mr. Robert A. Malone, Chairman and President of BP
America, he pointed to a "growing interest among financial investors in
oil and other commodities."

And at a May 21, 2008, Senate Judiciary Committee hearing, Shell
President John Hofmeister agreed that the price of crude oil has been
inflated, saying that the proper range for oil prices should be
"somewhere between \$35 and \$65 a barrel."

In May 2008, the International Monetary Fund (IMF), compared crude oil,
over the past 30 years, to the price of gold. Gold prices are not
dependent on supply and demand, and have been viewed as a highly
speculative commodity. The IMF analysis shows that crude oil prices
track increases in gold prices.

What this means is that oil has been transformed from an energy source
into a financial asset, like gold, where much of the buying and selling
is driven by speculators instead of producers and consumers. Oil has
morphed from a commodity into a financial asset, traded for its
speculative value instead of its energy value.

Even the Saudi Oil Minister has argued that high oil prices are due to
excessive speculation in the markets.

As former Secretary of Labor Robert Reich noted on National Public Radio
a few weeks ago, the problem is the government\'s failure to curb
excessive speculation.

The Commodities Exchange Act recognizes the dangers of excessive
speculation. Section 4a of the Act states, **["Excessive speculation in
any commodity]{.underline}** under contracts of sale of such commodity
for future delivery made on or subject to the rules of contract markets
or derivatives transaction execution facilities **[causing sudden or
unreasonable fluctuations or unwarranted changes in the price of such
commodity, is an undue and unnecessary burden on interstate
commerce."]{.underline}** (emphasis added) As a result, Section 4a
provides the CFTC with the authority to set position limits or take
other actions necessary to curb excessive speculation.

However, there are significant loopholes that exempt energy trading from
these protections against excessive speculation: the Enron Loophole, the
Foreign Boards of Trade Loophole, the Swaps Loophole, and the Bona Fide
Hedging Exemption. While the recently passed Farm bill addressed the
Enron Loophole for electronic trading facilities here in the United
States, a significant portion of the energy trading continues to be
exempt from any CFTC action to curb excessive speculation.

My bill, the 2008 Prevent the Unfair Manipulation of Prices Act (H.R.
6330), would end these exemptions, to ensure that excessive speculation
is not driving these markets beyond supply and demand fundamentals.

The 2008 PUMP Act, the most comprehensive energy speculation bill in
Congress, would address:

-   **Bilateral Trades:** These trades are made between two individuals
    and are not negotiated on a trading market.  Because the Farm Bill
    only closed the Enron Loophole for trades on electronic exchanges,
    these bilateral trades remain in the dark. 

> The PUMP Act would require that these bilateral trades are also
> subject to CFTC oversight.

-   **Foreign Boards of Trade:** Petroleum contracts offered through the
    InterContinental Exchange (ICE) on ICE Futures are cleared on a
    foreign board of trade in London.  On average, more than 60 percent
    of traders on ICE Futures are located in the United States. They're
    trading West Texas Crude, with a delivery point in the United
    States. That's a foreign board of trade in name only.

> Recently, ICE Futures agreed to provide the CFTC with trader
> information and to set position limits for their traders. However,
> this step is not enough. ICE still has a revised "No Action" letter,
> meaning that beyond information sharing and position limits, CFTC
> still won't have any authority to enforce US laws.
>
> In addition, NYMEX is in the process of offering US traders access to
> the exchange in Dubai, raising similar questions for that market.
>
> To clarify CFTC's jurisdiction over these "foreign" boards of trade,
> the 2008 PUMP Act would give the CFTC authority over these exchanges
> if they are using computer terminals in the United States, or they are
> trading energy commodities that provide for a delivery point in the
> United States.

-   **Swaps Loophole:** Swaps are currently excluded from requirements
    for position limits to prevent excessive speculation. Today,
    eighty-five percent of the futures purchases tied to commodity index
    speculation come through swap dealers.

> Because there are no requirements for position limits, these swaps
> have grown exponentially, driving crude oil prices higher. By
> eliminating this exemption, swaps would be subject to position limits
> to prevent excessive speculation.

-   **Bona Fide Hedging Exemption:**  The Commodity Exchange Act allows
    exemptions from position limits for businesses "to hedge their
    legitimate anticipated business needs."

> However, in 1991, CFTC authorized the first "bona fide hedging"
> exemption to a swap dealer (J. Aron and Company, which is owned by
> Goldman Sachs) with no physical commodity exposure, and therefore, no
> legitimate anticipated business need.
>
> Since 1991, 15 different investment banks have taken advantage of this
> exemption, even though they do not have a legitimate anticipated
> business need.
>
> The 2008 PUMP Act would clarify that "legitimate anticipated business
> needs" does not mean energy speculators.

-   **Strong aggregate position limits:** Once all of these loopholes
    are closed, we can then take effective steps to curb excessive
    speculation.

> My bill would require the CFTC to set aggregate position limits on
> energy contracts for a trader over all markets. Especially with the
> growing number of markets, speculators can currently comply with
> exchange specific position limits on several exchanges, while still
> holding an excessive number of total contracts in the aggregate. 
>
> By setting strong aggregate position limits over all markets, CFTC
> would be able to curb excessive speculation by making sure traders
> aren't amassing huge positions in a commodity in an attempt to play
> one exchange off of another.

By closing all of these loopholes and setting strong aggregate position
limits, CFTC would be better able to monitor trades to prevent market
manipulation and help eliminate the unreasonable inflation of energy
prices caused by excessive speculation, helping to protect American
consumers.

The 2008 PUMP Act has 60 bipartisan cosponsors, and has been endorsed by
several agriculture, airline, labor, and industry groups, including the
National Farmers Union, the Air Transport Association, the International
Brotherhood of Teamsters, and the Industrial Energy Consumers of
America, which is a coalition of more than 35 different companies such
as Dow Corning, Goodyear, BASF, US Steel, Tyson Foods, and International
Paper, amongst others. The full list of groups endorsing the 2008 PUMP
Act is listed on the endorsement letter that I have included with my
testimony. I have also included a section by section description of the
2008 PUMP Act.

I understand that there is literally a "War Room" that has been created
by those on Wall Street who would like to continue to see energy trading
remain in the dark. I'm sure they're hiring a lot of lobbyists and
making every attempt they can to discredit those who are calling for
reform.

However, I urge the members of this Committee and my colleagues in the
House to look at the evidence for themselves. We can either continue
with the status quo, and excessive energy speculation can continue to
inflate energy prices beyond underlying supply and demand fundamentals.
Or, we can stand up for our constituents, who facing high prices at the
pump, and our nation's businesses, who are struggling to cope with a
weak economy and high production and transportation costs due to energy
prices.

Excessive speculation is having a devastating effect on energy prices,
causing significant hardship for our entire economy. I look forward to
working with Chairman Peterson and the members of the Ag Committee to
send legislation to the President's desk to address excessive
speculation in energy markets, to offer consumers some relief at the
pump.