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S. HRG. 110–768 

ENERGY INFORMATION ADMINISTRATION’S 

FORECASTS FOR OIL AND GASOLINE PRICES 

HEARING 

BEFORE A

SUBCOMMITTEE OF THE 

COMMITTEE ON APPROPRIATIONS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

SPECIAL HEARING 

JUNE 25, 2008—WASHINGTON, DC 

Printed for the use of the Committee on Appropriations 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 
(II) 

COMMITTEE ON APPROPRIATIONS 

ROBERT C. BYRD, West Virginia, Chairman 

DANIEL K. INOUYE, Hawaii 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

BARBARA A. MIKULSKI, Maryland 

HERB KOHL, Wisconsin 

PATTY MURRAY, Washington 

BYRON L. DORGAN, North Dakota 

DIANNE FEINSTEIN, California 

RICHARD J. DURBIN, Illinois 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

JACK REED, Rhode Island 

FRANK R. LAUTENBERG, New Jersey 

BEN NELSON, Nebraska 

THAD COCHRAN, Mississippi 

TED STEVENS, Alaska 

ARLEN SPECTER, Pennsylvania 

PETE V. DOMENICI, New Mexico 

CHRISTOPHER S. BOND, Missouri 

MITCH MCCONNELL, Kentucky 

RICHARD C. SHELBY, Alabama 

JUDD GREGG, New Hampshire 

ROBERT F. BENNETT, Utah 

LARRY CRAIG, Idaho 

KAY BAILEY HUTCHISON, Texas 

SAM BROWNBACK, Kansas 

WAYNE ALLARD, Colorado 

LAMAR ALEXANDER, Tennessee 

CHARLES KIEFFER, Staff Director 

BRUCE EVANS, Minority Staff Director 

SUBCOMMITTEE ON ENERGY AND WATER DEVELOPMENT

BYRON L. DORGAN, North Dakota, Chairman 

ROBERT C. BYRD, West Virginia 

PATTY MURRAY, Washington 

DIANNE FEINSTEIN, California 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

DANIEL K. INOUYE, Hawaii 

JACK REED, Rhode Island 

FRANK R. LAUTENBERG, New Jersey 

PETE V. DOMENICI, New Mexico 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

ROBERT F. BENNETT, Utah 

LARRY CRAIG, Idaho 

CHRISTOPHER S. BOND, Missouri 

KAY BAILEY HUTCHISON, Texas 

WAYNE ALLARD, Colorado 

Professional Staff 

DOUG CLAPP

ROGER COCKRELL

FRANZ WUERFMANNSDOBLER

SCOTT O’MALIA (Minority) 

BRAD FULLER (Minority) 

Administrative Support 

MICHAEL BAIN
(III) 

C O N T E N T S 

Page 

Opening Statement of Senator Byron L. Dorgan .................................................. 1 

Opening Statement of Senator Pete V. Domenici ................................................. 3 

Statement of Senator Patty Murray ...................................................................... 5 

Prepared Statement ......................................................................................... 6 

Statement of Senator Wayne Allard ...................................................................... 6 

Statement of Senator Robert F. Bennett ............................................................... 8 

Statement of Guy Caruso, Administrator, Energy Information Administration, 

Department of Energy ......................................................................................... 10 

Prepared Statement ......................................................................................... 12 

EIA’s Current Oil and Gasoline Price Forecast and Market Analysis ................ 13 

Analytical Methods .................................................................................................. 14 

Market Fundamentals ............................................................................................. 16 

Financial Markets and Oil Prices .......................................................................... 18 

Outer Continental Shelf .......................................................................................... 30 

OCS Production ....................................................................................................... 39 

Additional Committee Questions ............................................................................ 43 

Questions Submitted by Senator Dianne Feinstein .............................................. 43 

(1) 

ENERGY INFORMATION ADMINISTRATION’S 

FORECASTS FOR OIL AND GASOLINE PRICES 

WEDNESDAY, JUNE 25, 2008 

U.S. SENATE, SUBCOMMITTEE ON ENERGY AND WATER DEVELOPMENT, COMMITTEE ON APPROPRIATIONS, Washington, DC. 

The subcommittee met at 2:35 p.m., in room SD–192, Dirksen 

Senate Office Building, Hon. Byron L. Dorgan (chairman) presiding. 

Present: Senators Dorgan, Murray, Feinstein, Domenici, Bennett, 

Craig, and Allard. 

OPENING STATEMENT OF SENATOR BYRON L. DORGAN

Senator DORGAN. I am going to call the hearing to order. This is 

a hearing of the Appropriations Subcommittee on Energy and 

Water Development, an oversight hearing on the Energy Information Administration’s fiscal year 2009 budget request, as well as a 

discussion of forecasts on oil and gasoline prices. 

Mr. Caruso, the Administrator, we appreciate your being here. I 

know that from watching the news reports, you have been in Saudi 

Arabia for the meeting called by the Saudis that was held, involving people from around the world. We know that you have traveled 

a lot of miles recently and are perhaps weary, but we appreciate, 

nonetheless, your coming to this discussion. 

The Energy Information Administration is a very important 

agency and department, and the President has requested increased 

funding for the EIA. The EIA, as you know, produces reports and 

information that is quoted by sources all across this country on the 

issue of energy supply, energy demand, energy price, and many related matters. So what you do and say and think and evaluate is 

very important in this country. You make short-term forecasts of 

energy prices. These are presumably to be benchmarked as to the 

direction of critical energy resources and their relationship to our 

economy. 

I want to go through some charts today. The purpose of calling 

you here is not to pass judgment on your agency. I think your 

agency is enormously valuable and important. I will say to you, Mr. 

Caruso, we have had the opportunity to sit across the dais from 

each other in the Energy Committee at hearings you have attended, and I know what you think, by and large, of what is happening in the marketplace. You know what I think. 

But I want to go through a series of charts, and I am going to 

ask questions of you following your statement and the recognition 
2 

of others who will wish to make statements. But I do that because, 

as we begin a discussion about the EIA and what has happened at 

the EIA recently, I want to describe the at least beginning point 

for me of what I try to understand is happening in the marketplace. 

The price of oil and gas has skyrocketed. The last 12–14 months, 

the price of oil has doubled. I cannot see anything in the fundamentals of supply and demand or the acknowledgement of what 

might or might not happen or be necessary in the future with respect to India and China, two large potential consumers in the future. I see nothing that has fundamentally changed or altered 

things sufficiently so that it would justify a doubling of the price 

of oil. 

That being the case, I want to go through a few charts, and I will 

do this very briefly. This chart describes in graphic form what has 

happened to the price of oil, as it has nearly doubled in a year. It 

is pretty startling when you think about it, that the price of oil 

would double in a year. And the question is what has happened in 

the construct of this graph—what has happened in the middle of 

that that would encourage or support, from a fundamentals standpoint, the doubling of the price of oil? 

We will go on to the next one. This is a chart. I went back and 

took a look at what the EIA has predicted in each case, and this 

is a very interesting chart. It is not meant to say I told you so at 

all, but it is, based on what I could find, what the EIA has predicted would happen. In May 2007, last year, oil was about $65, and that line on the 

bottom is where you thought oil would go. July 7, that is where you 

thought oil would go. September that is where you thought it 

would go. And you go right up the line. 

And in fact, take a look at the red line which is where the price 

of oil has actually gone, and we will see that for whatever reason— 

I assume the EIA is looking at the fundamentals, supply, demand, 

all kinds of things in the marketplace and evaluating what you 

think would justify what price. So you make a projection. But what 

has happened here is the projection is way, way, way off, not even 

close because the price of oil has gone up like a Roman candle. 

So I am going to save that chart because we will talk about that 

more. 

But I was interested in another chart as well that I put together. 

It is a chart that shows the projection of Goldman Sachs. Now, that 

is a big, old player in this marketplace. And they evaluated where 

they thought—and they would make public pronouncements where 

they thought the price of oil would go. Those gray areas represent 

their range. Interestingly enough, they came a lot closer because 

they were in the marketplace and had some ability to figure out 

where this was going or maybe even the ability to help make it go 

to where they were projecting. But those gray areas are where they 

were predicting the price to be. And the last gray area is a new 

announcement by Mr. Murdy from Goldman Sachs, the possibility 

of $150 to $200 a barrel for oil, very different projections from a 

very big player in the marketplace. 

Why are they hitting their gray areas even after they announce 

them and their projections are so very different than the EIA? 
3 

Let me go on, if I might, to a study that was done by the House 

of Representatives released a couple days ago. It said the explosive 

growth of speculation in the oil futures market—2,037 percent of 

the activity in that market was by speculators. In 2008, 71 percent, 

that was a House Subcommittee on Oversight and Investigations, 

so a dramatic growth in speculation in the futures market. 

Next, this month, the past month, Secretary Bodman said the 

reason we are looking at these very high prices for oil is strictly 

supply and demand. 

The next quote is from you, Mr. Caruso. ‘‘Our view is that fundamentals are pulling the market along and the investors are looking at the same factors we are and saying they think this market 

has more up-side potential.’’ 

Finally, this past week in Saudi Arabia, Secretary Bodman says, 

‘‘There is no evidence that we can find that speculators are driving 

futures prices for oil.’’ 

Now, I describe all that to you because I happen to think most 

of it is inaccurate, and the EIA is especially important to this country. The work you do is important. The work your employees do is 

important to this country. And I am hoping that we can have a discussion today not only about your budget, but also about the fundamentals and what is happening with the prices. 

My own view is very different than yours, I think, and also Secretary Bodman’s. My view is that there is no other explanation, no 

other conceivable explanation in the last 12 to 14 months that 

would justify a doubling of the price of oil. Fourteen months ago, 

was there an expectation that the Chinese would like to drive more 

cars? Sure. People from India would like to drive more vehicles? 

Sure. Are they going to need gas stations? You bet. We knew all 

of those things 14 months ago. 

In fact, over the last 14 months, people have been driving less 

in this country. We are prodigious users of energy, but people are 

driving less. You have seen the reports, 4.5–5 billion fewer miles, 

and therefore there is less gasoline going through the carburetors. 

Demand is down, and for the first 5 months of this year, crude oil 

inventories were up. So if supply is up, and demand is down, one 

would expect prices to moderate. In fact, prices continued to go up. 

The Saudis announced that they are going to produce 700 million 

barrels or maybe even 800 million additional barrels of oil per day 

for a period. One would expect if supply goes up, prices come down. 

Yet, prices go up instead. 

There is a lot happening here that I think is attributable to unbelievable excess speculation occurring in the marketplace, and I 

am trying to understand it. Others are, and some people strongly 

say that’s not the case. I believe strongly it is. And I am hoping 

we can have a discussion about that, Mr. Caruso, today. 

Let me call on my colleague, the ranking member, Senator 

Domenici. 

OPENING STATEMENT OF SENATOR PETE V. DOMENICI

Senator DOMENICI. Well, thank you very much, Mr. Chairman. 

I think you know how much I respect you and how much I appreciate the ability to work with you after you took over and we still 

continue down the same steps, for the most part, and walk up the 
4 

same steps. And we seem to be hitting on the same wavelengths 

more times than not. 

But I too have been thinking that what you are trying to express 

here may be the case, but I can tell you I have come to the opposite 

conclusion. I wish you well, but I do not believe that there is any 

body of experience or authority out there that would say that speculation and speculators have the biggest role or even a big role in 

the price of oil as it moved up during the last 2 years. 

Now, I want to be careful to say that there are factors that are 

at play that are unusual for this commodity. As I see it, I choose 

to read people like Daniel Yergin—I guess you know of him, do you 

not, Mr. Caruso? And he is one of the foremost energy experts. I 

do not believe anybody has ever said he has any interest other 

than the facts. And the Energy Information Agency and many 

other experts have attributed this 300 percent increase of crude oil 

since 2003 to the following supply and demand fundamentals in the 

marketplace. 

First is an increase in demand. World oil consumption continues 

to increase as a result of the double-digit economic growth in China 

and India. And this fundamental growth that everybody sees as the 

first of a number of demand fundamentals, that the more those 

people on the outside look at that, the more they see that the demand is going to continue and the demand is going to grow. And 

that has a very big impact on what they legally bid for the oil. 

Second, world surplus production capacity is at just 1.7 million 

barrels a day. Surplus capacity is 1.7. This is half the capacity we 

had from 1996 through 2003. Reduced capacity leaves world oil 

markets vulnerable to supply disruptions and unable to effectively 

respond to price increases. 

My third point is geopolitical instability is one of those factors 

that must be taken into consideration, and it is very hard for anybody to measure that. But clearly, it has a big impact, positive or 

negative, and in this case, in the top oil-producing countries and 

the instability that goes on there contributes to greater uncertainty 

and for good reason, reasons like the disruption in Nigeria—that 

was a big one, 1.4 million barrels a day. Iraq, 500,000 barrels a 

day. 

And the fourth proposition is that U.S. crude oil inventories are 

falling. You stated to the contrary, but you were careful to talk 

about a specific period of time. I am talking generally. Today we 

are below the 2007 inventory levels and are falling below the 5- 

year average as well. 

And finally, the decline in the value of the dollar has also had 

an impact on the value and price of oil. The U.S. dollar has fallen 

30 percent against major currencies, increasing the price of U.S. 

imports, including oil. 

So it is apparent from your testimony that our national oil crisis 

is a global one. However, I believe there are things that the U.S. 

must do to increase supply and reduce demand and reduce our dependence. Failure to address the high price will have a crippling 

effect on our economy. 

The American people are ahead of us, and by overwhelming majorities, they tell us we should produce more of the energy that we 

own now. The Albuquerque Journal, a respected newspaper, pub-
5 

lished an editorial suggesting that we need to have a domestic production plan ‘‘and self-confidence to use it.’’ According to MMS— 

that is another great source of information and manager of large 

oil properties—only 2.4 percent of the total offshore acreage is 

being leased and 85 percent of the continental offshore is under 

moratorium and represents 574 million acres. 

So, Mr. Chairman, I appreciate your willingness to examine this 

issue. I know you are even interested in the offshore drilling situation in our country and the moratorium that exists. I hope that in 

the not too distant future we might work together on that problem 

and see what we could do. 

I would like to put the editorial from my hometown paper in the 

record. And, Mr. Chairman, I want to be very frank with you. I 

read a lot of editorials and I would be pleased to read any from 

your State. But I truly believe this editorial that I am going to put 

in the record deserves your attention when this hearing is over. I 

think it should be read by policymakers here in the United States 

Senate. They are not a political paper. They are not Democrat or 

they are not Republican. But I think they have come up with the 

role that we as policymakers ought to take during this crisis that 

we have in this country. 

As I view it, I will put it this way. We are going to move from 

the kind of economy we are now, using crude oil derivatives to run 

our transportation system, which is what is eating it up, to something different. It will not be run by crude oil, something different. 

But from now till that time comes—it may be as long as 30 to 

40 years—that is what the experts say. I call that the bridge, the 

bridge from now to that future point. And I say that this editorial 

has caught the significance of that bridge. If we as policymakers 

do not insist that as we go over that bridge, that we use as much 

of our own crude oil as possible, we are shirking our responsibility. 

In other words, we cannot avoid using a certain amount of crude 

oil derivatives, crude oil, and diesel fuel, as we move over this 

bridge for the next 30 or 40 years, and if we do not understand 

that the cost is going to be destructive of our economy—the costs 

we are paying will approach $500 billion a year at the current price 

of oil or slightly lower. If that stayed for a year, we will export 

$500 billion. I can stop. It is not goods. It is just dollars. What we 

get for it is nothing more than some heat out of the pipes of automobiles and trucks and buses. That is all we get for what we send 

across that bridge. 

I think we must relook at the inventory of assets and go out and 

get them during this intervening time because we are not going to 

solve the CO2 problem as we go across the bridge. We have got to 

cross the bridge with crude oil and crude oil derivatives. And we 

will be destroyed long before global warming has any impact if we 

do not do something about the demand on our side by substituting 

local domestic supply. 

And I thank you. 

Senator DORGAN. Senator Murray? 

STATEMENT OF SENATOR PATTY MURRAY

Senator MURRAY. Mr. Chairman, thank you. I will submit my 

statement for the record. 
6 

Let me just say this is extremely timely. As my colleagues know, 

I go home to Washington State every week, and I am shocked at 

the rising price that I pay. I paid $4.45 on Sunday to fill up my 

tank. This has a huge impact on our neighbors as they see more 

and more of their paycheck going to pay for their gas to get to 

work, go to the grocery store, or to do their chores. It is taking a 

bite out of all our small business budgets, our trucker budgets, and 

our school districts which are paying more for gas for their buses. 

Our farmers are telling us that they are paying as much as $500 

a day. That is up 60 percent from last year on diesel fuel alone. 

We are going to be heading into the winter months and the price 

of natural gas and heating oil is going to be hitting those pocketbooks again. 

PREPARED STATEMENT

I appreciate your having this hearing. I think it is very important that we understand this issue from a variety of different perspectives, and I hope we can all learn something from today, thank 

you. 

[The statement follows:] 

PREPARED STATEMENT OF SENATOR PATTY MURRAY

Mr. Chairman, I want to thank you for calling this hearing today. I think it is 

very timely. I go home on the weekends, and the price of gas at the local station 

just keeps rising. It was $4.45 for a gallon of regular unleaded last weekend. Now, 

I fill up my tank when I’m home and I know that $4.45 a gallon is substantially 

higher than the national average. And when it takes $50 to fill the tank on even 

a small, fuel-efficient car, its clear that hard-working Americans are being confronted with difficult choices to make ends meet. 

But these skyrocketing fuel prices are not just affecting consumers. I am hearing 

from many small businesses and family farmers in my State. I am hearing from my 

State’s farmers, some of whom are spending $500 per day—up about 60 percent 

from last year—on diesel costs alone. And as we enter the harvest season, those 

costs are only going to go up. And this is on top of other rising costs that they must 

put into their crops. 

And Mr. Chairman, I’m concerned about the rising cost of natural gas as well. 

During these hot summer months, many folks aren’t thinking about how much it 

will cost to heat their homes this winter. If natural gas prices continue on this upward trend, millions of Americans—particularly low-income families and seniors— 

could face a double whammy of high gas prices and high heating costs this winter. 

When you combine this with the rising cost of food and health care, declining 

home values and overall economic uncertainty, many are simply finding it impossible to make ends meet. 

That is why it’s so important that we’re meeting today to hear from the Energy 

Information Administration about its forecasts for oil and natural gas prices, and 

what it sees moving forward. 

Senator DORGAN. Senator Murray, thank you very much. 

Senator Allard, do you have a statement? 

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Mr. Chairman, I do. 

First of all, I would like to thank you for holding this hearing 

today. This is very timely. I agree that we are dealing with an 

issue that impacts everybody in this country. It is going to affect 

the services, whether you are in the service industry. It is going to 

affect product development, whether you are in manufacturing or 

not. And I think that we have an obligation as a part of this legis-
7 

lative body to at least try and understand the problem and see if 

we cannot come up with a solution based on the facts. 

I believe that we need to take steps that are necessary to move 

us out of this problem as quickly as possible. I am of the view personally that we simply should not take any of our options off the 

table for the consumer. I mean, we should not try and put all our 

eggs in the renewable energy basket. As Senator Domenici pointed 

out, we are through a bridge time. Obviously, the future—we do 

not know what kind of energy is going to be available, but right 

now, what we have most available is the hydrocarbons, oil and gas 

and coal. And hopefully at some point, maybe we can redevelop our 

nuclear energy sources. 

But I would like to just take a moment to talk about this issue 

as to whether there is speculation in the market. So in order to better understand the facts, I have gone to another agency that keeps 

track of what is happening in the markets, and that is the CFTC, 

Commodity Futures Trading Commission. If you look at this chart 

here, there does not show any evidence based on their records of 

speculators driving the futures prices. If you look at that, that is 

pretty much a straight line. You can see where speculation, in 2002 

when gasoline prices were relatively stable, was at a higher level 

than it is now. So the fact is there was a lot of variation in the 

year 2002. 

Then you get into 2003. The highest point probably was between 

2004 and 2005. If you look at that, it is a relatively stable fluctuation curve. Now this is on crude oil futures. 

Then if we go to the next chart that I brought up, again, this is 

CFTC, Commodity Futures Trading Commission. Speculators, they 

do not think, are driving up spot prices because they do not have 

any records that show what has happened. In fact, they show that 

commercial inventories have declined indicating no speculative 

hoarding. And I think that is the key word, ‘‘speculative hoarding.’’ 

Now, there may be hoarding in other sectors. You know, if I was 

a farmer or rancher today and I had crops to put up in August, I 

think I would fill my diesel tank right now as full as I possibly can, 

anticipating the thing. So there is no record of that happening. 

And there is no record of what is happening in the foreign markets. I mean, this is more than just a domestic market. It includes 

worldwide markets. We do not have records of what is happening 

in Japan and what is happening in China, whether they are hoarding fuel or not in their plan. 

So this is one agency that we were able to get some information 

from. I think it needs to be a part of our discussion. 

And so I compliment you for this hearing to give us an opportunity to kind of look at what is happening throughout the world 

and this country. And whatever we come up with as a solution 

should be based on facts. I think transparency is important. I think 

understanding, getting the records available out there—and that is 

what this hearing is all about—is very important so that we can 

make the right decision. So we need to make sure that we can get 

the facts, one way or the other, as best we possibly can, where we 

can get them. Obviously, there are limits as to what we can require 

of foreign countries because they have their sovereignty issues and 

whatnot, but at least make our best guess based on the facts. 
8 

Thank you, Mr. Chairman. 

Senator DORGAN. Thank you very much. 

Senator Bennett? 

STATEMENT OF SENATOR ROBERT F. BENNETT

Senator BENNETT. Thank you very much, Mr. Chairman. 

This is the second such hearing I have been to today. This morning, under the chairmanship of Chuck Schumer, in the Joint Economic Committee, we had a hearing on exactly the same subject 

with a different panel of witnesses. And I will not rehearse everything that came out of there but share with you several things that 

I learned at that hearing that added to my understanding of this. 

You made reference in your opening statement, Mr. Chairman, 

about, gee, we knew this was coming or we knew these circumstances would be in place. One of the witnesses this morning 

said—and I had not focused on this—when Nigeria went down as 

a result of the activities that occurred with the insurgents or terrorists or whatever we call them, they cut the amount of world oil 

supply as much as the Saudis raised it, so that everything the 

Saudis put on the market to try to lower the price was offset by 

taking Nigeria off line. And he said one of the things you could do, 

if you are talking about trying to bring the world price down, would 

be diplomatic efforts to try to get Nigeria back on. And he used 

that as an example to demonstrate how uncertainties in the world 

oil market were a major reason why we see these prices being paid. 

I had known and they stressed the fact that per capita consumption in the United States has come down dramatically since the 

1970s and the oil shock that occurred with OPEC’s boycott. That 

means that consumption in the United States percentage-wise has 

less an effect on the world market than it used to. If our per capita 

consumption is coming down—yes, our total number of population 

is going up. So the national consumption of oil is going up but very 

slightly compared to other countries and particularly compared to 

China, which means American leverage on the overall market is 

continuing to shrink. I found that to be an interesting thing to 

think about. 

Now, the one that I had not thought of, although I guess I really 

understood it, was the impact of the lack of people and equipment. 

One of the witnesses stressed that we cannot get the people to man 

the ships to go out to offshore drilling. We cannot get people to do 

much of the work. There is a labor shortage in this field. And as 

a consequence, we also do not have equipment in many, many 

places. That resonated with me because we have oil being produced 

right now in eastern Utah that is not being refined, and the reason 

it is not being refined—it is just growing in inventory—is that 

there is not any refinery capacity to deal with it. 

Now, we have refineries in Salt Lake City that are going absolutely full blast. What are they doing? They are refining Canadian 

crude. As the Canadians increase their production out of tar sands, 

the easiest way for the refineries in Salt Lake to get crude to refine—it is cheaper and easier to have it come down by a pipeline 

from Canada than it is to bring it where there is no pipeline from 

eastern Utah. So producers in eastern Utah are producing oil that 

is growing in the inventory without the refining capacity, and this 
9 

one witness said a large part of the bottleneck is not overall production. Although he did agree that worldwide you needed more 

production. He said it is the inability to turn it into usable product 

because of a shortage of both people and equipment. 

And I thought I would share with you that insight that came out 

of this morning’s hearings. And I look forward with great interest 

to what we are going to learn this afternoon. 

Senator DORGAN. Senator Bennett, thank you very much. 

This will be an interesting hearing, frankly. I would observe you 

can put together whatever hearing you like. Actually I could fill the 

table with experts, I would say to Senator Domenici. There are experts who have testified before the Senate Energy Committee and 

in other committees who have worked in this industry for 30 years 

who say that there is an unbelievable amount of speculation, that 

the price of oil should not be above $60 or $70 a barrel at this 

point. The market is broken. It is not working. So I could fill these 

chairs with experts on that side of the issue, and you all could fill 

chairs with people who say what speculation, are you kidding me? 

So we have chosen instead to have Administrator Caruso who 

represents the agency, the Energy Information Administration that 

works on these issues for us. Mr. Administrator, thank you for 

coming. We will recognize you for a statement, after which I think 

we will have an interesting occasion to discuss these issues. 

Senator DOMENICI. Mr. Chairman? 

Senator DORGAN. Senator Domenici? 

Senator DOMENICI. Before you proceed, could I just—would you 

permit me an observation? You just indicated that on this side 

would be those who say there is no speculation. On that side, there 

would be those who say there is. I would hope that you would not 

do that. I do not think we are on the side that says there is not 

and your side that says there is. I think we are genuinely trying 

to find out what is going on and what we can have an impact on. 

It is in that context that we look at speculation or no speculation. 

I could make an easy case that if we went after speculators and 

did this and this and this, we would save a whole lot of money for 

the American people. The point is I do not know how to do that 

because every time I try to find out, I am told there is no way, 

which leads me to think it is very hard to prove speculation. And 

that is all I mean when I talk on my side. It is hard to prove it. 

If it is there, I would join you. I would be right behind you if it 

is there. 

And I thank you for letting me talk. I will shut up now. 

Senator DORGAN. Well, Senator Domenici, my reference only was 

to listen to the statements, and my point was that there are some 

on this subcommittee perhaps, as there is on every committee, who 

believe very strongly that this is the cause of speculation, a dramatic run-up in prices. There are others who believe that is not the 

case. I think all three of you expressed great doubt that that is the 

case. And so that was my only reference. It was not try to separate 

us versus them. I think you know that. 

Senator BENNETT. It is a matter of degree, Mr. Chairman. Certainly I think the hearing is well timed and the point of the hearing is appropriate. 

Senator ALLARD. And where it might be occurring. 
10 

Senator DORGAN. Well, let us proceed to listen to Administrator 

Caruso. As I said, I think we will have an interesting hearing, and 

it is not about us versus them on any panel. It is about what is 

happening. What on earth is happening to the American people 

here, and what are its consequences and what are its causes? Let 

us spend some time talking about that. 

Mr. Caruso, proceed. 

STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY 

Mr. CARUSO. Thank you, Mr. Chairman and members of the committee. I, once again, appreciate this opportunity to appear before 

you today to discuss the factors that the Energy Information Administration considers when making our short-term forecasts on 

crude oil and gasoline prices. I especially appreciate your opening 

remarks and the confidence in the hard-working men and women 

of the Energy Information Administration. 

We are the independent statistical agency of the Department and 

we do not promote or advocate policy and do not represent the administration’s views necessarily or the Department’s, so I hope we 

can have a very open discussion. 

Since I testified before you in December 2007, crude oil prices have increased, as your chart indicated, from $92 per barrel in December to actually $133 before I left the office today. They were 

down several dollars. 

Our current forecast is for crude oil to average $122 for the full year of 2008 and increase a bit to $126 for 2009. So we are looking 

at continued high crude prices relative to the history. Also, regular-grade retail gasoline prices have risen from $3.02 in December 2007 to a national average of $4.08 last week. We are 

forecasting the price of regular gasoline to average $3.78 per gallon 

for 2008 on a national average basis, and, as Senator Murray 

pointed out, in some regions like the west coast, it is much higher 

than that. We expect prices to be high as well in 2009; $3.92 is our 

national average projection for 2009. 

As highlighted in our most recent monthly projections, several 

factors are combining to cause oil supply to struggle to keep up 

with the demand growth, as I am sure was discussed at this morning’s hearing as well, thereby accounting for much of the upward 

trend in oil prices. Our analysis to date suggests that market fundamentals—strong demand, disappointing supply growth, concern 

over actual or perceived supply disruptions, relatively low inventories, and most importantly, very limited spare production capacity and global refining capacity constraints—are the primary drivers of global oil prices. The current very tight oil market balances 

and the possibility of further supply disruptions are causing prices 

to rise to unprecedented highs. 

Of course, we recognize that commodities markets are increasingly complex, as indicated by the charts that were put up before 

in the opening statements, and notwithstanding our views regarding the fundamentals as the dominant factors driving oil prices 

higher in today’s markets, we share this committee’s interest in exploring how information from markets in energy derivatives could 

be used to improve forecasts of crude oil and gasoline prices. 
11 

One of the key challenges we face is that current measures that 

are used as proxies for speculative activity, such as the total open 

interest in the NYMEX—one chart was shown here today—the net 

long positions of noncommercial traders in the NYMEX futures 

market and investment in commodity index funds all have limitations. We really do not know the total size and nature of commodity index fund activity and speculation. The development of 

better activity measures and more transparent information regarding activity in markets for energy-related financial derivatives 

would facilitate additional econometric analysis of these issues. 

We welcome the comments from several members of the committee asking for greater data transparency. EIA relies on a number of tools to project crude oil prices, including an econometric 

model of oil production, inventories, and spare capacity. We also estimate how disruptions could affect prices and past oil forecast errors and extensive expert judgment on domestic and international 

markets are also relied upon. Therefore, better information, greater 

data transparency would inform all of those efforts. 

We continually strive to improve our short-term forecasts in the 

face of considerable data gaps in key countries, particularly those 

of the emerging economies, such as China and India. We also rely 

on data on changes in demand and supply that are not reflected 

in timely data, industry changes, new methods of estimation and 

forecasting, and more recently, financial factors that may be affecting the run-up of oil prices. 

Turning to gasoline prices, it is clear that crude oil prices are a 

dominant factor. A crude oil price of $135 per barrel alone translates into a cost of $3.20 per gallon before taxes or other costs and 

profits associated with refining, distribution, and marketing. In addition to the cost of crude oil, motor gasoline prices also include the 

wholesale margin, which is the difference between the wholesale 

price of a gallon of gasoline and a gallon of crude oil, a retail margin reflecting the cost and profits associated with distribution to 

and sales by retail outlets, and taxes at the State, Federal, and 

local levels. EIA’s short-term forecasts also incorporate information 

on market conditions and events that cause the wholesale gasoline 

margin to vary significantly over time. For example, gasoline margins were high relative to historic norms last summer, but are 

much lower this summer. 

Recent experience with very high and rapidly rising oil prices 

and large deviations of actual prices from forecasts, as highlighted 

in the chairman’s opening remarks, highlight the challenges faced 

by EIA and other forecasters. While EIA’s recent forecasts have 

missed the mark in absolute terms, they have outperformed the 

monthly forecasts by a number of top consultancies in the industry 

over recent years. We also track our projections versus the New 

York Mercantile Exchange futures contract, and we have consistently been equal or better than the NYMEX at predicting oil prices 

6 months into the future. 

As a side note, if you had replaced the EIA forecasts in your 

chart with the NYMEX futures prices for those exact same months, 

it would look almost exactly the same, just as a point of information, Mr. Chairman. 
12 

EIA has already acted to improve both its short-term and longterm modeling capabilities. In the short-term model, for example, 

we have added more regional detail and included expected levels of 

weather-related supply disruptions based on NOAA’s seasonal 

weather forecasts. Our fiscal year 2009 budget request proposes additional improvements in both the data quality used as input to 

models and the modeling tools themselves. The budget request also 

supports several initiatives mandated in the Energy Policy Act of 

2005 and the Energy Independence and Security Act of 2007, including tracking and reporting of refinery outages, which I know 

you are very interested in, Mr. Chairman, and the fuller integration of ethanol and other biofuels in our energy data surveys. 

Let me conclude by placing EIA’s role in the broader context of 

data collection and analysis for both physical and financial markets. EIA clearly has the lead role in collecting and analyzing data 

regarding physical energy markets. Our energy data collection programs are widely viewed as a model for others throughout the 

world in developing transparent, timely, and high quality data. 

However, as highlighted in our budget request, there are important 

needs for improvement in this area. 

Turning to data on energy-related financial derivatives, EIA does 

not have the lead role, but we are actively supporting efforts by the 

CFTC and other agencies to improve that data. EIA is a member 

of the CFTC’s Energy Markets Advisory Committee, and we are 

staffing and advising the Department on the interagency policy 

task force. Once reliable data on energy derivatives become available, I would expect EIA to be a key user of that data as we explore 

ways to improve our forecasting activities by incorporating it alongside the energy and economic data we already use in our analysis 

activities. 

PREPARED STATEMENT

This completes my oral testimony, Mr. Chairman. I would be 

glad to respond to any questions that you and any other members 

of the committee may have. Thank you very much. 

[The statement follows:] 

PREPARED STATEMENT OF GUY CARUSO

Mr. Chairman and members of the committee, I appreciate the opportunity to appear before you today to discuss the factors the Energy Information Administration 

(EIA) considers when making our short-term forecasts of oil and gasoline prices. 

EIA is the independent statistical and analytical agency within the Department 

of Energy. While we do not promote, formulate, or take positions on policy issues, 

we do produce objective, timely, and relevant data, projections, and analyses that 

are meant to assist policymakers, help markets function efficiently, and inform the 

public. Our views are strictly those of EIA and should not be construed as representing those of the Department of Energy or the administration. 

As requested in your invitation letter, my testimony focuses on recent forecasts 

for oil and gasoline prices and the factors that are considered in making these forecasts. It also touches briefly on our forecasting record and elements in our fiscal 

year 2009 budget request that will contribute to better forecasting and analyses. 

To briefly summarize the main points addressed in this testimony: 

—Since I last testified on this issue in December 2007, crude oil prices have increased from a monthly average of $92 per barrel (December 2007) to more than 

$135 per barrel in June 2008. Our current forecast is for crude oil prices to average $122 per barrel in 2008 and $126 per barrel in 2009. In addition, national 

average regular-grade retail gasoline prices have risen from $3.02 per gallon in 
13 

December 2007 to $4.08 per gallon as of June 23, 2008. We are forecasting the 

price of regular-grade gasoline to average $3.78 for 2008 and $3.92 for 2009. 

—As highlighted in our most recent monthly projections, several factors are combining to cause oil supply to struggle to keep up with demand growth, thereby 

accounting for much of the upward trend in oil prices. Our analysis to date suggests that market fundamentals—demand, supply (including actual or perceived 

supply disruptions), inventories, and spare production capacity—are the primary drivers of global oil prices. The current very tight oil market balances and 

the possibility of further supply disruptions are causing prices to rise to unprecedented highs. 

—While fundamentals are the primary drivers of current oil markets, we are 

thinking about possible ways to use information about activity in the markets 

for energy derivatives to improve our forecasts. One of the challenges we face 

is that current measures that are used as proxies for speculative activity, such 

as total open interest in the New York Mercantile Exchange (NYMEX) futures 

market, net-long positions of non-commercial traders in the NYMEX futures 

market, and investment in commodity index funds, all have limitations. The development of better activity measures and more transparent information in 

these areas would facilitate our efforts. 

—EIA relies on a number of tools to project crude oil prices, including an econometric model of oil production, inventories, and spare capacity; estimates of how 

disruptions affect or could affect prices; past oil price forecast errors; and extensive expert judgment on domestic and international oil markets. 

—We continually strive to improve our short-term forecast in the face of considerable data gaps in key countries, changes in demand and supply that are not 

reflected in timely data, industry changes; new methods of estimation and forecasting; and more recently, financial factors that may be affecting the run-up 

of oil prices. 

—Crude oil prices are the dominant determinant of gasoline prices. Motor gasoline prices also include the wholesale margin (the difference between the wholesale price of a gallon of gasoline and a gallon of crude oil), a retail margin reflecting the costs and profits associated with distribution to and sales by retail 

outlets, and taxes at the Federal, State and local levels. EIA’s short-term forecasts incorporate information on market conditions and events that cause the 

wholesale gasoline margin to vary significantly over time, for example, gasoline 

margins were high relative to historical norms last summer but are much lower 

this summer. 

—Recent experience with very high and rapidly rising oil prices and large deviations of actual prices from forecast values highlight the challenges faced by 

EIA and other forecasters. While EIA’s recent forecasts have missed the mark 

in absolute terms, they have outperformed the monthly forecasts by top 

consultancies in the industry over the past couple of years. We also track our 

projections versus the NYMEX futures contract, and we have consistently been 

equal or better than the Exchange at predicting oil prices 6 months into the future. 

—EIA has already acted to improve both its short- and long-term modeling capabilities. In the short-term model, for example, we have added more regional detail and included expected levels of weather-related supply disruptions based on 

National Oceanic and Atmospheric Administration (NOAA) seasonal weather 

forecasts. Our fiscal year 2009 budget request proposes additional improvements in both the data quality used as input to models and in the modeling 

tools themselves. The budget request also supports several initiatives mandated 

in 2005 and 2007 energy legislation, including tracking and reporting of refinery 

outages and fuller integration of ethanol and other biofuels into our energy market data surveys. 

EIA’S CURRENT OIL AND GASOLINE PRICE FORECAST AND MARKET ANALYSIS

Each month EIA produces its Short-Term Energy Outlook (STEO), which provides 

a 13–24 month projection of U.S. and, where appropriate, global energy supplies, energy demands, and prices. The price of oil, in particular, the price of West Texas 

Intermediate (WTI) crude oil, the U.S. benchmark crude oil price, is one of the 

prices for which we provide monthly projections. Since I last testified on this issue 

in December 2007, WTI prices have increased from monthly average of $92 per barrel (December 2007) to current levels of more than $135 per barrel. In our June 

STEO, we are forecasting WTI crude oil prices to average $122 per barrel in 2008 

and $126 per barrel in 2009. In addition, national average regular-grade retail gasoline prices have risen from $3.02 per gallon in December 2007 to $4.08 per gallon 
14 

1See for example, ‘‘Forecasting Crude Oil Spot Price Using OECD Petroleum Inventory Levels,’’ Ye, Zyren, Shore, International Advances in Economic Research (2002) 8: 324–333; ‘‘A 

Monthly Crude Oil Spot Price Forecasting Model Using Relative Inventories,’’ Ye, Zyren, Shore, 

International Journal of Forecasting (2005) 21: 491–501; and ‘‘Forecasting Short-Run Crude Oil 

Price Using High- and Low-Inventory Variables,’’ Ye, Zyren, Shore, Energy Police (2006) 34: 

2736–2743. 

as of June 23, 2008. We currently are forecasting the price of regular gasoline to 

average $3.78 for 2008 and $3.92 for 2009. 

As highlighted in EIA’s June STEO, several factors are combining to cause oil 

supply to struggle to keep up with demand growth, thereby accounting for much of 

the upward trend in oil prices. Based on our analysis to date, we believe that market fundamentals—demand, supply (including actual or perceived supply disruptions), inventories, and spare production capacity—are the primary drivers of global 

oil prices. The current very tight oil market balances, the possibility of further supply disruptions, and continued strong economic growth in emerging markets are 

causing prices to rise to unprecedented highs. 

In recent months, there has been growing concern about the role oil futures and 

swaps markets are playing in the increase in WTI prices. In particular, what is 

causing the increase in the volume of trades? What is causing increased influx of 

index funds in the market? Is the increasing participation driving oil prices higher? 

Or are oil prices increasing participation? Is the inflow of speculators an appropriate 

focus of regulatory concern? Is the oil price best described as an asset price bubble? 

Not surprisingly, there is a growing body of inconsistent opinion on the many 

issues surrounding futures market behavior and oil prices, and little systematic and 

comprehensive economic analysis. The Commodity Futures Trading Commission 

(CFTC), which has done extensive work in this area and is responsible for oversight 

and regulation of U.S. commodity futures markets, recently announced several initiatives to enhance the oversight of energy and agricultural futures markets, including creating the formation of a CFTC-led interagency task force. The task force, 

which includes representatives from the CFTC, Federal Reserve, Department of the 

Treasury, Securities and Exchange Commission, Department of Energy, and the Department of Agriculture, is examining investor practices, fundamental supply and 

demand factors, and the role of speculator and index traders in the commodity markets. 

As outlined above, EIA’s view is that oil markets today are characterized by 

strong demand, limited supply growth, and low spare capacity and that in the nearterm, both the supply and demand curves for oil are now near-vertical. Any small 

shift in demand or supply, or even the perception of a supply shift due to possible 

supply disruptions, will result in significant price increases. However, the increased 

inflow of funds and participants in the futures markets, which I discuss below, may 

indeed affect oil prices to some degree in the short run, but are more likely symptomatic of the tight market conditions and resulting high prices, not the cause. Additional analysis is clearly needed, though we suspect it will be difficult to isolate precisely the impacts on oil prices. We hope our forecasts, and more importantly the 

thinking behind them, help everyone better understand the complexities of these 

continuously changing markets, the critical need for better and more transparent 

supply, demand, and trading data, and the need to constantly test new hypothesis 

with good analytic tools. 

ANALYTICAL METHODS

Oil Price Modeling 

At EIA, we rely on a number of tools to project WTI prices, including an econometric model of oil production, inventories, and spare capacity; estimates of how disruptions affect or could affect WTI prices; past oil price forecast errors; and extensive expert judgment on domestic and international oil markets. We continually 

strive to improve our short-term forecast in the face of considerable data gaps in 

key countries, changes in demand and supply that are not reflected in timely data, 

industry changes; new methods of estimation and forecasting; and more recently, financial factors that may be affecting the run-up of oil prices. 

Econometric Model.—EIA has developed and documented an econometric model 

that looks at the crude oil market over the past 16 years. The model is one part 

of the information used to establish the STEO crude price projection each month. 

The model is regularly updated to reflect changing market conditions. For example, 

during the 1990s, much of the variation in crude oil prices could be explained by 

fluctuations in Organization for Economic Cooperation and Development (OECD) petroleum inventories.1 During this time, there was the typical negative correlation 
15 

2 ‘‘Short-Run Crude Oil Price and Surplus Production Capacity’’, Ye, Zyren, Shore, International Advances in Economic Research (2006) 12:390–394. 3 ‘‘The Recent Disconnect in Crude Oil Price and Inventory Relationship’’, Ye, Zyren, Shore, 

article to be published in upcoming issue of Journal of Energy and Development. 4See, for example, ‘‘Volatility Relationship between Crude Oil and Petroleum Products,’’ Lee 

and Zyren, Atlantic Economic Journal (2007), 35:97–212. 

between inventories and price (high prices, low inventories) in the period that ran 

from January 1992 through June 1999. Following the collapse in oil prices in 1999, 

the Organization of the Petroleum Exporting Countries (OPEC) acted to reestablish 

control of the crude oil market, pulling back on production, and pushing the price 

to $30 for a barrel of crude oil. Still, the negative correlation with inventories persisted. However, around June 2004, this relationship shifted again, this time demonstrating a positive correlation between inventories and crude price. This implied 

additional market activity was likely not captured by the simple inventory-price relationship model. 

Another market variable, excess crude oil production capacity, helps to explain the 

changing price behavior.2 While EIA’s analysis of crude oil prices found that the excess capacity variable added little additional explanatory power during the 1990s, 

in recent years, this variable improves the explanatory power of the model. 

The situation continues to change. The current crude oil market seems to represent a condition of unstable equilibrium. The ultimate price path exhibits an upward-ratcheting or see-saw pattern around the underlying trend, rather than a 

smooth trajectory. This pattern is typical of commodity markets under these conditions. EIA is pursuing further work in this area that shows that recently the relationship between excess capacity and price becomes asymptotic, where small reductions in capacity can generate large price increases.3 This behavior is well recognized in economic literature for industries in which large capital investment costs 

are required to develop new capacity and there is little scope for substituting other 

products to satisfy demand. For crude oil, it indicates that, somewhere in the range 

of 1 to 2 million barrels per day of spare production capacity, the market effectively 

approaches the industry’s production limits, leaving only price to rebalance markets 

as demand grows. 

The current version of the model reflects these changing market conditions and 

contains OECD industrial total petroleum inventory levels, excess crude oil production capacity, and a ratchet variable to capture recent behavior. But there is also 

room for improvements, and EIA is currently exploring ways to measure and forecast oil price volatility 4 and working to better understand trader behavior and 

measure its impact on crude oil prices changes, as discussed below. 

Disruptions Model.—EIA uses its Disruption Impact Simulator (DIS), which is a 

spreadsheet-based tool to estimate the impact of world oil supply disruptions on 

world oil prices and on the U.S. economy, to inform the short-term price path. Given 

the size of the disruption, DIS is able to project changes in world oil prices, the U.S. 

real gross domestic product (GDP), the U.S. unemployment rate, and the U.S. inflation rate. DIS relies on parameters specified by EIA economists, but is flexible to 

allow us to alter any of the parameters used in the model calculation to examine 

a range of ‘‘what if’’ cases. The DIS model is used in conjunction with other models 

when estimating the WTI price path; if there are concerns about potential disruptions, the DIS model helps us examine the impact on oil prices, which can be incorporated in the forecast. 

Hurricane Assessments.—EIA also develops an annual hurricane assessment, 

which we publish along with the STEO in May. The assessment, using NOAA’s prediction regarding storms during the upcoming hurricane season (June 1 to November 30), estimates the amount of oil and natural gas that could potentially be shut 

in during the hurricane season. These estimates are taken into consideration when 

determining our near-term price forecast. 

Motor Gasoline Price Modeling 

Retail motor gasoline prices in the STEO model are forecast as a markup over 

the projected cost of crude oil. The difference between the pump price of gasoline 

and the price of crude oil is made up of three components: (1) the wholesale margin, 

which equals the gasoline wholesale spot price minus the refinery average cost of 

crude oil; (2) the retail margin, which reflects the costs and profits associated with 

distributing gasoline to retail outlets and selling it to consumers; and (3) Federal, 

State and local taxes. 

The wholesale margin is modeled as a U.S. average while five regional equations 

are maintained at the Petroleum Administration for Defense District (PADD) level 

for both the retail margins and taxes. U.S. average retail margins and taxes are cal-
16 

culated by weighting regional margins by each region’s estimated share of total U.S. 

gasoline consumption. In addition, PADD region finished gasoline and motor gasoline blend component inventory equations are also included. Consequently the STEO 

model for gasoline prices includes 26 separate regression equations. 

The difference between the retail price of gasoline and the average refiner cost 

of crude over the last 5 years (January 2003 to December 2007) has ranged from 

a low of $0.73 per gallon (January 2003) to a high of $1.68 per gallon (May 2007). 

The greatest source variation in monthly margins is in the wholesale margin and 

the least variation is in taxes (Table 1). 

The STEO model attempts to capture several market conditions and events that 

contribute to the observed variations in price margins. These include seasonality in 

demand; lags in the pass-through of crude oil prices to wholesale prices and from 

wholesale prices to retail prices; inventories that may be higher or lower than desired; and unusual one-time events that represent outliers that could bias the model 

results, e.g., 9/11, hurricanes. 

However, no model can perfectly predict future price margin variation as current 

market events unfold in ways that have never been observed before. For example, 

EIA expected the current weakness in gasoline consumption and growth in ethanol 

supply would contribute to lower wholesale margins than had been seen over the 

last two summers. However, this combination of events had never been observed before, and wholesale gasoline margins so far this summer have been even lower than 

expected. 

Oil Price Forecast Errors 

Recent experience with very high and rapidly rising oil prices and large deviations 

of actual prices from forecast values highlights the challenges faced by EIA and 

other forecasters. While EIA’s recent forecasts have definitely missed the mark in 

absolute terms, EIA’s forecasts over the last couple of years have outperformed the 

monthly forecasts by top consultancies in the industry. We also track our projections 

versus the NYMEX futures contract, and we have consistently been equal or better 

than the Exchange at predicting oil prices 6 months into the future. 

EIA, the other forecasters, and the NYMEX futures market have generally underforecast the steady increase in the WTI spot price over the last 5 years, but EIA’s 

average 6-month forecast error is the smallest. WTI forecast errors over the last 5 

years have tended to increase for all forecasters and NYMEX as the forecast horizon 

lengthens, but EIA’s forecast error compares favorably to others for all horizons between 6 and 24 months. 

MARKET FUNDAMENTALS

Supply, Demand, Inventories and Spare Capacity. In EIA’s view, recent price increases are an extension of oil market developments originating in the 1990s with 

relatively high inventories, ample surplus production capacity, and oil prices fluctuating around $20 per barrel. When spot prices moved above or below this level, 

the price of futures contracts requiring delivery in distant months generally traded 

close to the $20 level, consistent with a market expectation that producers would 

ensure that spot prices would eventually return to that level. 

However, as leading OPEC member countries shifted towards a tight inventory 

policy and global oil demand recovered from the slowing effect of Asia’s financial crisis, the global market balance tightened, and inventories declined sharply at the beginning of the present decade. Oil prices rose to $30 per barrel, in what might be 

seen as the first leg of the upward trend. By 2003, inventories were drawn down 

sufficiently such that subsequent increases in global demand stretched oil production to levels near capacity. The large, unexpected jump in world oil demand growth 

in 2004, fostered by strong growth in economic activity in Asia and the United 

States, reduced excess production capacity significantly. 

Now, in mid-2008, oil prices have increased by almost 300 percent since January 

2003, but despite higher prices, world oil demand growth remains relatively strong. 

Since 2003, world oil consumption growth has averaged 1.8 percent per year (Figure 

1). Non-OECD countries, especially China, India, and the Middle East, represent the 

largest part of this growth, while at the same time overall non-OPEC supply growth 

has slowed (Figure 2). In the past 3 years, non-OPEC supply growth has been well 

below levels seen just 4 years ago. As a result, the world oil market balance has 

tightened significantly (Figure 3). World oil consumption growth has simply outpaced non-OPEC supply growth every year since 2003. This imbalance increases reliance upon OPEC production and/or inventories to fill the gap. 

World surplus production capacity remains low, at an estimated 1.7 million barrels per day for 2008, which is well below the 1996–2003 annual average of 3.9 million barrels per day (Figure 4). This puts additional upward pressure on prices, 
17 

leaving world oil markets vulnerable to supply disruptions. In addition, this surplus 

capacity is highly concentrated in a few countries, with Saudi Arabia holding almost 

all of this capacity. Without significant surplus capacity, market participants can no 

longer rely on increased production from key members of OPEC to offset supply disruptions and restore balance to avoid significant price changes, as they did in the 

1990s. Industry recognizes the need for new capacity investments, but those additions are costly and come with a significant lag. 

As for inventories, OECD stocks were at record lows in 2003, following the strike 

in Venezuela. Preliminary OECD inventory data for the first part of 2008 show that 

OECD stocks have again fallen below the levels seen in 1996–2002. Because oil use 

has been growing over time, inventories are even tighter when considered on a 

‘‘days of supply’’ basis. In addition, U.S. inventories for crude oil and key petroleum 

products are all relatively low. After remaining relatively high for much of 2006 and 

the first half of 2007, U.S. crude oil inventories have fallen towards the bottom end 

of the average range, even as refinery throughputs have been low so far this year. 

Geopolitical Uncertainty.—There is currently a high degree of uncertainty in 

world oil markets due to fears of the availability of oil supplies. EIA takes these 

factors into consideration when we produce the monthly STEO report. 

Current world oil supplies are highly concentrated. In 2007, the top ten oil producers represented about half of total world supply. In addition, geopolitical risk 

surrounds many of these top producers, either because of current supply disruptions 

(Nigeria and Iraq) or the perceived threat of a disruption (Iran and Venezuela). Finally, as previously discussed, there is very little surplus production capacity available to offset any disruption. In May 2008, there was an estimated 1.4 million barrels per day of surplus production capacity, all located in Saudi Arabia, which represents just 2 percent of world oil demand. The combination of these factors means 

that prices react very strongly to any actual or perceived supply disruption (Figure 

5). 

Supply disruptions are a frequent occurrence in the oil industry. During the past 

24 months, there have been almost two dozen supply disruptions, lasting from a few 

days to many weeks, which affected world oil production and exports. These were 

caused by power failures, workers strikes, pipeline leaks and explosions, cyclones 

and hurricanes, saboteurs, and civil wars. Over half of these resulted in oil production outages of over 100,000 barrels per day. The most significant disruption resulted from the ongoing strife in Iraq and Nigeria. These disruptions have varied 

in size over time, with Iraq losing over 500,000 barrels per day of exports in March 

2008 and Nigeria reaching over 1.4 million barrels per day of shut-in production at 

one point in April. 

While actual supply disruptions directly affect world oil markets due to a loss of 

physical barrels available to the market, much of the impact of supply disruptions 

is due to market perception of the situation. This situation is reinforced by the limited amount of spare production capacity available. As long as potential disruptions, 

both real (e.g., Iraq and Nigeria) or perceived (e.g.., concerns about the potential loss 

of supply from Iran), exceed the amount of additional production capacity that can 

be brought online quickly, geopolitical concerns will weigh heavily on oil markets. 

When constructing our short-term outlook, we take into consideration the current 

disruptions and the potential for additional disruptions, including the probability 

that severe weather could impact oil and natural U.S. production, refining, and 

transport operations as it did in 2005. The specific impacts of these effects vary from 

month to month. 

Value of the U.S. Dollar.—Between January 2007 and March 2008, the value of 

the dollar against the Euro fell by 29 percent while the price of WTI crude oil rose 

by 93 percent. Some analysts have pointed to these common trends as an indicator 

that the declining value of the dollar has contributed to higher oil prices. However, 

during other periods we have seen oil prices rise even as the value of the dollar remain unchanged or even rose. For example, between November 2004 and November 

2006, the value of the dollar strengthened by 12 percent against the Euro, while 

the WTI spot price rose by 35 percent. Since early March 2008, the dollar has held 

its value against the Euro while WTI spot prices increased from $102 per barrel to 

a peak of over $138 per barrel. 

Exchange rates, like oil prices, are signals that transmit information on underlying fundamentals. As in the international oil market, where changes in oil prices 

bring oil demand into balance with oil supply, changes in exchange rates are among 

the signals, along with interest rates, that equate the demand for money and credit 

with their supply. 

There has been no systematic and stable relationship between oil prices and exchange rates over time, which makes econometric analysis problematic. In the current economic environment, it is difficult to parse out econometrically the effects of 
18 

constrained oil supply growth, strong world GDP growth, and the decline in expected rates of return on U.S. assets and their greater risk relative to foreign assets 

as reflected in the weaker dollar. Furthermore, inconsistent price signals caused by 

the global patchwork of petroleum product subsidies may limit the effect of high relative oil world prices on demand, particularly in the developing world. 

FINANCIAL MARKETS AND OIL PRICES

Financial investments in commodities have surged over the last few years as commodities are increasingly being used for portfolio diversification and as a hedge 

against inflation and the weakness of the U.S. economy and the dollar, in addition 

to their traditional roles as providing opportunities to hedge or speculate on price 

changes. Commodities have become attractive as financial assets because of the continued tight balances within many commodity markets (i.e., strong demand for commodities in emerging markets, sluggish supply response to higher prices, low inventories, and low spare capacity), leading to uncertainty about future prices. 

Of particular interest has been the growth in commodity index funds. Traditionally, commodities have been ‘‘bought to use’’ rather than ‘‘bought to hold.’’ In other 

words, a hedging company would buy or sell oil with the intent to make use of it 

in a specified time frame. A trader would buy or sell to later sell or buy before some 

specified time frame. An investor in equities such as a commodities index fund, on 

the other hand, will buy to hold, or even bequeath. Investors in equities will adjust 

their exposure to various risks based on a portfolio that changes with price, but not 

very directly. 

Econometric estimation of the influence of futures market participation or speculation on oil prices is problematic because of the difficulty in measuring the volume 

and direction of speculation. Current measures that are used as proxies for speculative activity, such as total open interest in the NYMEX futures market, net-long positions of non-commercial traders in the NYMEX futures market, and investment 

in commodity index funds, all have limitations. For this reason, we really do not 

know the total size and nature of commodity index fund activity and speculation. 

The development of better activity measures and more transparent information in 

these areas would facilitate additional analysis of these issues. 

Turning to the measures, albeit imperfect, that are available today, open market 

interest on the NYMEX for light sweet crude oil futures and options contracts has 

increased from about 666,000 contracts (each contract is for 1,000 barrels of crude 

oil) on June 24, 2003, to 3,150,000 contracts on May 13, 2008. Over this period the 

price of WTI crude oil has increased from $30 to $125 per barrel. 

One could expect the futures market to affect oil prices over the very short run 

(hours and days) through the transmission of new information that may be distorted 

through the participation of uninformed investors or ‘‘herding’’ behavior. However, 

over the longer run (months and years), it is not obvious that speculation or increased participation in the futures market ‘‘causes’’ higher prices in the physical 

market. Instead, increased futures market activity may simply be a response, in the 

same way oil prices are, to continuing tightness and uncertainty in the physical 

markets. 

Though one might expect that the level of open interest on the NYMEX is correlated with speculative activity, the relationship between total open interest and 

price is unclear. For example, if speculators entered the market expecting prices to 

rise, they would presumably attempt to take long positions on oil futures contracts, 

bidding up the price. However, if speculators entered the market expecting prices 

to fall, they would presumably attempt to take short positions on oil futures contracts, driving down the price. While both of these scenarios would increase open 

interest, they would each have opposite effects on the price of oil futures contracts. 

Because of the ambiguity of total open interest as a measure of the direction of 

speculation and its price impact, the relationship between long contracts and short 

contracts held by non-commercial traders, traders who do not claim to be hedging 

at all, has been used as a proxy to indicate the direction of speculative interest. 

When non-commercial traders are ‘‘net long’’ (the number of long contracts exceeds 

the number of short contracts), it is presumed that speculators are betting on increases in price. If a preponderance of them are making these bets, then the price 

can increase based solely on their own demand. However, the distinction between 

commercial and non-commercial traders is weak. For example, speculative investments in commodity index funds are categorized as commercial rather than noncommercial trades. 

The non-commercial net long positions in crude oil have not been consistently correlated with oil prices. Over the first half of 2007, both non-commercial net long positions in light sweet crude oil and crude oil prices increased. However, the number 
19 

of net-long positions at the end of May 2008 was no higher than they were in June 

2007 even though oil prices have almost doubled over this period. Moreover, in the 

natural gas market, between November 2006 and January 2007, non-commercial positions fell from a net long 29,000 contracts to a net short 113,000 contracts while 

natural gas prices rose slightly. 

The third proxy for speculative activity in commodity markets is the total amount 

of money invested in commodity index funds. However, under the Commodity Futures Modernization Act of 2000, the total amount of money invested in commodity 

index funds is not publicly reported. Thus, estimates of assets under management 

in index funds and the share of those funds that are hedged on the NYMEX crude 

oil futures market vary widely, making any statistical analysis using these data suspect. 

CONCLUSION

Mr. Chairman and members of the subcommittee, EIA has already acted to improve both its short-term and long-term modeling capabilities. Further significant 

improvements in both the data used as input to models and modeling tools are proposed in our fiscal year 2009 budget request. The budget request also supports several initiatives mandated in 2005 and 2007 energy legislation, including tracking 

and reporting of refinery outages and fuller integration of ethanol and other biofuels 

into our energy survey systems. 

While EIA believes that fundamental factors such as strong demand growth, a 

dramatic decline in global surplus crude oil production capacity, and global refining 

capacity constraints are the major factors driving oil prices higher, we share your 

interest in exploring how information from markets in energy derivatives could be 

used to improve forecasts of oil and motor gasoline prices. One key challenge to pursuing this line of analysis is the difficulty in measuring the volume and direction 

of speculation and commodity fund activity with currently available proxies. We 

really do not know the total size and nature of commodity index fund activity and 

speculation. The development of better activity measures and more transparent information in these areas would facilitate additional econometric analysis of these 

issues. 

This concludes my testimony, Mr. Chairman and members of the committee. I 

would be glad to answer any questions you may have. 

TABLE 1.—MINIMUM AND MAXIMUM MONTHLY AVERAGE PRICE MARGINS, JAN. 2003–DEC. 2007 

[Cents per gallon] 

Minimum Monthly 

Margin 

Maximum Monthly 

Margin 

Wholesale margin ............................................................................................................ 22.0 102.8 

Retail margin .................................................................................................................. 8.2 26.0 

Taxes ............................................................................................................................... 42.3 53.9 

Total retail gasoline—crude oil margin ........................................................... 73.1 167.8 

The minimum and maximum margins may not sum to the total margins because they may occur in different months. 
20 
21 
22 

Senator DORGAN. Mr. Caruso, thank you very much. 

Let me ask that the chart be put back up with respect to the 

EIA. 

Mr. Caruso, I want to ask a question about this chart, and I 

want to go to the January 2008 estimate. My understanding is that 

in your January 2008 estimate, you projected crude oil prices to be 

$87 a barrel on average this year. You predicted that world consumption of oil this year would be 87.4 million barrels a day. Six 

months later in June of this year, you said, well, our prediction is 

not $87. It is going to be $122 a barrel. So that’s a $40 a barrel 

difference. 

The most important point is that in 6 months your estimates 

changed from $87 a barrel to $122 a barrel, but you indicated 

world consumption is going to decrease. In January, you said world 

consumption is going to be 87.47 million barrels a day. This month, 

you said consumption is going to be 86.38 million barrels a day. 

So, you know, I am not much of an economist. I taught a little 

economics in college. I studied enough just to be dangerous, I 

guess. But tell me how, given supply and demand and other circumstances, one predicts in January $87 a barrel and then in June 

you say it is going to be $122 a barrel. So it goes up almost $40 

a barrel even as you predict that world consumption is going to go 

down this year. Tell me how that works. I do not understand it. 

Mr. CARUSO. Well, on the consumption side, the higher prices are 

having an effect and that is—— 

Senator DORGAN. No. I understand that. 

Mr. CARUSO [continuing]. The main reason why the consumption 

projection is lower than it was 6 months ago, in addition to lower 

GDP. 

Senator DORGAN. I understand the relationship of consumption 

to price. A higher price will tend to have people using less. 
23 

What I am asking is, as consumption decreases, why does your 

estimate of price increase? 

Mr. CARUSO. Well, the reason—let me go back to why is the price 

higher. The price is higher because we have been disappointed, 

frankly, on the supply response. We are seeing less non-OPEC supply coming on line in 2008 than we projected in January of this 

year. So we have a tighter supply situation now than I would have 

presented to you, as I did, in December 2007. 

Senator DORGAN. Well, let me read to you an April 2008 Business Week article, and the numbers I have checked. Gasoline reserves are at the highest level since the early 1990s in the United 

States. The United States used 4 percent less petroleum than we 

did a year ago. U.S. production is expected to rise by 3.3 percent 

in the second quarter, 4.1 percent in the third quarter, with a net 

result that the U.S. buffer for oil production against demand is up 

3 million barrels in excess capacity. 

Even as all that existed, this line went straight up, and it is pretty clear to me you did not know that was going to happen or you 

would have told us it was going to happen. You thought something 

completely different was going to happen in every single circumstance. Yet, that surprised you because your analysis as an 

economist of supply and demand does not justify that line. Am I 

correct? 

Mr. CARUSO. I think the numbers you repeated there are about 

the United States, but we looked at it, of course, in a global context. 

Senator DORGAN. Okay. 

Mr. CARUSO. So we have, as I said, less supply coming into the 

market than we would have thought in January 2008. That is a big 

factor. 

The other one was mentioned by, I believe, Senator Bennett. We 

had—— 

Senator DORGAN. Nigeria. 

Mr. CARUSO [continuing]. Nigerian disruption, as well as unexpected declines in Mexican and North Sea production—sharper declines. So what is going on in this global market of 86 million or 

87 million barrels a day, whichever number you wanted to use, 

whether you use the January or the June, is that there is insufficient spare capacity to respond to disruptions on the supply side or 

to any surprises. There are no cushions in the marketplace. 

Senator DORGAN. But, Mr. Caruso, you indicated that supply has 

not kept pace. I described to you that in fact consumption has decreased between January and June estimates, and so you take a 

look at one piece of it and say, well, here is where my eyesight is. 

My question is a broader question. We are spending about $100 

million for your agency, and I am assuming you have great people. 

I do not want to tarnish or diminish the folks who work for you 

or you, for that matter. 

But I am saying this. If that red line is what the actual experience has been with prices and the yellow line is your best estimate, 

what on earth happened? You called it a deviation. Look, this is not 

even in the same county. I mean, this is not missing it by a country 

mile. Tell me how that red line happens when your best estimates 

on supply and demand, reserves, carryover, and all those issues, 
24 

give you the yellow line every single month you make an estimate. 

This is unfathomable to me, and I am trying to understand your 

explanation. 

Mr. CARUSO. The explanation is that in a market that has very 

little spare capacity or excess inventory, that any change in supply 

or demand requires a large change in price to rebalance the market. In economist’s terms, it is very low short-term price elasticity. 

If there is no more supply available, a 1 percent increase in demand requires a 20 percent increase in the short-term price to rebalance that market. 

Senator DORGAN. Well, is there some sort of learning capacity 

here? Would you make the same mistake every month which you 

have done? I mean, every single assessment makes the same mistake. Are you describing the same mistake to that particular provision every month? 

Mr. CARUSO. As new data comes in, we revise the estimates. 

Senator DORGAN. With respect to the Commodity Futures Trading Commission, the one observation I would have about that particular agency is they cannot see what they are unable to see, and 

to draw conclusions with information they do not have is to provide 

lack of informed decisions to the Congress. I am very distressed 

with what the CFTC says. I mean, they say this is not speculation. 

I would say, Mr. Caruso, for CFTC and for you, the only logical 

explanation for that red line has to be something that is happening 

that you do not see and have never seen or if this is about fundamentals that you should be able to see, then there is something 

wrong in the agency. We cannot have this. You have either got to 

be on that line or somewhere close to where we are—I just described that the investment bankers have been closer than your 

agency. And maybe that is because they are out there predicting 

where this is going to go because they are all long in contracts. I 

do not know. But my point is you cannot explain the red line to 

me, and that bothers me. 

I had an investment banker come in, one of the biggest ones, and 

he spoke for 45 minutes. When he finished talking, I was out of 

breath. He was one of these guys who just kept yakking. And the 

fact is he could not explain either. Before he left my office, he could 

not explain the first question I asked him, and that is what change 

in fundamentals existed in the last 12 months that justifies the 

doubling of the price. You have not answered it, and he could not. 

Do you want to try one more time? 

Mr. CARUSO. Non-OPEC supplies failed to keep up with demand—the supply would be needed to meet demand in a market 

where there are no cushions. And so you have to have very sharp 

price increases to rebalance the market—that is the shortest explanation I could come up with. 

Senator DORGAN. My time has more than expired, but I think 

you are missing the elephant in the room. Unbelievable excess 

speculation that you and I and the Government owe the American 

people a remedy for. But we will talk more. 

Mr. CARUSO. I would agree that we need more information about 

the speculative activity or really broader than that, really financial 

market activity in commodities markets. I said that in the testi-
25 

mony. And I think the CFTC is also saying that in their testimony 

as well. 

Senator DORGAN. After denying it for 5 months, they have finally 

had an epiphany over there. 

I have other questions that I will ask in a moment, but I will ask 

my colleagues to be able to proceed. Senator Domenici. 

Senator DOMENICI. Mr. Caruso, let me make sure that I understand. This price that we are talking about that you put up, both 

predicted and actual, is in dollars. Right, because that is what everybody agrees to use. 

Mr. CARUSO. Yes, sir. 

Senator DOMENICI. Does China pay the same price essentially as 

we do for the oil? 

Mr. CARUSO. The global price is denominated in dollars. Essentially everyone pays that same price. 

Senator DOMENICI. Does India pay the same price? 

Mr. CARUSO. Yes, sir. There is a global price for crude oil. 

Senator DOMENICI. The point I am trying to get at, when I ask 

you, it sounds like a very simple question and you answered it very 

casually and cavalierly—but the point of it is if the speculators are 

taking advantage—and I hope we can find out who they are and 

what they are and what instruments they are using—they are 

doing the same thing to China and to India and to everybody else. 

Right? 

Mr. CARUSO. Yes, sir. 

Senator DOMENICI. So if we are getting beat over the head and 

if our citizens are being denied something in this process, so are 

the millions of people in China and the hundreds of millions in 

India. And where are the other big markets in the world that import? India, China, America. 

Mr. CARUSO. Japan and—— 

Senator DOMENICI. Japan. Yes, all the countries that have vibrant economies are stuck essentially with this oil price. Right? 

Mr. CARUSO. Yes, sir. 

Senator DOMENICI. Do you know right now today, as you talk to 

us—you are our only expert that I am aware of that we pay substantial money to maintain a vibrant agency. And I have supported 

you every time. When I was in his shoes, I put even more money 

in, and so did he, because we needed expertise. 

Is there any reason you have to suspect before this committee 

and in behalf of the American people—you are testifying. You are 

our servant. Is somebody speculating illegally? Is there some cheating going on that you can hardly help but see because the price is 

going up so high that you cannot fathom that is there, other than 

somebody speculating and doing something wrong? 

Mr. CARUSO. Obviously, we are not the agency that collects that 

data, so we would not have enough information to be able to answer that question. That is the role of the CFTC and ultimately the 

Federal Trade Commission and the Department of Justice. 

Senator DOMENICI. Yes, I know that. But you are experts, and 

certainly if things keep coming out in a way that would appear to 

experts to be erroneous or unsubstantiated or dramatically unexpected, you would go back and do them over. Would you not? If you 
26 

said, look, something is wrong with this. It went up too high. You 

would go back and take another look. Would you not? 

Mr. CARUSO. Yes, sir. We are working with the CFTC on this 

task force, and there is a report that they are working on, promised 

by September 15, looking at the issues of whether there is any manipulation in the market. 

Senator DOMENICI. I wanted to just ask you this last question. 

Do you work collaboratively with the Commodity Futures Trading 

Commission in looking at what is going on in the world markets 

of oil and exchange information and then discuss various things 

that are going on? Do you do that? 

Mr. CARUSO. Yes. We are members of their market monitoring 

committee and we are supporting the task force that the CFTC is 

heading. 

Senator DOMENICI. And what is that? 

Mr. CARUSO. They have formed a task force among relevant Federal agencies really to try to answer the chairman’s question: is 

there manipulation going on, what is behind the rapid run-up in 

oil prices, and whether or not they can—— 

Senator DOMENICI. Okay. How long have you been doing this 

kind of work? 

Mr. CARUSO. We have been working with them on—me personally? 

Senator DOMENICI. Yes. 

Mr. CARUSO. I attended my first meeting 2 weeks ago. 

Senator DOMENICI. How long have you been doing the kind of 

work you do? 

Mr. CARUSO. Oh, me personally? I had to admit it, 42 years. 

Senator DOMENICI. And how long have you been the head of an 

agency that is in charge of giving information to the American people and to the Government like you are now? 

Mr. CARUSO. About 6 years. 

Senator DOMENICI. Six years. What did you do before that? 

Mr. CARUSO. I was a career civil servant in the Department of 

Energy and then an energy economist at the CIA. 

Senator DOMENICI. All right. With all that background and you 

see this going on, do any buttons come on, or do you just assume 

that what we see is what we get? 

Mr. CARUSO. I have my concerns and that is why I think we need 

more information. I am not adamant that there are no other nonfundamental factors. We just do not have enough information. 

What we do know is the physical data on physical markets, and we 

look at that and we try to apply the best economic principles and 

come up with—we think we can explain most of the price increase, 

but I am certainly open-minded and would like to see more data. 

Senator DOMENICI. Thank you very much. 

Thank you, Mr. Chairman. 

Senator DORGAN. Senator Murray. 

Senator MURRAY. Thank you, Mr. Chairman, and Mr. Caruso, 

thanks for being here. 

In your testimony and in responding to questions, you talk about 

the physical forces in the market, supply and demand, as being the 

primary drivers of these skyrocketing prices that we are all seeing. 

In March of this year, you testified before the Senate Energy and 
27 

Natural Resources Committee that the price of oil, which was $112 

per barrel, should have been $90 based on that supply and demand. So it is clear there were other forces in play in March and 

a lot of those forces are remaining in effect today. 

You have talked about how the EIA faces challenges in measuring speculative efforts, and you mentioned that your agency 

needs to develop some better measurements of these speculative activities, and more transparent information. I think we all are saying we need more transparency. Can you please expand on what 

type of information you are referring to and where do you plan to 

get that information? 

Mr. CARUSO. Well, I think it is the information that the CFTC 

has requested with respect to commodity price index funds. There 

was really a lack of information about how large that market is because some of its activities are not regulated or not reported to 

CFTC, and that now has been requested. There is also more information needed on over-the-counter markets and a better understanding of the separation between commercial and noncommercial 

trades in the commodities markets. I think all of those things are 

being sought by the CFTC, and we did talk about them in the market monitoring committee, as well as the task force meetings. 

Senator MURRAY. This week, Acting CFTC Chairman Walt 

Lukken told the Homeland Security and Government Affairs Committee that in times like this, the opportunity for market manipulation is ripe. Last week he told a number of us who sit on the Appropriations Committee that manipulation could not be ruled out. 

You may remember several years ago my home State of Washington and other west coast States suffered through the western 

energy crisis, and for years industry representatives and industry 

regulators came and testified before all of us time and time again 

that market forces were the source of the skyrocketing electricity 

costs we were seeing. It was not until the tapes of those traders 

talking about the manipulative schemes at Enron were discovered 

that our suspicions of market manipulation were confirmed. So you 

can see my background and know why I look at this and want to 

make sure that we are asking the questions to know if manipulation is occurring. 

Now, the CFTC is working to monitor our markets, but can you 

tell me how EIA accounts for potential market manipulation when 

you do your forecasts and analysis? 

Mr. CARUSO. We rely on their data. We would be users of any 

data that CFTC would make publicly available on that issue. They 

are obviously the lead and we would use that data, if it were available, in our analysis. We are analytical users of the data collected 

by CFTC and any other—— 

Senator MURRAY. Yes, and you indicated that you had been doing 

this for a number of years. Just from your expertise looking at this, 

do you see any cause for concern for manipulation in the numbers 

you are seeing? 

Mr. CARUSO. Well, I think we should be concerned and we should 

do everything we can to avoid a repeat of the very unfortunate experience that you referred to in the—— 

Senator MURRAY. So we cannot rule it out. 
28 

Mr. CARUSO. I would agree with Chairman Lukken. He is certainly in a position to make that statement. And I certainly think 

we need to look and if we find that, make sure that the perpetrators are properly punished. 

Senator MURRAY. I appreciate that. 

Thank you, Mr. Chairman. 

Senator DORGAN. Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman. 

The first question I just would like to ask is in your testimony, 

you said the primary factors when making cost projections were demand, supply, inventories, and spare production capacity. And I 

have noted that two things were not in that list. One was market 

speculation and the other one was the value of the dollar. So as you 

saw from the chart there, based on the facts that they have now 

and the information that they collected, they do not believe that 

speculation had a noticeable impact on oil price. And I am not saying that it is not there, but right now I am saying we do not have 

the facts to state that it is definitely there. 

Do you believe that speculation, based on the facts that you have 

right now, has an impact on the price of oil? 

Mr. CARUSO. We cannot see any evidence, and we, of course, rely 

on what has been provided to us by the CFTC. 

Senator ALLARD. But you are using the same figures that they 

are using. 

Mr. CARUSO. Yes, we are using those figures, and we both admit, 

both EIA and CFTC, that we would like to see more data. I wanted 

to make that clear. 

Senator ALLARD. Yes, and I understand that. I think they are 

looking at information on swaps and indexes and whatnot—— 

Mr. CARUSO. Yes. 

Senator ALLARD [continuing]. Because that is not a part of those 

figures right now. 

Mr. CARUSO. That is correct. 

Senator ALLARD. Hopefully, we will have that when we come into 

September. 

Mr. CARUSO. Yes, sir. 

Senator ALLARD. Now, on the value of the dollar, did you look at 

the value of the dollar when you were making your projections? 

Mr. CARUSO. Yes. 

Senator ALLARD. It seems to me like it has had a dramatic impact. 

Mr. CARUSO. Well, you know, if you look at the price of oil and 

the value of the dollar, the depreciation of the dollar has been correlated to the price of oil. In fact, the oil price has gone up. The 

dollar has been going down. 

Senator ALLARD. Does that have sort of a compounding effect? 

Mr. CARUSO. Our best economists do not think there is a direct 

causality between the dollar and oil prices. There may be some indirect effects, and one would be, for example, that countries that 

have had their currencies appreciate versus the dollar are paying 

less for the final product, and that certainly increases oil demand 

with a lower price in Euros, for example. Demand otherwise would 

have been higher if they had been paying a dollar price instead of 
29 

a Euro price. So there may be an indirect impact, but we do not 

see any direct effect of the dollar—direct correlation and causality. 

Senator ALLARD. I had seen a TV show where they were trying 

to gather facts on the price of oil and they made a quote about 

what the consumer was paying for a tank of gas or a gallon of gas 

in Saudi Arabia, around 27–28 cents a gallon. But we are looking 

at in some areas over $4 a gallon. Is that heavily subsidized in 

Saudi Arabia? 

Mr. CARUSO. It is heavily subsidized in all the oil-producing 

countries and, as well, in many other emerging economies. Our 

best data indicates in a world of about 85 million barrels a day of 

oil consumed, about 30 million of that is under subsidization. So 

the consumers of the 30 million barrels a day are not paying the 

full market price. 

Senator ALLARD. Now, I would like to understand. I mean, the 

chairman has an interesting bunch of facts. I am gathering the 

facts that the chairman is bringing up has to do pretty much with 

American markets, and you are talking on world markets. 

Mr. CARUSO. Yes, sir. 

Senator ALLARD. Is it possible for you to get us a chart or facts 

and compare world markets versus American markets in a relatively short time here? 

Mr. CARUSO. Yes, sir. 

Senator ALLARD. Maybe in a week or so? 

Mr. CARUSO. Yes. We update that on a monthly basis. 

Senator ALLARD. I think it would be helpful to me if we could get 

a chart that compared American markets and world markets. I 

think it helps us better understand some of the points that the 

chairman is making and understand some of the facts. 

[The information follows:] 

ANNUAL OIL CONSUMPTION 

Year China U.S. Other World 

2000 .............................................................................................................. 4.8 19.7 52.2 76.7 

2001 .............................................................................................................. 4.9 19.6 52.8 77.4 

2002 .............................................................................................................. 5.2 19.8 53.1 78.0 

2003 .............................................................................................................. 5.6 20.0 54.0 79.6 

2004 .............................................................................................................. 6.4 20.7 55.2 82.3 

2005 .............................................................................................................. 6.7 20.8 56.1 83.7 

2006 .............................................................................................................. 7.2 20.7 56.8 84.7 

2007 .............................................................................................................. 7.6 20.7 57.3 85.5 

2008 .............................................................................................................. 8.0 20.3 58.1 86.4 

2009 .............................................................................................................. 8.4 20.3 59.0 87.8 
30 

Mr. CARUSO. There is one point that I think is relevant to both 

of your observations on that, and that is, one of the murky areas 

is we do not really have good data on China. We have estimates 

of what they are consuming. We have no good idea of what their 

inventories are. 

Senator ALLARD. And they are a big consumer. 

Mr. CARUSO. They could be hoarding. I am not saying they are. 

They could be hoarding and we would not know it. There is just 

no data. 

Senator ALLARD. Okay. 

Have you done any modeling to project future supplies if the resources available in oil shale and the Outer Continental Shelf are 

tapped? Have you done any of that? 

Mr. CARUSO. We have looked at the OCS resource availability. In 

our Annual Energy Outlook, which goes out to 2030, in the 2007 

edition we had an OCS open access case, and we looked at what 

would the additional supplies be. 

Senator ALLARD. Can you share the results of their modeling at 

least with the Outer Continental Shelf? You do not have anything 

similar to that on oil shale? Can that be developed? 

Mr. CARUSO. We have not done that for oil shale because the economics of oil shale are still, even at these oil prices, relatively unfavorable. 

[The information follows:] 

OUTER CONTINENTAL SHELF

The EIA Annual Energy Outlook 2007 analysis on opening access to the currently 

restricted areas of the Outer Continental Shelf (OCS) is EIA’s most recent analysis 

on the issue. The analysis indicates that cumulative domestic production of crude 

oil from 2012 through 2030 with OCS access is projected to be 1.6 percent higher 

than in the AEO 2007 reference case and 3 percent higher in 2030 alone, at 5.6 mil-
31 

lion barrels per day. For the lower 48 OCS, annual crude oil production in 2030 is 

projected to be 7 percent higher—2.4 million barrels per day with OCS access compared with 2.2 million barrels per day in the reference case. 

Senator ALLARD. Well, you have not gone through the rules and 

regulation process. So how do you know what your lease arrangement is going to be or your royalty payments? 

Mr. CARUSO. Correct. 

Senator ALLARD. So you cannot do that until you get—— 

Mr. CARUSO. We know the resource is there. It is the economics 

and technology that, as you know, very directly—— 

Senator ALLARD. I think that is the frustrating part for the oil 

producers with oil shale is that they need to get to the point where 

they can make those projections. And I see you have the same 

problem. 

Mr. CARUSO. Yes, sir. 

Senator ALLARD. I see my time is expired. Thank you. 

Senator DORGAN. Senator Feinstein? 

Senator FEINSTEIN. Thank you very much, Mr. Chairman. 

Mr. Caruso, I would like to refer you to the last two paragraphs 

in your written comments on page 11, if I might. This is, I think, 

the area that we are all concerned with. ‘‘When noncommercial 

traders are ‘net long’ (the number of long contracts exceeds the 

number of short contracts), it is presumed that speculators are betting on increases in price.’’ It is my understanding that that is true 

to 90 percent of these trades. 

‘‘If a preponderance of them are making these bets’’—and that is 

the 90 percent—‘‘then the price can increase based solely on their 

own demand. However, the distinction between commercial and 

noncommercial traders is weak.’’ And we know that the CFTC has 

given the big institutional investors noncommercial status. So they 

can actually buy very long and very big contracts and not take receipt of anything. ‘‘For example, speculative investments in commodity index funds are categorized as commercial rather than noncommercial.’’ 

Are you empowered to collect this data? 

Mr. CARUSO. No. That is the—— 

Senator FEINSTEIN. CFTC? 

Mr. CARUSO [continuing]. CFTC. One of the things that I propose 

or at least advocate for is to have greater transparency. That is one 

of the areas we think makes it very difficult to answer the chairman’s question and, indeed, your question. We are working very 

hard to get that answer to you—the letter you sent me—on what 

exactly can we disaggregate regarding the impacts of the different 

effects. Without that data, I think we really cannot do that. 

Senator FEINSTEIN. See, I very much agree with what the chairman has said. And I have a real problem. Let us take a big institutional investor like CalPERS, you know, hundreds of millions of 

dollars. I do not understand when a commodity is scarce like this 

why these kinds of investors and why swaps should even be permitted. It seems to me that when a commodity is scarce in the futures market, it is one thing for an airline to do it because they 

receive the commodity. It is another thing for CalPERS or any 

other institutional investor to do it because it is just making 

money, and I do not see how it cannot affect the price because ev-
32 

erybody is betting long. And then you admit that it does have a 

price impact in your written paper. 

Mr. CARUSO. It could very well be having a price impact; like I 

said, if we had more data we might know. Could I respond to that? 

Senator FEINSTEIN. Sure, please. 

Mr. CARUSO. I think that this may be part of why we are having 

a little bit of a—not disconnect, but as the chairman has pointed 

out, how can you reconcile fundamentals versus this financial activity is a broader way to put it. If a financial institution like 

CalPERS decides it would like to move from 1 percent of its portfolio in commodities to 3 percent, that is a big deal for a pension 

fund like that. When they look out 1 or 2 years, they see nothing 

but up-side potential particularly in oil markets. 

Now, is that speculation or is that fundamentals? I personally 

think that they are looking at the fundamentals to make that decision. Now, perhaps—— 

Senator FEINSTEIN. Could I interrupt you? I think they are speculating, otherwise why would they be there? 

Mr. CARUSO. Well, they are speculating—— 

Senator FEINSTEIN. They are speculating that it is going to go 

up—— 

Mr. CARUSO. Yes. 

Senator FEINSTEIN [continuing]. And they are going to make 

money and everybody else is making money. So they go into it. And 

so everybody has jumped into it in unprecedented fashion. And I 

think it has really impacted the market. 

Now, what do I know? I am just a lowly Senator, but to me it 

is just common sense. So I wonder, first of all, why the CFTC put 

them in this noncommercial category, which therefore they have no 

limits as opposed to being in a commercial category where there is 

a limit. It is 20 million barrels of oil a contract. That is a lot. And 

then there is another limit, I guess, in the last 3 days of a contract. 

Mr. CARUSO. Correct. 

Senator FEINSTEIN. But I mean, this has created a huge special 

feeding tank for all these institutional investors, and I think it has 

pushed up the price of oil worldwide. 

Mr. CARUSO. Well, certainly as I said in the testimony, we certainly would like to look more—— 

Senator FEINSTEIN. Yes, because we had in another committee 

every CEO of every big oil company. We asked them the question. 

You remember? Is this a supply and demand issue? The answer 

was no. The Saudis, the answer is no. The figures of the chairman 

just on consumption, the answer is no. 

Then what is the change? The change is the infusion in the marketplace of huge institutional investors with hundreds and hundreds of millions of dollars. How can that not drive up the price 

of oil? Can you answer that? 

Mr. CARUSO. I think it is a combination of the fundamentals 

being there to inform the investment decisions that are being 

made, saying, hey, this looks like a no-brainer. This market is 

nothing but—you know, we’ve got all these supply problems. We do 

not see any new oil coming on line. The perception is that we are 

perhaps even facing peak oil. I think that certainly is influencing 

these decisions. So I think it is hard to disaggregate those. 
33 

Senator FEINSTEIN. My time is up, Mr. Chairman. Thank you. 

Senator DORGAN. We are going to have a second round if you are 

around, Senator Feinstein. 

Senator FEINSTEIN. Okay. 

Senator DORGAN. Senator Bennett? 

Senator BENNETT. Thank you very much. 

I would like to continue this conversation because one of the 

things that was said in this morning’s hearing that had not occurred to me on this very issue was the whole question of describing speculators. We have an image of speculators and they are all 

basically green eyeshade types running pension funds that have ice 

water in their veins and are driven by pure profit. And in this 

morning’s hearing, the comment was made airlines are in the marketplace in this fashion hedging. We think the hedge funds are terrible, but actually the airline, in order to protect itself against price 

increases, is in the market hedging through a hedge fund. 

Senator FEINSTEIN. There is no problem. 

Senator BENNETT. Okay, no problem. But in the aggregate of 

what we are talking about of commercial and noncommercial, this 

falls into a definition question of where is the bet being done. This 

is not an airline buying oil. This is an airline buying in futures to 

hedge against something that happens in the oil. So the airline is 

there on both sides of—— 

Senator DORGAN. Senator Bennett, would you yield on that 

point—— 

Senator BENNETT. Sure. 

Senator DORGAN [continuing]. So that we can just clear up that 

point? The market, in my judgment, was established for the purpose of consumers and producers to be able to hedge risk with respect to a physical product. 

Senator BENNETT. Sure. 

Senator DORGAN. What you have just described is a perfect function of the market—— 

Senator FEINSTEIN. That is right. 

Senator DORGAN [continuing]. Legitimate hedging by airlines 

which are heavy users of the product. 

Senator BENNETT. Yes, and that is my point. How can we identify, in the name of the large-term speculators, how much of that 

is the legitimate hedging and how much of that is somebody who 

is buying the product simply to sell to somebody who will buy the 

product who has no legitimate place in the market? 

As I said earlier, I do not in any way, along with Senator Domenici, think it is appropriate to say this side is trying to protect speculators and that side is trying to attack speculators. I think we are 

all trying to find out, as much as possible. But let us find out by 

getting some kind of definition of the institutions or the people that 

are engaged in this activity so that we know what their motives 

are. And if, indeed, somebody is—a large number of people—this is 

theoretical, but nonetheless, it is historic. If a large number of people are buying at ever-increasing prices for the sole purpose of selling to someone else at an ever-higher price, then the market is 

being set up for a classic bubble. 

That is exactly what happened in the housing market. People 

bought houses not to live in them but to sell them to somebody else 
34 

who would buy them to sell them to somebody else, and the housing market ultimately collapsed. 

That is what happened with dot com stocks. They did not buy the 

dot com stocks because they were expecting a dividend because 

they were going to own the company. They bought the stock at $20 

so they could sell it to somebody at $30 who was buying it to sell 

to somebody at $40, and eventually the bubble burst. 

So if, indeed, that is going on to the degree that some people suspect, there will be a burst at some particular point. The bubble will 

burst and things will come down just the way it did in the housing 

speculation or the dot com speculation. 

Do you see any signs of that kind of buying as opposed to other 

kinds of hedging and activity? 

Mr. CARUSO. Well, I think, really going back to Senator Feinstein, trying to get at the data that she just referred to—those 

types of investments like CalPERS versus a classic hedge, as you 

pointed out, for an airline—is exactly the type of data that would 

be useful to answer this question. We just do not have that data. 

Senator BENNETT. We do have that data. 

That leads me to my next question. Oh, go ahead. 

Mr. CARUSO. One other point on that. What is going on here I 

think is the perception that this is a no-brainer, only an up-side 

market. And the reason that is relevant is that there is a lack of 

institutions or individual investors who are willing to take the buy 

side—I am sorry—the sell side of this. 

Senator BENNETT. Yes. So there may be a little bit of both. 

Mr. CARUSO. Yes. 

Senator BENNETT. And I think that is probably reality. That 

leads me to my next question. 

We obviously need more transparency. We need more information both at the CFTC and perhaps at your agency, and I would 

support legislation that would increase the number of people available to you as quickly as possible. 

Suppose—and I think this is not an unusual suppose—under 

pressure if people at CFTC or elsewhere say, okay, we are going 

to crack down, we are going to put in these kinds of restrictions, 

we are going to have all sorts of regulation, the trading in oil goes 

offshore, moves from CFTC, moves from America to Dubai or London. Would we not then have less transparency than we have now? 

Mr. CARUSO. Yes. 

Senator BENNETT. And would the market, therefore, not be more 

likely to get out of control under those circumstances than it would 

be now? 

Mr. CARUSO. Well, I think if you take the most extreme hypothetical circumstance where much of the volume out of NYMEX 

moves to Dubai, we would lose a great deal of transparency. That 

is correct. 

Senator BENNETT. So we need to be a little careful about what 

we do. 

Mr. CARUSO. Yes. 

Senator BENNETT. Okay. Thank you. 

Senator DORGAN. Senator Craig? 

Senator CRAIG. Thank you for being with us, Administrator Caruso. 
35 

So if we have institutional buying in an up-side market and 

there is no perception of a down side, if in the process we are creating the bubble that Senator Bennett has spoken to, then let us 

create a down side by bursting the bubble. We can burst the bubble 

sooner than the market can if we tell the market that in a 1.5 percent growth market with no spare capacity, we are going to add capacity to the market for the foreseeable speculative future and we 

bring a few million more barrels a day into the market or we convince the market that we are going to over a fixed period of time. 

What does that do to the market if a government, this Government, says we are going to bring on line and make available to the 

market what are known reserves to be brought to the market in 

the time it will take to get there, and we will urge that by facilitating it as reasonably possible as the market can respond? What 

happens? 

Mr. CARUSO. I think that if the market was really convinced that 

however we were—— 

Senator CRAIG. And I would define convinced as everything we 

can possibly do, including the signature of a President that we are 

going to do that. 

Mr. CARUSO. I think the market would respond because these 

pension funds and other financial investors have no interest in 

whether the price is up or down. They are only interested in being 

on the right side of the transaction. 

Senator CRAIG. Of course. That is by definition who they are. 

Mr. CARUSO. So those long positions would very quickly become 

short positions. 

Senator CRAIG. And, of course, we hear the wailing of frustration 

and the gnashing of teeth at this moment that, oh, my goodness, 

that is years and years out. Everything in this business is years 

out. It is the reality of this industry. You do not bring on a new 

field overnight. But if you are out there drilling and discovering 

and the market is clearly conditioning you to be there by the price 

available in the market, at margins, even if they come down 30 

percent, still make it a profitable venture, it seems to me that that 

begins to work. 

Now, other things can happen, and I think that we are not yet 

predicting them effectively. China last week reacted as only China 

can react. They raised their tax on fuel because they as a government control fuel access to their citizens. And they react differently 

because their infrastructure, while increasingly dependent on hydrocarbons—it is about 90 percent dependent—they can change because only 1 out of every 1,000 Chinese has a car, and they can 

quickly discourage the second or third Chinese in 1,000 from buying a car by raising the value. We cannot do that in this country. 

We have no elasticity. We are very inelastic because we all have 

them. We not only have one, we have two, or we have three. 

And so it is interesting for me to watch everybody try to model 

the Chinese when the marketplace may be reshaping them in a 

way we have not yet figured. Especially it has become increasingly 

unpopular in this world to be a dirty producer, and by definition 

they are dirty. 

It is also fascinating to me that some are suggesting—and you 

did not suggest it. It would be fair for the record to show that. But 
36 

there could be some hoarding going on out there. We were hoarders 

up until a few weeks ago when we shut the SPR off. That by definition is hoarding. We do not know if other countries are doing that. 

They are simply buying in a market and receiving. They may be 

sticking it into the ground like we are. If they are and if we were, 

that would still the market because that is the demand. Is that not 

correct? 

Mr. CARUSO. That is correct. 

Senator CRAIG. Now, you could say it is bad or it is good to 

hoard. We said it was good to hoard because we were creating a 

security blanket during a period of crisis, but it was by definition 

hoarding. And we decided to stop it for a while. And the chairman 

helped lead the attack and we agreed with him. 

So I find it really fascinating in an environment where there is 

little to no margin left, in a demand growth of 1.5 percent a year 

and no desire to produce more than that, that the markets would 

not respond and the opportunity to speculate within the market 

structure has happened. 

I do not ask you to respond to that. I know you are frustrated, 

as we all are, but we have also got to be honest with ourselves 

when we keep denying ourselves the production we know we have 

and are capable of producing. We say as an arrogant nation to the 

Arabs, you produce it because we do not want to. And we expect 

you to produce it in the volume we need. Now, go get at it. Turn 

your valves up. Drill more holes over there because we are not 

going to because we are clean, pristine, rich, and arrogant. And I 

do not know of any other way to define it because that is what we 

are doing in this country. 

I am fascinated at the new conversion rate of the new religion, 

and the new religion is drill at any cost, do it cleanly, do it environmentally soundly. Any cost does not define that because you are 

burning down my house, my pocketbook, and my family’s security. 

So thank you for being here. 

We will proceed on. I hope, in our effort to solve a problem, we 

do not decide to destroy the market or send it overseas or send it 

to Dubai or create a lack of transparency for all consumers. But we 

have been in the state of denial for 20 years and our denial has 

come home to roost and it is a very expensive cost. Thank you. 

Senator DORGAN. Senator Craig, thank you very much. 

I might observe on this issue, I happen to think we should do a 

lot of things, including opening up more of the eastern Gulf of Mexico. We need to drill more but—— 

Senator CRAIG. And the chairman and I agree and we are on bills 

together. 

Senator DORGAN. But I might also say that the EIA has projected 

that the U.S. production will increase every year from now until 

2016. So it is not as if we are not producing. We are producing 

some more. 

Senator CRAIG. Mr. Chairman, in relation to what demand? Is it 

greater than the world demand or greater than the national demand? 

Senator DORGAN. Well, I want to talk about that. 

Senator CRAIG. If it is not, the market goes up. 
37 

Senator DORGAN. I am going to talk about the demand in a 

minute. 

I want to come back to Administrator Caruso’s notion that this 

is the fundamentals, and he has indicated that he thinks that this 

line is because of change in supply issues. 

But before I do that, I brought some charts. I was not going to 

use them, but because the suggestion has been experts would not 

predict that this is speculation, I want to put up some thoughts 

from experts. 

Mr. Gheit testified up on the third floor in the Energy Committee. Here is what he said: ‘‘There is no shortage of oil. I am convinced that oil prices should not be a dime above $55 a barrel.’’ 

That was last October. But I have just called him recently and 

talked to him by telephone. He feels exactly the same way today. 

He said, ‘‘I call it the world’s largest gambling, all open 24/7, totally 

unregulated like a highway with no cops, no speed limit, and everybody going 120 miles an hour.’’ This man has worked 30 to 35 

years, top energy analyst for the Oppenheimer Company. I think 

he is an expert. I have talked to him at some length. He has testified here. I have talked to him on the phone. I think this qualifies 

as an expert. 

Stephen Simon, as I expect—is kind of an expert. He is the Senior Vice President of Exxon Mobil. I do not quote that company 

often because they are happy to deposit our money in their bank 

accounts with these prices. But he said the price of oil should be 

about $50–$55 a barrel. 

Clarence Cazalot at Marathon Oil, Chief Executive Officer, he is 

the CEO of Marathon, one of the large companies. ‘‘$100 oil is not 

justified by the physical demand in the market.’’ 

Let me leave it at that, but I have got six or seven more charts. 

I want to come back to the point you made, Administrator Caruso. I just went through your estimate of consumption worldwide 

and production worldwide. And you have told me that you think 

lack of production is the thing that has changed the fundamentals. 

If we can have that first chart back up. 

It occurs to me that in January of this year, you made an estimate. If we can point to that line, January 2008, that is the estimate of where EIA thought this was going to go. Now, I have 

looked at what you proposed as estimates for production and consumption, and it appears to me that while production is, in fact, 

down just a bit, consumption is actually down just a bit more in 

2009 and down just about equal to the decline in production. So, 

in fact, there is virtually no difference in fundamentals that could 

justify anything on that line. I just went through this as I got the 

information. 

I am trying to understand what you are saying to me. You are 

saying to me there are—you know, I understand Nigeria and all 

the daily stuff that goes on, but I am talking about the things that 

you saw every time you tried to make an estimate with your best 

economists, best lawyers. I hope you have got some M.B.A.’s, by the 

way, because that would be best your bet. 

Mr. CARUSO. Not enough. 

Senator DORGAN. Okay. You need M.B.A.’s down there. 

Mr. CARUSO. Yes, sir. 
38 

Senator DORGAN. So every time you tried to make an estimate, 

you not only just missed it, you just were not even on the chart. 

And I think what you are telling me today is there is some speculation, but mostly it is fundamentals and mostly it relates to world 

supply. And as I have just looked, world demand/consumption has 

gone down slightly more than the supply reduction. So, your answer does not add up to me. 

Mr. CARUSO. Well, we take into account everything, not only the 

facts, as you have mentioned—supply, demand, and inventories 

and productive capacity. I cannot remember which Senator referred 

to it, but the perception of where the future is headed informs or 

at least influences decisions being made in the marketplace, what 

people are willing to pay for the price of oil. If you believe that you 

are not going to have enough supply in 2009, you would pay more 

in 2008. So I think there is a combination of factors here. Supply, 

demand, inventories, productive capacity, and perceptions of where 

we are headed are influencing this market. 

And as I said, I am not saying that this—obviously, I am not 

going to say it has been perfect. 

Senator DORGAN. Well, less than that. I mean, that is a far cry 

from perfect. And you know, look. Maybe I would have made the 

same mistake, but the fact is if I were looking at that chart and 

sitting in the witness chair, I would think how on earth would I 

explain this. How could I explain missing it? The red line is what 

has happened. The yellow line is what you thought would happen 

every single month. 

My point is I think you are missing something big. I do not know 

whether you are reluctant to explain it because Secretary Bodman 

has said there is no speculation. The President has got another 

narrative about drilling. I mean, I do not understand it. 

But I have not been able to figure out today—I thought you told 

me in the first round that the purpose of this or the reason for this, 

the reason you missed it and apparently each time missed it by a 

mile is worldwide production. And what I have just described is 

consumption is actually decreased slightly more than production 

has decreased. So that seems to me that your answer does not fit 

here. It does not work here. 

And I am not trying to brow beat you, Administrator Caruso, because I like you and I like your agency. But I do not like this, and 

I do not like the fact that a whole lot of people are saying, you 

know what? If it looks like a duck and quacks like a duck and 

walks like a duck, it is obviously a pig. There is clearly speculation 

here and experts that have testified before our committee, it seems 

to me, know this business pretty well. Many of them have said 

there is an unbelievable drum beat of speculation. 

Mr. CARUSO. Well, I would like to see more data to be able to 

make that judgment, sir. 

Senator DORGAN. Do you think that data would ever exist to 

allow you to make that judgment? 

Mr. CARUSO. I think so. 

Senator DORGAN. You said before the Energy Committee you 

thought this speculation—after I questioned you at some length, 

you said you thought speculation might contribute 10 percent to 

the current price of oil. 
39 

Mr. CARUSO. Yes. I think in any given day or short term, it could 

easily be that. Yes. I am just saying that over the longer time 

frame, the fundamentals can explain most of it. 

Senator DORGAN. I will ask one more question. Thank you, Administrator Caruso. 

Senator Feinstein? 

Senator FEINSTEIN. Why has the Saudi addition of 700,000 barrels a day not lowered oil prices? 

Mr. CARUSO. Well, I think it is very hard to get a real handle 

on what the addition actually has been. As best we can tell, it is 

probably closer to 300,000 barrels a day. Based on the information 

we have, they went from 9.4 million barrels a day to 9.7 million 

barrels a day from May to June of this year. As has been pointed 

out here, during that same month, we had a decline in Nigerian 

production, as a result of some rebels who attacked an offshore 

drilling rig, and I believe it was Shell had to shut it down. That 

was about 300,000—— 

Senator FEINSTEIN. Yes, but that might be, but the trend line 

has been so dominant that even when additional oil is added, it 

does not make any difference at all. 

In your 2007 Annual Energy Outlook, you stated this, and I 

would like to quote. ‘‘The projections in the OCS access case indicate that access to the Pacific, Atlantic, and eastern gulf regions 

would not have a significant impact on domestic crude oil and natural gas production or prices before 2030. Leasing would begin no 

sooner than 2012, and production would not be expected to start 

before 2017. Total domestic production of crude oil from 2012 to 

2030 in the OCS access case is projected to be 1.6 percent higher 

than in the reference case and 3 percent higher in 2030 alone at 

5.6 million barrels per day.’’ 

Now, in essence, do you stand by that statement today? 

Mr. CARUSO. That is our best analysis, Senator Feinstein. 

Senator FEINSTEIN. So you are saying drilling in the Outer Continental Shelf effectively will do nothing with respect to price, at 

least to 2030. 

Mr. CARUSO. It will have a small effect, yes, only a small effect. 

Senator FEINSTEIN. What is that small effect? 

Mr. CARUSO. Oh, I think—I cannot remember precise numbers. 

I could provide them for the record, but I believe it was less than 

$1 a barrel. 

Senator FEINSTEIN. All right, if you would provide that for the 

record. 

Mr. CARUSO. Yes, I will. 

Senator FEINSTEIN. I would appreciate that. 

[The information follows:] 

OCS PRODUCTION

EIA’s Annual Energy Outlook 2007 analysis of expanding Outer Continental Shelf 

(OCS) access projected that the impact on the domestic oil wellhead price in 2030 

would be a reduction of approximately $0.14 (0.3 percent), from $51.25 in 2005 dollars to $51.11. EIA expects that, while the impact in a higher world oil price environment would be greater, the price impact would remain 1 percent or less. Key reasons for the small differences are that oil prices are largely determined on the international market and development of these resources would require considerable 

time and investment dollars, so greater impacts are not anticipated until after 2030. 
40 

Senator FEINSTEIN. I mean, Senator Dorgan asked—you have got 

to, I think, look for the one thing that is different in all of this. And 

the one thing that has always appeared to me recently to be different in the marketplace is rampant speculation, one way or another. 

One of the things that we learned in the West during the Enron 

crisis were the depths to which energy traders would go to make 

a buck, the lack of any kind of a moral compass in that trading 

community. 

And now you have this huge anschluss of hundreds of millions 

of dollars in the institutional investment community, and that is 

the only thing I know of that is different. 

Do you know of anything else that is different? 

Mr. CARUSO. Compared to—I mean, I think in the last 5 years, 

there is no doubt that there has been a very significant surge in 

financial capital movement out of equities and other instruments 

into commodities. Everyone agrees with that. There is a clear correlation. What I think is still missing is the causality, whether we 

can actually pin it down, and that is where I think, hopefully, the 

CFTC study that we are working on will shed some light on that. 

Senator FEINSTEIN. But you cannot tell me any other major significant thing that has happened other than this, nor can anybody 

else. And yet, many other people just like you say, oh, it cannot 

have that kind of price effect, but it is. And it seems to me to debunk it when you do not know—I mean; to me it is just sort of 

clear like looking at you is clear. This is the elephant in the room 

that was not in the room before. 

Mr. CARUSO. I think another thing that really changed is that in 

2004 we had the largest increase in world oil demand that we have 

experienced since we have been collecting data, and that really limited the amount of spare capacity in the world. That is definitely 

a change and we still have not recovered from that. So if you wanted to point to a fundamental factor—I am not debunking. What I 

am saying is I look at what I know and—— 

Senator FEINSTEIN. It was the incentive for these futures markets to go very long and they did. I do not think anybody expected 

this kind of effect, whether it is an aberration or not. I have got 

to believe there is a causal implication. 

Mr. CARUSO. And that I hope we can prove. 

Senator FEINSTEIN. I hope you can and I think it is really important that you look at it. I think, you know, like Senator Bennett— 

well, he wants to look at something else. I would like to have staff 

really look at this, Mr. Chairman, and come back to us. I wrote a 

letter, I think, on May 22 asking some of these questions, and Mr. 

Caruso referred to it. I hope I will get a response soon. 

Mr. CARUSO. Yes. We hope to get that to you by the end of next 

week. 

Senator FEINSTEIN. Thank you very much. I Appreciate that. 

Senator DORGAN. Senator Feinstein, thank you. 

The point that Senator Feinstein made about west coast electricity with the Enron Corporation strikes a nerve. I chaired the 

hearings here in the Senate over in the Commerce Committee. Ken 

Lay came to my committee, took the oath. We swore him in. He 

took the Fifth Amendment to all of my questions. He has, of course, 
41 

since died. But we know that it was a criminal enterprise. A number of his colleagues are now in prison. 

And you know it is interesting. Senator Feinstein was in the 

hearings that I was in leading up to all of that when the wholesale 

electricity prices went up like Roman candles and we had the regulators from the Government sitting at these tables. There is nothing going on. Vice President Cheney derided anybody that thought 

there was some speculation, some manipulation. He was derisive of 

those of us who were talking about it. 

Senator FEINSTEIN. That is right. 

Senator DORGAN. There is nothing going on. This is the way the 

market works. Yes, there is an upward climb that is dramatic. 

That is the way the market works. 

We later found out it was criminal behavior, unbelievable criminal behavior. And the fact is about $10 billion to $15 billion was 

taken out of people’s pockets on the west coast by that criminal behavior. 

Senator FEINSTEIN. Forty billion dollars was the cost to California alone of that. 

Senator DORGAN. I mean it is pretty unbelievable. 

So I tell you that not because I think there is criminal behavior, 

not because I am alleging anything here. It is just that I am suspicious when agencies come and tell us, well, we see this big line 

go up, but everything is fine. 

The CFTC Chairman came to our committee recently. You know, 

for 4 or 5 months, he has been saying wherever he could speak that 

this is just fundamentals. Now, as I said, he had some epiphany 

after having had a long night’s sleep and he woke up and said we 

have been investigating it for 7 months. Well, which one is true? 

That you were unconcerned, or was it the fundamentals all this 

while you have been investigating? I have minimum—minimum— 

confidence in the Chairman of the CFTC to get to the bottom of 

anything, let alone this, because he is predisposed to how he already answered it, despite the fact he cannot see what he should 

know in order to make informed conclusions. 

Having said that, I want to go back to one more point, Administrator Caruso. At every point on this run-up—you all make monthly projections. At every point what has happened is we have seen 

a substantial what you term deviation between what happened and 

what you expected to happen. Are you saying to me today that in 

every case it was because there was a change in worldwide production? Because that is what you have largely said, on the production 

side. 

Something obviously happened in every case. What do you think 

happened in every case to make this so inaccurate in every case? 

Mr. CARUSO. Well, I would have to go back and take a look at 

it, but every month we take a look at every aspect of the fundamentals that we have all been discussing here, seeing whether 

or not we got it wrong last month, how can we adjust that, have 

there been any changes in actual data that would change our view, 

including activities with respect to geopolitical events. So it would 

be very hard for me, off the top of my head, now to tell you what 

changed every month, but—— 

Senator DORGAN. Have you seen a chart like this before? 
42 

Mr. CARUSO. Oh, yes. 

Senator DORGAN. If I had that chart—have you gone back to your 

agency and said, hey, guys, what’s up? Are you kidding me? We are 

paying a lot of money to a lot of people to see if we can make projections as best we can and look at what is happening. And I am 

wondering if you do not have people that say, well, I will tell you 

what’s up, Mr. Administrator. We look at all this data. We see 

worldwide demand. We see what is happening in terms of consumption. We see the data. That is why we made the projections, 

but there is something else going on, Mr. Administrator. Do you 

have anybody inside your agency that says that if you asked them 

what’s up? 

Mr. CARUSO. Well, they are looking as hard as they can for 

what’s up, and they are trying to do the best they can every month. 

Senator DORGAN. Would you give me the names of the people 

that are searching for what’s up? I mean, you get my point. I do 

not mean to be a wise guy. 

Mr. CARUSO. Sure. The person who is in charge of—— 

Senator DORGAN. All right. Well, they are good-looking people. 

And if one of you is in charge of what’s up, I am anxious to get 

periodic reports. 

My point is that I would think having studied economics and 

business and all these issues—I know you do not want this to happen. You are a good agency. This country is advised by your agency. A lot of things happen every month based on your judgment 

about what is going to happen. And so we need you to get this 

right. And I do not think it is your fault because something is happening that clearly you do not understand based on this line and 

probably I do not understand it and Senator Feinstein does not understand it. But I think I know what it is. I do not know the dimensions of it because most of it happens in the dark. 

It is called dark money because the CFTC decided of its own volition there are a lot of things happening that they do not want to 

see. So they do no action letters to say to the Intercontinental Exchange you can trade these commodities to a London-based exchange owned by U.S. companies. You can trade them. In fact, we 

will let you trade them in Atlanta, Georgia off computer terminals 

in this country, and we will decide we should not see them. That 

is unbelievable in my judgment. 

But my sense is this is a mistake that you make pretty honestly 

because it is the way you study economics. Fundamentals should 

drive price, and it does not have any relationship to price right 

here. Do you not think that is the case? 

Mr. CARUSO. Well, if it is, we definitely are going to do our best 

to ask you or whoever the proper authority is to give the authority 

to increase the data collected by the proper people, which in this 

case is the CFTC, and improve our modeling because bad data, no 

matter how good the model is, yields bad results. 

Senator DORGAN. Well, Senator Feinstein, I appreciate your 

being here. 

Mr. Caruso, let me say, as I said at the start, you are a good person. You run a good agency. Again, I think any qualified person 

looking at fundamentals would probably come up with the estimates you have come up with, and that is what I regret because 
43 

there is dark money out there that no one can understand. So I am 

just trying to get, as best I can, some notion of what is happening. 

And I have called you here. My colleagues, I think, have asked 

good questions. 

And I know, as I said, you have traveled around the world with 

the Secretary to Saudi Arabia. You are weary and tired. Neither 

you nor your agency probably wanted to come here. Your workers 

do not want to come here. 

I do not mean in any way ever to make fun of your agency, although I do mean to say this line is a far cry from the estimates. 

But that is because I think something is happening that you cannot see and I cannot see. And I want to find out who is looking for 

it, and I would like to have a loud amplifier when somebody finds 

it to be able to hear what they have found. 

Mr. Administrator, thank you very much for you time today. I 

have not talked about your budget so much. As you know, the 

President has sent us a budget recommendation. We are working 

on that, but I very much appreciate your time. 

Mr. CARUSO. I appreciate your confidence, sir. 

ADDITIONAL COMMITTEE QUESTIONS

Senator DORGAN. At this time I would ask the members of the 

committee to submit for the record any additional questions they 

have for the witnesses. 

[The following questions were not asked at the hearing, but were 

submitted to the Department for response subsequent to the hearing:] 

QUESTIONS SUBMITTED BY SENATOR DIANNE FEINSTEIN

Question. On May 22, I wrote to request that EIA analyze oil prices over the past 

2 to 4 years in an effort to estimate the impact of the major factors now believed 

to influence the price of oil, including specifically: 

—Changes in geopolitical stability; 

—The strength of the dollar; 

—Increased oil market speculation; 

—The emergence of index fund investments; and 

—Market fundamentals such as oil supply, demand, and storage. 

EIA models and predicts the future price of oil as one of its primary functions. 

This analysis will inform Congress as it works to alleviate the burden that currently 

faces the American people. Considering its great urgency, I am very disappointed 

that I have not yet received a response. What progress has EIA made in determining the role speculation, the depreciating dollar, and geopolitical instability have 

played in recent increases in the price of oil? 

Answer. On July 2, 2008, the Energy Information Administration (EIA) provided 

a response to your letter dated May 22, 2008. In short, our analysis to date suggests 

that market fundamentals—strong demand, disappointing supply growth, concern 

over actual and perceived supply disruptions, low inventories, very limited spare 

production capacity, and global refining capacity constraints—are the primary drivers of global oil prices. The current very tight oil market balances and the possibility 

of further supply disruptions are causing prices to rise to unprecedented highs. 

Changes in the geopolitical stability of key producers and producing regions—one 

of the factors cited in your letter—in a supply environment that is already tight also 

suggest that fear of supply disruptions due to instability is also a fundamental in 

today’s oil market. 

Exchange rates are another factor identified in your letter. We find that there has 

been no systematic and stable relationship between oil prices and exchange rates 

over time. For example, between January 2007 and March 2008, the value of the 

dollar against the Euro fell by 29 percent while the price of West Texas Intermediate (WTI) crude oil rose by 93 percent. However, between November 2004 and 
44 

November 2006, the value of the dollar strengthened by 12 percent against the 

Euro, while the WTI spot price rose by 35 percent. 

Increased oil market speculation and the emergence of index fund investments are 

the other factors mentioned in your letter. The increased inflow of funds and participants into the futures markets may affect oil prices to some degree in the short run, 

but it could also be a symptom of the tight market conditions and resulting high 

prices, rather than a cause. 

Additional analysis is clearly needed, though we suspect it will not be possible to 

precisely isolate the impacts of various factors affecting oil prices. Notwithstanding 

our views regarding the role of fundamentals as the dominant factors driving prices 

higher in today’s oil markets, we share your interest in exploring how information 

from markets in energy derivatives could be used to improve forecasts of oil prices. 

Question. In your testimony before the subcommittee, you told me that you are 

awaiting data from Commodity Futures Trading Commission (CTCF) in order to answer my May 22 letter and that you also stated that you wanted more powers to 

collect data on your own. Exactly what power are you requesting, does it require 

legislation, and if so, are you willing to submit draft legislation language? 

Answer. In our July 2 response to your letter, we indicated that the increased inflow of funds and participants in the futures markets could affect oil prices to some 

degree, but also that it might be difficult to precisely isolate the impacts on oil 

prices. Nevertheless, given its possible use, we are exploring how energy-derivatives 

trading information could be used to improve oil price forecasts. As I said at the 

hearing, a challenge we face is that current measures used as proxies for speculative activity, such as total open interest in the New York Mercantile Exchange 

(NYMEX) futures market, net-long positions of ‘‘non-commercial’’ traders in the 

NYMEX futures market, and investment in commodity index funds, all have limitations. Ultimately, we really can’t quantify the total size and nature of commodity 

index fund activity, as well as other forms of speculation today. It is our belief that 

the development of better activity measures and more transparent information regarding activity in markets for energy-related financial derivatives would facilitate 

execution of a robust econometric analysis responsive to your May 22 letter. 

The recently released Interim Report on Crude Oil from the Interagency Task 

Force (ITF) on Commodity Markets attempted to break down its analysis in more 

detail, using categories where information is currently available to the CFTC but 

not publicly reported on a regular basis. That information, though more detailed, 

still does not break down positions in ways that would allow effective analysis of 

the index speculation; and so the CFTC has established a ‘‘Special Call’’ for more 

comprehensive position information from commodity swap dealers and commodity 

index traders. The ITF indicated in its Interim Report that it expects to add information from the Special Call to its final report. We hope that that additional information and its analysis will allow us to better develop our efforts to incorporate 

speculative trading information into our forecasts. 

However, EIA, which is striving to improve the quality and transparency of physical energy market data, does not have the lead role on derivatives data. Instead, 

we are actively supporting efforts by the CFTC, the regulator of this activity, to improve the collection of that data. I would expect EIA to be a key user of that data 

as we explore ways to improve our forecasting activities by incorporating it alongside the energy and economic data we already use in our analysis activities. I do 

not foresee any difficulty in arranging for appropriate EIA access to such data, nor 

the need to collect it independently from the CFTC, and consequently, see no need 

for additional legislation at this time. 

Question. In your testimony before the subcommittee, you asserted that increasing 

speculation may reflect market fundamentals, as investors bet that further shortages will drive up oil prices. However, by definition, institutional traders are long 

in the oil markets regardless of the market fundamentals because they are using 

the commodities markets as a hedge against risk in other investments. Why don’t 

you believe that billions of dollars of new investment, all betting that the price will 

go up could drive up the price? Please explain what effect it’s having. 

Answer. One of the key challenges we face in answering this question is that current measures that are used as proxies for speculative activity, such as total open 

interest in the New York Mercantile Exchange (NYMEX) futures market, net-long 

and net-short positions of non-commercial traders in the NYMEX futures market, 

and investment in commodity index funds, all have limitations. We really do not 

know the total size and nature of commodity index fund activity and speculation. 

The development of better activity measures and more transparent information regarding activity in markets for energy-related financial derivatives would facilitate 

our analysis of this question. EIA, which is striving to improve the quality and 

transparency of physical energy market data, does not have the lead role on deriva-
45 

tives data, but we are actively supporting efforts by other agencies such as the Commodity Futures Trading Commission to improve that data. Once such data become 

available, I would expect EIA to be a user of it as we explore ways to improve our 

forecasting activities by incorporating it alongside the energy and economic data we 

already use in our analysis activities. 

Question. Do you agree that institutional investors and index traders who never 

take delivery of oil but own millions of barrels of oil on paper are ‘‘speculators?’’ 

Answer. According to the Commodity Futures Trading Commission (CFTC), the 

distinction between hedging and speculation in futures markets is less clear than 

it may appear. Traditionally, those with a commercial interest in or an exposure to 

a physical commodity have been called hedgers, while those without a physical position to offset have been called speculators. In practice, however, hedgers may be 

‘‘taking a view’’ on the price of a commodity, and even those who are not participating in the futures market despite having an exposure to the commodity could be 

considered speculators. 

Traditional speculators enter into futures contracts with the intention of reversing 

their positions before they would be required to deliver (in the case of short positions) or to accept (in the case of long positions) physical delivery of a commodity. 

Traditional speculators could further be differentiated depending on the time horizons at which they operate. Speculators known as scalpers or market makers operate at the shortest time horizon—sometimes trading within seconds. These traders 

typically do not trade with a view as to where prices are going and will usually offset their positions soon after entering into them. They typically buy contracts at a 

slightly lower price than the current market price and sell them at a slightly higher 

price, perhaps at only a fraction of a cent profit on each contract. Other types of 

speculators take longer-term positions based on their view of where prices may be 

headed. Speculators known as ‘‘day traders’’ establish positions based on their views 

of where prices might be moving in the next minutes or hours, while ‘‘trend followers’’ take positions based on price expectations over a period of days, weeks or 

months. Through their efforts to gather information on underlying commodities, the 

activity of these traders serves to bring information to the markets and aids in price 

discovery. 

While hedging and speculation are often considered very different activities, both 

can promote price discovery in futures markets. In essence, futures prices are a reflection of the opinions of all those entering the market. Moreover, the actions of 

those who can, but choose not to, enter the futures market are also quite important 

for price discovery. For example, a commercial trader holding physical inventory, 

but choosing not to hedge it in the futures market (by taking a short position), will 

not only withhold a downward pressure on the price, but may also send a signal 

that prices are expected to rise in the future. 

To provide the public with information on the activity of traders in the futures 

and options markets, the CFTC publishes a weekly Commitments of Traders (COT) 

report. Traders are classified either as ‘‘commercial’’ or ‘‘non-commercial’’ based on 

CFTC Regulations. In classifying traders as commercial or non-commercial rather 

than hedgers and non-hedgers, the CFTC recognizes that the ultimate motivations 

of traders cannot be observed from the data. That is, while a commercial trader may 

be matching a futures position against a cash-market price risk, it is not known 

whether such a trader is doing so on a routine basis in order to minimize ongoing 

price risks or doing so selectively based on specific market expectations. Thus, some 

of the trading information captured by the commercial trading category may reflect 

activity that could be characterized more as speculative rather than hedging. 

Question. I have introduced legislation, the Oil Speculation Control Act, to put position limits on institutional investments in oil markets. Please analyze the economic impact of the legislation on oil markets. 

Answer. EIA is not in a position to analyze how enforcing limits on commodity 

market participants would affect trading volumes and/or trading positions. This type 

of technical analysis is best suited to the Commodity Futures Trading Commission 

(CFTC), which has the data and expertise needed to address how proposed changes 

in trading requirements affect market behavior. 

Question. In its 2007 Annual Energy Outlook, EIA forecast that ‘‘the average 

world crude oil price declines slowly . . . from a 2006 average of more than $69 per 

barrel to just under $50 per barrel in 2014 as new supplies enter the market.’’ Did 

your forecast consider the role of speculation in the energy markets? If not, why 

not? 

Answer. To the extent that trading activity in the forward markets reflects trader 

expectations about future oil supply and demand fundamentals, EIA’s reference 

price case is intended to capture those factors. The Annual Energy Outlook (AEO) 

explicitly states that the reference case projection should not be considered a fore-
46 

cast, and the full AEO includes both high and low oil price cases to illustrate the 

sensitivity of the projection to alternative prices. There are many factors on both 

the supply and demand sides of the market that affect the price of oil in the short 

term and the long term. In the short term, unexpected shortfalls of oil due to labor 

strikes or civil strife, damage to pipelines, changes in inventory behavior, and unexpected increases in demand can all affect near-term oil prices. In developing the outyear prices for the AEO, EIA generally looks at the long-term (to 2030) fundamentals of oil supply and demand. These fundamental factors include the demand for 

liquid fuels, the expected level of conventional oil production by countries that are 

not members of the Organization of the Petroleum Exporting Countries (OPEC), the 

growth of unconventional oil supply, and the expected production decisions of the 

members of OPEC. It is also worth remembering that the oil price cases for 

AEO2007 were developed in mid-2006, when spot and futures market oil prices were 

very different than today’s prices. We did not explicitly consider the role of ‘‘speculation’’ in developing the three long-term oil price cases used in AEO2008, since it is 

very unlikely that forward-market trading activity will affect oil prices over a 20- 

plus-year time frame. 

Question. Does supply and demand explain the rise is oil prices? 

Answer. As we stated in our July 2 response to your May 22 letter, and discussed 

in our answer to your first question, our analysis to date suggests that market fundamentals—strong demand, disappointing supply growth, concern over actual and 

perceived supply disruptions, low inventories, very limited spare production capacity, and global refining capacity constraints—are the primary drivers of global oil 

prices. The current very tight oil market balances and the possibility of further supply disruptions are causing prices to rise to unprecedented highs. Changes in the 

geopolitical stability of key producers and producing regions in a supply environment that is already tight also suggest that fear of supply disruptions due to instability is also a fundamental in today’s oil market. The increased inflow of funds and 

participants in the futures markets may affect oil prices to some degree in the short 

run, but it could also be a symptom of the tight market conditions and resulting 

high prices, rather than a cause. We agree that additional analysis is clearly needed, though we suspect it will not be possible to precisely isolate the impacts of various factors affecting oil prices. 

Question. EIA’s Annual Energy Outlook 2008 forecasts that crude oil prices will decline gradually from current levels to $57 per barrel in 2016 ($68 per barrel in 

nominal dollars), as expanded investment in exploration and development brings 

new supplies to world markets. In developing its oil price outlook, EIA explicitly 

considered growing world consumption, the outlook for oil production, and OPEC behavior. Did EIA consider changes in geopolitical stability, the strength of the dollar, 

increased oil market speculation, or the emergence of index fund investments in oil 

futures markets? 

Answer. EIA considered these factors differently in the short-term than in the 

long-term portions of its AEO2008 reference case oil price path. In the first few 

years of the projection, EIA gives weight to current geopolitical conditions, including 

the effects of civil unrest and expectations that national oil companies may chose 

to restrain their investments in oil production capacity. In the longer term, EIA 

gives increased weight to underlying economics of undeveloped oil resources and allows them to be produced more rapidly than current conditions might allow. EIA 

also includes projections for lower and higher oil price cases in all editions of the 

AEO, including AEO2008. One of the major determinants of expected world consumption of liquids is the expected level of economic activity reflected in each country or region’s gross domestic product (GDP). In developing the outlook for GDP, the 

expected strength of the dollar over the projection period and its implications are 

considered. To the extent that trading activity in the forward markets reflects trader expectations about future oil supply and demand fundamentals, EIA’s reference 

price case is intended to capture those factors. As noted in the answer to a prior 

question, our reference price case does not capture the extent to which forward markets rise or fall based on other considerations. 

Question. The Ten-in-Ten Fuel Economy Act required NHTSA to set fuel economy 

standards at the ‘‘maximum feasible’’ level from model year 2011 to 2019. To determine the maximum feasible level, NHTSA considers the consumer savings of reduced fuel use and the social benefit of reducing air pollution. Unfortunately, the 

price of gasoline NHTSA used to calculate its recently released draft CAFE standard 

was $2.26 per gallon in 2016 and $2.51 per gallon in 2030—far below what consumers are paying at the pump today—based on EIA’s estimate. You recently told 

a House Committee that NHTSA should be using the EIA’s high gas price scenario, 

which estimates prices will range from $3.14 in 2016 to $3.74 in 2030, when it sets 

its fuel economy standards. Will you write to NHTSA to make this recommendation? 
47 

Answer. As I stated at the June 11, 2008, hearing before the House Select Committee on Energy Independence and Global Warming, NHTSA has our high oil price 

case from the Annual Energy Outlook 2008; and it is the prerogative of that agency 

as to which price case—reference case or high price case—it chooses to use in its 

rulemaking. As noted in your question, I also stated that since the market is on a 

higher oil price path now, I would recommend use of our high price case. Subsequent to the hearing, my office has discussed this issue with Department of Transportation staff. 

Question. When will EIA update its Energy Outlook to more accurately reflect 

changes in the oil markets that have occurred in 2008? 

Answer. The Annual Energy Outlook is an annual publication, with the early release (only the reference case) typically posted on the EIA Web site in December 

and the complete version released in March. The full AEO takes between 6 and 8 

months to complete. The oil price cases for the AEO are developed at the beginning 

of the process, so the three oil price paths considered in the AEO2008 were developed in the summer of 2007. Given the lengthy gestation period for each edition of 

the AEO, there are no midyear updates of the AEO oil price paths. However, we 

do update the oil price forecast in the Short-Term Energy Outlook (STEO) on a 

monthly basis. Unlike the STEO, the AEO provides users with several alternative 

oil price paths. 

Question. When will EIA release an updated high cost estimate? 

Answer. In addition to EIA’s longer term energy projections, EIA releases a 

monthly Short Term Energy Outlook (STEO). Our most recent STEO, released on 

July 8, 2008, stated that global supply uncertainties, combined with significant demand growth in China, the Middle East, and Latin America, are expected to continue to pressure oil markets. We projected that West Texas Intermediate crude 

prices, which averaged $72 per barrel in 2007, will average $127 per barrel in 2008 

and $133 per barrel in 2009. The oil price paths (low, reference, and high) for 

AEO2009 are currently under development. The AEO2009 reference case is scheduled for release in December 2008, with the other cases scheduled for release in 

March 2009. 

Question. In every EIA estimate since 2005, EIA has forecast that the price of oil 

has peaked and should soon drop: —In 2005, EIA estimated that oil prices would decline to $46.90 per barrel in 

2014; —In 2006, EIA estimated that oil prices would decline to $46.90 per barrel in 

2014; —In 2007, EIA forecast that oil prices would decline to just under $50 per barrel 

in 2014; and —This year’s forecast predicts that oil prices will fall to $58 per barrel in 2016. 

To me, this suggests that your analysts, who look at supply and demand, cannot 

explain why the price of oil keeps going up. Is it possible that EIA’s analysis is so 

consistently wrong because it fails to consider the price of speculation in the marketplace? 

Answer. Three points ought to be noted about the observations in the first four 

bullets above. First, the oil prices quoted for 2014 and 2016 are in real, not nominal, 

terms. It is true EIA’s reference case oil price projections showed a peaking, in real 

terms, but this was not the case for the nominal price of oil of these outlooks. Second, the upward reassessment of the real oil price by 2014 (and 2016) in the reference case is evidence of the fact that EIA continues to monitor the world oil market, which is rapidly evolving due to changes in geopolitical and fundamental economic factors. The AEO2008 oil price cases were developed during the summer of 

2007, when world oil prices in spot and futures markets were much lower than they 

are today. Third, 2014 and 2016 are several years in the future and thus it is not 

possible to assess the projection accuracy of EIA’s outlook for those years. Lastly, 

the high oil price and the low oil price cases are presented in both the Annual Energy Outlook and International Energy Outlook to take into account the uncertainties surrounding these factors, particularly the outlook for oil production and OPEC 

behavior. 

Question. On June 22, 2008, Red Cavaney, President & CEO of the American Petroleum Institute, told ABC News that ‘‘Every single available drilling rig, drill ship 

is in use—being used right now. You can’t go and drill when you don’t have equipment. We are not magicians as an industry.’’ According to data compiled for ODSPetrodata’s monthly World Rig Forecast—Short-Term Trends report, worldwide demand for mobile offshore drilling units will continue to grow throughout the next 

12 months, resulting in drilling programs being postponed. If every oil drilling ship 

and every rig is already in use, would you agree that oil companies already have 

more access to offshore areas than they have equipment to exploit? 
48 

Answer. EIA does not track the availability of drilling ships or rigs. Over time, 

we would expect the number of onshore and offshore drilling rigs to change in a 

manner that depends on the relationship between the rental rates and capital costs 

of the equipment in question. 

Question. Would you agree that opening new areas of the outer continental shelf 

would not increase the amount of exploration? 

Answer. The opening of new areas of the outer continental shelf (OCS) to Federal 

oil and gas leasing is not expected to increase the amount of exploration in the nearterm, but would likely increase the amount over the longer term. The opening of 

Federal offshore moratoria areas provides oil and gas companies more options for 

exploration and production projects than would otherwise be the case if these moratoria regions remained unavailable. There is a significant volume of undiscovered, 

technically recoverable oil and natural gas resources in the Pacific, Atlantic, and 

Eastern Gulf Coast OCS moratoria areas; however, conversion of those resources to 

production would require both time and money. Another factor slowing development 

is that the average field size in the Pacific and Atlantic regions tends to be smaller 

than the average in the Gulf of Mexico, implying that a significant portion of the 

additional resource would not be as economically attractive to develop. Oil and gas 

companies are constrained by a number of factors that restrict their ability to fund 

and develop the number of oil and gas exploration and production projects in any 

particular year, including the number of onshore and offshore drilling rigs that are 

currently available in the United States and the limited pool of trained personnel. 

Over the longer term, it is expected that opening these areas would expand the 

size of the industry with resultant increases in the number of rigs and personnel. 

This would result in additional exploration that would eventually increase domestic 

oil and gas production. 

CONCLUSION OF HEARING

Senator DORGAN. This hearing is recessed. 

[Whereupon, at 4:18 p.m., Wednesday, June 25, the hearing was 

concluded, and the subcommittee was recessed, to reconvene subject to the call of the Chair.] 

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