ENERGY SPECULATION: IS GREATER REGULATION 

NECESSARY TO STOP PRICE MANIPULATION? 

(PART II) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT AND 

INVESTIGATIONS 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JUNE 23, 2008 

Serial No. 110–128 

( 

Printed for the use of the Committee on Energy and Commerce 

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ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE 

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ENERGY SPECULATION: IS GREATER REGULATION 

NECESSARY TO STOP PRICE MANIPULATION? 

(PART II) 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT AND 

INVESTIGATIONS 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JUNE 23, 2008 

Serial No. 110–128 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

COMMITTEE ON ENERGY AND COMMERCE 

JOHN D. DINGELL, Michigan, Chairman 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, JR., New Jersey 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

Vice Chairman 

LOIS CAPPS, California 

MIKE DOYLE, Pennsylvania 

JANE HARMAN, California 

TOM ALLEN, Maine 

JAN SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

DARLENE HOOLEY, Oregon 

ANTHONY D. WEINER, New York 

JIM MATHESON, Utah 

G.K. BUTTERFIELD, North Carolina 

CHARLIE MELANCON, Louisiana 

JOHN BARROW, Georgia 

BARON P. HILL, Indiana 

DORIS O. MATSUI, California 

JOE BARTON, Texas 

Ranking Member 

RALPH M. HALL, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN SHADEGG, Arizona 

CHARLES W. ‘‘CHIP’’ PICKERING, 

Mississippi 

VITO FOSSELLA, New York 

ROY BLUNT, Missouri 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO MACK, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

SUE WILKINS MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

PROFESSIONAL STAFF

DENNIS B. FITZGIBBONS, Chief of Staff 

GREGG A. ROTHSCHILD, Chief Counsel 

SHARON E. DAVIS, Chief Clerk 

DAVID L. CAVICKE, Minority Staff Director 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

BART STUPAK, Michigan, Chairman 

DIANA DeGETTE, Colorado 

CHARLIE MELANCON, Louisiana 

Vice Chairman 

HENRY A. WAXMAN, California 

GENE GREEN, Texas 

MIKE DOYLE, Pennsylvania 

JAN SCHAKOWSKY, Illinois 

JAY INSLEE, Washington 

JOHN D. DINGELL, Michigan (ex officio) 

JOHN SHIMKUS, Illinois 

Ranking Member 

ED WHITFIELD, Kentucky 

GREG WALDEN, Oregon 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOE BARTON, Texas (ex officio) 

(II) 

(III) 

C O N T E N T S 

Page 

Hon. Bart Stupak, a Representative in Congress from the State of Michigan, 

opening statement ................................................................................................ 1 

Hon. Ed Whitfield, a Representative in Congress from the Commonwealth 

of Kentucky, opening statement ......................................................................... 4 

Hon. John D. Dingell, a Representative in Congress from the State of Michigan, opening statement ....................................................................................... 5 

Hon. Joe Barton, a Representative in Congress from the State of Texas, 

opening statement ................................................................................................ 7 

Prepared statement .......................................................................................... 9 

Hon. Jay Inslee, a Representative in Congress from the State of Washington, 

opening statement ................................................................................................ 10 

Hon. Greg Walden, a Representative in Congress from the State of Oregon, 

opening statement ................................................................................................ 11 

Hon. Charlie Melancon, a Representative in Congress from the State of Louisiana, opening statement ................................................................................... 13 

Hon. Michael C. Burgess, a Representative in Congress from the State of 

Texas, opening statement .................................................................................... 14 

Hon. Mike Rogers, a Representative in Congress from the State of Texas, 

prepared statement .............................................................................................. 16 

Hon. Gene Green, a Representative in Congress from the State of Texas, 

prepared statement .............................................................................................. 104 

WITNESSES

Fadel Gheit, Managing Director and Senior Oil Analyst, Oppenheimer & 

Co., Inc. ................................................................................................................. 17 

Prepared statement .......................................................................................... 19 

Roger Diwan, Partner and Head of Financial Advisory, PFC Energy ................ 25 

Prepared statement .......................................................................................... 27 

Answers to submitted questions 1 ...................................................................

Michael W. Masters, Managing Member and Portfolio Manager, Masters Capital Management, LLC ......................................................................................... 41 

Prepared statement .......................................................................................... 43 

Answers to submitted questions ...................................................................... 440 

Edward M. Krapels, Ph.D., Director, Energy Security Analysis, Inc. ................. 61 

Prepared statement .......................................................................................... 63 

Answers to submitted questions ...................................................................... 451 

Doug Steenland, President and Chief Executive Officer, Northwest Airlines .... 137 

Prepared statement .......................................................................................... 139 

Answers to submitted questions ...................................................................... 454 

Steven R. Williams, Chairman and Chief Executive Officer, Maverick USA, 

Inc. ......................................................................................................................... 148 

Prepared statement .......................................................................................... 150 

Eugene A. Guilford, Jr., Executive Director and Chief Executive Officer, Independent Connecticut Petroleum Association ...................................................... 164 

Prepared statement .......................................................................................... 167 

Answers to submitted questions ...................................................................... 458 

Walter Lukken, Acting Chairman and Commissioner, U.S. Commodity Futures Trading Commission .................................................................................. 196 

Prepared statement .......................................................................................... 200 

Answers to submitted questions ...................................................................... 461 

James Newsome, Ph.D., Chief Executive Officer and President, New York 

Mercantile Exchange, New York, New York ...................................................... 234 

Prepared statement .......................................................................................... 236 

Answers to submitted questions ...................................................................... 488 

Page

IV 

Sir Robert Reid, Chairman, ICE Futures Europe, Intercontinental Exchange, 

Inc., Atlanta, Georgia .......................................................................................... 240 

Prepared statement .......................................................................................... 242 

Answers to submitted questions ...................................................................... 493 

Michael Greenberger, J.D., Professor of Law, Director, Center for Health 

and Homeland Security, University of Maryland, Baltimore, Maryland ........ 251 

Prepared statement .......................................................................................... 254 

Answers to submitted questions ...................................................................... 509 

SUBMITTED MATERIAL

Slides accompanying Mr. Stupak’s opening statement ........................................ 304 

Chart entitled ‘‘Jet Fuel—A New Reality’’, submitted by Mr. Green .................. 307 

Congressional Record excerpt, submitted by Mr. Burgess ................................... 308 

Letter of June 20, 2008, from U.S. Commodity Futures Trading Commission 

to Messrs. Dingell and Stupak ............................................................................ 309 

Reports, dated 2008, from Credit Suisse Commodities ........................................ 311 

Slides presented during hearing ............................................................................. 344 

CFTC Fact Sheet ..................................................................................................... 363 

Letters from Fuel Coalition .................................................................................... 367 

Dated June 11, 2008, to Representatives Reid, McConnell, Pelosi, and 

Boehner .......................................................................................................... 367 

Dated June 20, 2008, to Mr. Stupak ............................................................... 369 

Report, dated January 29, 2003, from Congressional Research Service ............. 371 

Letter of June 18, 2008, from Joint Trades to Senators and Members of 

Congress ................................................................................................................ 388 

Glossary of Key Terms for hearing ........................................................................ 390 

Senate Testimony of Michael W. Masters, dated May 20, 2008 .......................... 394 

News clips, dated June 19, 2008 ............................................................................ 413 

Subcommittee exhibit binder .................................................................................. 531 

1 Mr. Diwan did not answer submitted questions for the record. 

(1) 

ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE MANIPULATION? (PART II) 

MONDAY, JUNE 23, 2008 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, 

COMMITTEE ON ENERGY AND COMMERCE, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 11:00 a.m., in room 

2123, Rayburn House Office Building, Hon. Bart Stupak (chairman 

of the subcommittee) presiding. 

Present: Representatives Stupak, Melancon, Green, Inslee, Dingell (ex officio), Whitfield, Walden, Burgess, and Barton (ex officio). 

Also Present: Representatives Ross and Rogers. 

Staff Present: Scott Schloegel, John Sopko, Richard Miller, John 

Arlington, Kyle Chapman, Carly Hepola, Katherine Graham, Alan 

Slobodin, Peter Spencer, and Whitney Drew. 

OPENING STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN 

Mr. STUPAK. This meeting will come to order. 

Today we have a hearing entitled, ‘‘Energy Speculation: Is Greater Regulation Necessary to Stop Price Manipulation? Part II.’’ 

Each member will be recognized for an opening statement. I will 

begin. 

Today’s hearing will examine whether excessive speculation in the oil futures market is contributing to the unprecedented $70 increase in crude oil prices in just 1 year. This spike has sent gasoline up 107 percent to more than $4 a gallon, And diesel costs are 

up 188 percent to $4.70 per gallon. 

The wallets of consumers have been hit hard and industries that 

depend on energy are hemorrhaging in red ink. And for some companies, their very survival is in jeopardy. 

But what has caused this unprecedented rise? Is it too much demand chasing too little supply? Or is it excessive speculation and 

greed inflating prices? Here is what some of the oil experts have 

said. 

Quote, ‘‘I cannot think of any reason that explains the run-up in 

crude oil price besides excessive speculation.’’ Fadel Gheit, managing director, Oppenheimer & Company, who will testify today. 

Another quote: ‘‘There may now be upwards of $25 to $30 of 

speculation in the price of crude, which continues to soar despite 

stockpiles in the U.S.’’ MF Global Energy Risk Management Group. 

2 

Quote, ‘‘The proper range of oil prices should be somewhere between $35 and $65 a barrel.’’ John Hofmeister, president of Shell 

Oil Company. 

The International Monetary Fund also echoes these views. 

Quote, ‘‘It appears that speculation has played a significant role 

in the run-up in oil prices as the U.S. dollar has weakened and investors have looked for a hedge in oil futures and gold. What this 

means is that oil has been transformed from an energy source into 

a financial asset, like gold, where much of the buying and selling 

is driven by speculators instead of producers and consumers. It 

means that bets are placed driven by interest rates, inflation expectations, and portfolio manager investment decisions,’’ end of quote. 

The growth of commodity index investment supports the IMF 

conclusion that oil has become a financial asset. They have skyrocketed from $13 billion in 2003 to an estimated $260 billion in 

March of 2008. 

Just this past weekend, the Secretary of Energy and Oil Ministers met in Saudi Arabia to discuss the oil crisis. However, the 

Secretary of Energy could have made a much shorter trip to New 

York or Chicago to find an immediate way to address high prices 

at the pump. We must end the excessive speculation in the energy 

markets. Even the Saudi oil minister has argued that high oil 

prices are due to excessive speculation in the markets. Bringing 

down oil prices will require a multi-pronged approach of conservation, strengthening the value of the dollar, and ending excessive 

speculation in the energy markets. My bill, H.R. 6330, known as 

the ‘‘Prevent Unfair Manipulation of Prices’’ or PUMP ‘‘Act of 

2008,’’ will deliver the quickest and most comprehensive reforms 

needed to end excessive speculation. 

Since the most popular commodity index, called the Goldman 

Sachs Commodity Index, has 78 percent in energy commodities like 

oil and gasoline, it seems fair to ask whether a twentyfold increase 

in commodity index investment is contributing to a bubble in oil 

prices. Lehman Brothers estimates that the benchmark crude oil 

futures price goes up about 1.5 percent for every $100 million in 

commodity index investments. 

Why is this phenomenon significant to you when you fill up your 

gas tank? Because your pension fund manager may be using your 

retirement money to drive up the price of oil. What would happen 

if pension fund managers decided to increase their commodity investment by another twentyfold? We don’t know the answer and 

apparently neither does anyone in the Administration, but nothing 

is standing in their way from increasing such investments. 

This is what the experts are saying. Let’s look at some of the 

data. 

Chart number 1 shows the number of futures contracts for crude 

oil has grown 425 percent, almost in lock step with the oil price increases over the past 5 years. 

Chart number 2 shows that the speculators have increased their 

share of futures contracts in oil from 37 percent in 2000 to a whopping 71 percent in April 2008. Meanwhile, the producers and refiners who actually use the futures market to hedge price risk have 

shrunk from 63 percent to 29 percent. 

3 

What is going on here? Have speculators hijacked trading on the 

futures exchanges? 

We are told we should be grateful to speculators for providing liquidity that allows the futures markets to operate, but this data 

suggests that the oil futures market is drowning in liquidity. Today 

we hope to learn whether this wave of speculation has separated 

prices from the very supply and demand fundamentals that are 

supposed to balance the market. 

The Commodity Futures Trading Commission, CFTC, tells us the 

speculators are simply following the price signals set by physical 

consumers and producers. But given this imbalance, you have to 

wonder if the regulator is missing the forest for the trees. 

Chart number 3 shows the rapid growth in swaps dealers buying 

oil futures. Swaps dealers are investment banks who set up the 

commodity index deals for pension funds and sovereign wealth 

funds. 

[The information appears at the conclusion of the hearing.] 

In 2000 these swap dealers had only 10 percent of the contracts 

to buy futures contracts. However, that number has tripled to 30 

percent in 2008. In fact, the New York Mercantile Exchange, 

NYMEX, has granted 117 hedging exemptions since 2006 for West 

Texas Intermediate crude oil contracts, many of which are for swap 

dealers with no physical hedging positions. Is it a coincidence that 

investment banks tripled the number of futures contracts they are 

buying at the same time that oil prices are skyrocketing? 

Today we want to find out whether the CFTC understands the 

degree to which speculators of various stripes and motivations have 

seized control over a significant majority of oil futures. 

We want to find out whether the CFTC is going to shed light on 

the vast over-the-counter market, where energy derivatives are 

traded but go unregulated. 

We want to find out if the CFTC and its staff are sufficiently motivated to question the activities of Wall Street and its powerful investment bankers. 

We want to explore the arcane loopholes which allow investment 

banks and commodity dealers to evade speculative position limits 

that are supposed to prevent price distortion. 

CFTC claims it found no evidence that the futures markets have 

been subject to excessive speculation, but on May 29th it issued a 

special call to swap dealers for data on their investment in commodity indexes. We note this action came 9 days after one of our 

witnesses, Mike Masters, questioned the impact of an estimated 

twentyfold increase in commodity index investments. 

Today we will also assess the impacts to key sectors of our economy, such as the airlines, trucking, and petroleum marketing. Airlines are eliminating service to over 100 cities, laying off thousands 

of workers, and projecting up to $13 billion in losses this year due 

to jet fuel price increases that cannot be passed on to the consumer. 

Last week, CFTC, Commodity Futures Trading Commission, reversed its long-held view regarding one loophole that allows foreign 

boards of trade to offer electronic trading screens in the United 

States. But it still allows the trading on these terminals to play by 

less rigorous regulatory standards in a foreign country. When we 

4 

held our last hearing on energy speculation on December 12th, 

CFTC opposed the idea of requiring ICE Futures in London to 

abide by U.S. rules governing excessive speculation regarding crude 

oil. Six months later, I am pleased to see the CFTC dropped its opposition and will require ICE traders to be governed by certain 

U.S. rules. 

This is not the only loophole we need to examine. We also need 

to look at eliminating exceptions for swap dealers, providing greater transparency for trading in the $9 trillion over-the-counter market for commodities. We will look at whether it makes sense to prohibit index speculators from using commodity markets and whether 

increasing margins on financial speculators is a way to burst the 

oil price bubble. 

Make no mistake about it: Excessive speculation in commodity 

markets is having a devastating effect at the gas pump and is rippling throughout our entire economy. If we do not act now with 

swift diligence, we risk having our economy brought to its knees. 

This committee has responsibility for energy policy and we intend 

to make sure that we find solutions, place them on the President’s 

desk, and deliver relief to the American people. We hope today’s 

hearing will help illuminate this issue for the administration and 

the American people; then we can work together on a bipartisan 

basis to solve this problem. 

I next go to the gentleman from Kentucky, Mr. Whitfield, for his 

opening statement, please. 

OPENING STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH OF KENTUCKY 

Mr. WHITFIELD. Well, Chairman Stupak, thank you very much. 

And we certainly welcome our witnesses today on this important 

hearing relating to energy. 

Last week, the Energy Information Administration reported the gasoline average price was $4.13 a gallon across the country, more 

than $1 a gallon over last year. Diesel prices last week averaged 

$4.70 per gallon, almost $2 per gallon more than this time last 

year. Heating oil and jet fuel prices are also at record highs, as is 

the cost of crude oil, which has risen almost $70 per barrel, double 

the price a year ago. 

The American people and others want to know, is this due to 

supply and demand? Is it due to excessive speculation in the futures markets? Is it due to the declining value of the dollar, refinery capacity, or a combination of all of these things? 

This morning, we are going to hear from witnesses who will describe the economic impact that these prices are having on their 

businesses and how that is affecting their continued opportunity to 

provide jobs. We will also hear from energy market economists and 

participants who will explain the recent run-up in prices and help 

us understand, hopefully, whether the growth in noncommercial 

speculation in the energy commodities market is inflating oil prices 

significantly beyond underlying market fundamentals. 

The energy futures market is certainly a complicated market, 

and it serves an important function for those who actually buy and 

sell oil to hedge price risk and to reduce price volatility. It also apVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
5 

pears that it has served financial markets more broadly as a hedge 

against the weakening dollar and inflation. 

The numbers here are as dramatic as those we see at the pump. 

Over the past 5 years, the number of oil futures contracts has 

jumped from 700,000 to more than 3 million. A large portion of this 

growth has involved not traditional physical oil hedgers, but institutional investors such as public and private pension funds who are 

now getting into this market. 

The value of open interest associated with these institutional investors has risen from a mere $13 billion to $260 billion over the 

past 5 years. And this rise appears to correlate to the run up in 

oil futures prices. 

We need to understand exactly what is causing this increase in 

prices, especially any recent factors that have propelled those 

prices to current historically high levels. Is this a speculative bubble driven by the market expectations and speculative fervor that 

prices will continue to rise? Are these expectations realistic? Does 

this run-up reflect the growing role and goals of various institutional investments and commodity index funds? 

And what does all this mean for traditional market participants 

concerned about the physical supply and delivery of oil? Is the 

Commodity Futures Trading Commission doing enough? Does it 

need more information from exchanges and from over-the-counter 

markets? Do margin requirements need to be changed? So we will 

be hearing from the Commodity Futures Trading Commission 

today. 

And I would also mention that many members on this committee 

cosponsored legislation introduced by Ranking Member Barton a 

few weeks ago to have an interagency study of the effects of speculation on energy prices and to have more comparable regulation 

over foreign and domestic markets that trade U.S. commodities. 

We will also discuss other rules and regulations, such as increasing margin requirements that I mentioned earlier. All of these matters are going to be open for discussion this morning. 

I want to thank Chairman Stupak for holding this hearing. It is 

certainly a timely issue, one that the American people are extremely focused on. And I look forward to the testimony of all of 

our witnesses and the opportunity to ask them questions to help 

us better understand the situation we are in today. 

I yield back my 45 seconds. 

Mr. STUPAK. Thank you, Mr. Whitfield. 

Mr. Dingell for an opening statement, please. 

OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN 

Mr. DINGELL. Mr. Chairman, first of all, I commend you for your 

superb leadership of this subcommittee. And, second of all, I commend you and thank you for this hearing today. 

Today, working Americans are seeing energy costs take an everlarger bite out of the family budget. Costs have soared for gasoline, 

electricity, and heating, and increased fuel prices have driven up 

the price of food and everything else in our society. 

6 

This hearing today is laying the preface for this committee to 

begin to move forward on legislation cosponsored by virtually the 

entirety of this committee and our good friend Mr. Barton, the 

Ranking Minority Member. It is our intention to gather the facts 

today to try to find out exactly what is going on so that we may 

respond to the concerns that the American people have on these 

matters. 

Dramatic increases in fuel costs are affecting virtually every sector of the American economy. For fuel-intensive industries, in particular, this is a crisis. A case in point is the airline industry, and 

I want to welcome Mr. Doug Steenland, President and CEO of 

Northwest Airlines, who will be testifying today on the problem 

faced by his company and by the airline industry as a whole. 

Simply put, millions of Americans are feeling the pain from extraordinary increases in the price of oil, which is carrying through 

to price increases in everything else in the economy, especially in 

the energy area. 

This brings us to the central issue of this hearing: what caused 

this dramatic rise in prices? Are record oil prices simply a function 

of supply and demand, or are they a result of excess speculation, 

or both? 

The International Monetary Fund recently concluded that ‘‘speculation has played a significant role in the run-up of oil prices’’. A 

Lehman Brothers analysis suggests that more than 50 percent of 

the price of a barrel of oil may be attributable to speculation. The 

Saudis note that oil supply and demand seem to be in balance and 

that there is no substantive basis for current prices. Even the Department of Energy’s own Energy Information Administration says 

that ‘‘the flow of investment money’’ has contributed to a spike in 

oil prices. 

It is commonly held by economists, and I have been told by one 

of the great ones in a private discussion, that probably at least 25 

percent of the shoot-up in oil prices comes from speculation. 

It is unfortunate that the Secretary of Energy dismisses speculation as a cause of spiking oil prices and that the Secretary of the 

Treasury agrees, shrugging it off as a ‘‘tough period’’. Admittedly, 

he is right, it is a tough period. But there is a cause, and it must 

be ferreted out. In short, real solutions from this administration 

are harder to find than $3-a-gallon gasoline. 

The oil producers say that the answer is to drill for more oil. The 

environmental community says the answer is to conserve energy, 

to change the way we live, work, and play. Both sides have a valid 

point. We should search for more oil, although I note that the oil 

companies aren’t drilling on land they already have. And the environmentalists are right—we need to conserve energy. But both are 

long-term solutions that will likely take at least 10 years; they will 

do little to solve the immediate problem we face, and such actions 

will not curb the current excess speculation and manipulation in 

the oil markets. 

Mr. Chairman, as our witnesses will testify today, the sharp rise 

in energy prices during the Bush administration has been outpaced 

only by the rise in speculation. Energy speculation has become a 

fine growth industry, and it is time for the Government to intervene. 

7 

We need to consider a full range of options to counter this rapacious speculation. For example, we should examine imposing 50 

percent margin requirements on financial speculators; setting position limits on transactions across all future exchanges; requiring 

full disclosure of all trading by investment banks in all markets; 

preventing pension funds and others from using the commodity 

markets as an investment vehicle; and prohibiting investment 

banks from owning energy assets. These and others ideas need to 

be debated, evaluated, and acted upon sooner rather than later. 

Mr. Chairman, I look forward to the testimony of the witnesses 

and working with you and my colleagues on this committee to identify the causes of the problem and to address this problem, which 

is of perhaps the greatest magnitude that we have confronted in 

the energy area in my career in this Congress. 

Thank you, Mr. Chairman. 

Mr. STUPAK. Thank you, Mr. Chairman. 

I next turn to Ranking Member of the full committee, Mr. Barton 

from Texas, for an opening statement, sir. 

OPENING STATEMENT OF HON. JOE BARTON, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS 

Mr. BARTON. Thank you, Mr. Chairman. 

I am going to put my formal statement in the record and just 

speak off-the-cuff. 

You know it is an important hearing when Mr. Walden flies all 

night to be here, and Mr. Burgess and myself got up around 4 

o’clock in the morning in Texas to be here. And I am sure that Mr. 

Rogers and maybe you, Mr. Stupak, and even Mr. Dingell and Mr. 

Inslee—Mr. Inslee flew all night from Washington State. We don’t 

normally have hearings at 11 o’clock on a Monday morning. The 

fact that we are having this hearing and that we are all here shows 

how important it is. 

It is very important, because every week probably every family 

in America that doesn’t live in a central city and use public transportation is paying hundreds of extra dollars out of their pocket to 

have the mobility that we take for granted to go to work, go to 

school, and do all the things that Americans do in our great society. 

Let me say at the very beginning that speculators are not the 

cause of high energy prices. We have high energy prices because 

there is less than a 1 or 2 percent margin of supply over demand 

in world markets today. When you have that tight of a supply margin, a surplus reserve margin, you create a situation where speculators can drive the price higher because of the uncertainty principle concerning who is going to get that next barrel of oil. 

I could make some news today if the Secretary of Energy or the 

President of the United States would authorize me to announce at 

this hearing that the Strategic Petroleum Reserve is going to begin 

to sell 2 million barrels of oil a day beginning 2 weeks from tomorrow. 

We have the capacity to produce about 6 million barrels of oil a 

day out of the SPR. If we were to put 2 million barrels a day of 

oil on the world market, we could do that for over a year. And if 

the President were to announce that, probably the price of oil, the 

8 

futures market, I don’t know how far it would fall, but it would almost certainly go below $100 a barrel and stay there. 

We don’t use the SPR for those purposes. So the President is not 

going to make that announcement unless we change the law or unless, by act of Congress, we direct the President to do that. 

But the fundamental problem that we have is that the world is 

using 85 million to 86 million barrels of oil every day, and the 

world is producing 85 million to 86 million barrels of oil every day. 

And we have been stuck in that rut for the last 2 years, maybe 3 

years. 

High prices have not resulted in the supply increase that pure 

markets say should result. Why is that? Part of the reason is we 

are not drilling in the United States in areas that we know there 

is oil and gas. We are the only nation in the world that has reserves that we are not developing because of a conscious decision. 

You can argue the debates of that decision, but the fact is we are 

the treasure house for energy resources in the world, much more 

so than Saudi Arabia. So, as long as we keep the supply constant 

and the demand goes up, you create an opportunity for speculators 

to move in. 

And what Chairman Stupak said earlier is exactly right. When 

he put those charts up on the board, you look at the positions on 

the New York Mercantile Exchange, you look at the volume of trading that has increased on the Intercontinental Exchange, and most 

of it is in what people call video barrels. 

Now, I didn’t know what a video barrel was until 2 or 3 months 

ago, but a video barrel is a barrel of oil that is never going to be 

produced, it is never going to be consumed, but it is going to be 

traded by somebody who has no intention—no intention—to 

produce that oil and no intention to put that oil on the market. It 

is people at keyboards all over the world who are just deciding 

there is money to be made because of the tight market in oil. 

And what Chairman Stupak said about the various swaps and 

the sovereign wealth funds and all the institutional investors, they 

are moving into oil because they look at the supply-demand situation and they don’t see a supply increase, so they figure, ‘‘Well, 

heck, we have broken all the psychological barriers. We have broken $100-a-barrel oil. Now, people like Boone Pickens are talking 

about $200-a-barrel oil. So there is no psychological barrier. Why 

not? Why not?’’ 

And when we get to the technical part of this hearing, you are 

going to see that the long positions have just grown beyond expectation and that all the physical regulations that we put in place on 

the U.S. market so that we can’t have a repeat of what the Hunt 

brothers tried to do in the silver market 10 or 15 years ago, the 

CFTC is giving exceptions. They have given conscious exceptions. 

And Chairman Dingell and Chairman Stupak have written a very 

thoughtful letter asking for precise data on why those exceptions 

were given and how those data are being traded. 

So the purpose of today’s hearing—and it is a thing to have it 

on a day when we don’t vote until 6:30. We won’t be coming in and 

out. Once we get started, we are going to have the ability for the 

members of this Oversight Subcommittee to function in the truest 

sense of oversight for the Energy and Commerce Committee. We 

9 

can listen to the witnesses. We can get into questions for 10 minutes at a time and really educate both the Members of Congress 

and the American people on this market and then decide what to 

do. 

And the most important thing about this hearing—I am very 

glad that we have the gentleman from Great Britain that is with 

the Intercontinental Exchange. Because it won’t do any good if we 

get more transparency and more regulation that prevents unnecessary speculation in the U.S. exchanges if all that does is take it to 

the international exchanges. So I am very glad that we have our 

foreign visitors here. 

Mr. Chairman, this is an excellent hearing. You have a great 

group of witnesses. We have plenty of time. I look forward to the 

participation in the hearing today. 

With that, I yield back. 

[The prepared statement of Mr. Barton follows:] 

STATEMENT OF HON. JOE BARTON

Thank you, Chairman Stupak and Mr. Whitfield, for this very timely and important hearing on the impact of speculation on energy prices. I very much support this 

continuing oversight. This hearing can help us find ways to ensure our futures markets are working correctly and not being impacted by excessive speculation. 

This Congress needs to face reality about our energy needs. We need more American-made energy, including energy from oil, coal, natural gas, and all the viable 

alternatives. Another reality is that our nation’s economic strength depends on affordable energy for turning on the lights, getting to work, and cooking dinner without having to file bankruptcy papers. 

Oil prices have been subject to 4 to 5 years of negative expectations about the 

tightening of world oil supply and America’s own commitment to tap its ample supplies. A clear signal to world markets that America is waking up to these realities 

and finally seeking to use its own vast energy resources would help change expectations and help lower futures prices. 

Another economic reality is that our economy relies on well-functioning commodity markets to help energy producers and energy consumers to hedge their respective price risks, so that they can do their work efficiently. Well-functioning futures markets require transparency and clear rules to guard against manipulation, 

excessive speculation, and other problems that can harm consumers. 

Some of the recent rise in oil prices is believed to be linked to runaway speculation in the futures exchanges, particularly speculation by non-commercial players. 

This has raised concerns on both sides of the aisle about the rules that govern these 

exchanges—and whether there are loopholes and other inequities across the foreign 

and domestic trading venues which are causing problems. 

We don’t want our U.S. market at a competitive disadvantage to foreign markets. 

And we don’t want these foreign markets trading U.S. energy futures without being 

subject to the transparency requirements and trading limitations that our domestic 

markets have. 

I am encouraged to see that the Commodity Futures Trading Commission has announced modifications to its Foreign Board of Trade process to address the disparities between the United Kingdom and our regulatory structures. This action is 

something that would have been required in H.R. 6130—legislation that 19 Republicans and I introduced last month. I only wish CFTC had not waited until legislation was proposed to get started on a job that should have begun awhile ago. 

The CFTC says it will require other foreign exchanges to be comparably transparent and provide similar position and accountability limits on speculators that are 

applied to the U.S. exchange. This is a solid first step to getting control of any runaway speculation. 

The CFTC will form a federal interagency task force to examine the issues we will 

discuss today. This is also a good thing, along the lines of our legislation. I look forward to discussing with our witnesses today some of the questions that should be 

addressed in this study. For example, how futures prices in the cash market, especially in the forward months, impact the price of energy and other decisions in the 

physical marketplace. 

10 

I also look forward to discussing whether recent CFTC actions are sufficient to 

safeguard against manipulation. For example, the CFTC did not address exemptions 

from trading limits provided for so-called swaps transactions, involving commodity 

index funds, which have grown tremendously with the weakening U.S. dollar. 

We’ll hear today that these non-commercial speculators have come to dominate futures trading over traditional speculators. I would like to know what that means 

for the integrity of these markets. 

Many Members of both the House and the Senate have introduced all kinds of 

legislation dealing with futures markets and the CFTC, requiring all sorts of things 

from energy futures studies to the raising of margin requirements for speculators. 

I am cosponsoring H.R. 6238, Chairman Dingell’s bill, to establish an interagency 

working group to study the factors that affect the pricing of crude oil and refined 

petroleum products, and make recommendations on appropriate regulation. I hope 

that part of what we learn today will be what kinds of further congressional action 

are appropriate and necessary. 

Finally, let me say that the straightforward transparency that’s necessary for the 

markets is equally necessary for these proceedings today. This subcommittee traditionally takes its testimony under oath because it puts a high premium on the absolute accuracy of the information it receives. Today’s subject deals with a matter that 

affects the lives of millions of our people, and I don’t think it is possible to understate the strength of our expectation that we will receive only verifiable facts here 

today. 

Mr. Chairman, there are many witnesses who have a lot to say today. I thank 

you again and yield back the remainder of my time. 

# # # 

Mr. STUPAK. I thank the gentleman. 

Mr. Inslee for an opening statement, please, sir. 

OPENING STATEMENT OF HON. JAY INSLEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON 

Mr. INSLEE. Thank you. 

I first want to thank Chairman Stupak. Nobody in Congress has 

done more than Bart Stupak to really peel away the layers of the 

onion that are really hiding this explosion of speculation in the oil 

futures market. And I appreciate his work and his work on the 

PUMP Act that was introduced last week to really bring some sunshine to this. 

I want to make four points. 

First, when the Saudi oil minister tells you you have a problem 

with oil prices, you know you have a problem. When Jose Canseco 

tells you you have a problem with steroids in baseball, you know 

you have a problem. When the Saudis tell you you have a problem 

in the oil markets, you know you have a problem. So I am happy 

we are here today to discuss that. 

Second, the approach that we have taken, both with this hearing 

and Mr. Stupak’s PUMP bill, is to actually do something that could 

have an effect on prices in the relatively short term. 

Some people have suggested drilling in some of the most pristine 

areas in the country, even if it succeeded 20 or 30 years away, it 

is something our grandchildren could possibly enjoy but we would 

not. Ending rampant speculation in the oil future market has the 

capability of doing something for us who are approaching AARP 

age and above. And that is why it is appropriate for us to get to 

something that could actually have an impact today, this year, 

rather than something several decades hence. 

11 

Third, those who have argued that somehow we need to have all 

of this enormous liquidity in the market in order for the markets 

to function, ignore the charts that Mr. Stupak has put up, showing 

that the markets are drowning in liquidity. To argue that we need 

more liquidity is something like arguing the Iowa farmers need 

more liquid, more liquidity, in Iowa right now. 

We have a flood of liquidity in the market. We have had an explosion of speculative positions in these markets, as opposed to real 

physical risk associated with this. And it is clear that we have a 

problem in part because of the Enron loophole. 

And this is the fourth point I want to make. We really have seen 

this movie before. Now, I am from the Seattle area. And a few 

years back, because Congress willfully turned a blind eye and, 

more importantly, the administration turned a blind eye to manipulation of markets in the Enron scandal, it cost my constituents literally a billion dollars on the west coast of the United States. 

And we remember very well arguing with the Administration 

that the executive branch of the Government had some obligation 

to rein in this speculative manipulation of the market that was 

taking place in the dark. And the response by the Administration 

is, ‘‘No problem. There is no problem.’’ 

And I was reminded of a conversation when I heard Secretary 

Bodman yesterday say, or the day before yesterday, saying, ‘‘There 

is just no evidence of speculation in this market.’’ And a little bell 

went off in my head, where have I heard that before? Well, I heard 

it when we went to Vice President Cheney years ago, and I pled 

with him to take action in the original Enron scandal because it 

was obvious that there was a problem in these markets. It was obvious somebody was gaming the system and that speculation found 

a way to, in fact, have a price result. 

And I showed him a piece of paper showing that actually 32 percent of all the generating capacity in the United States was turned 

off one morning when there were brownouts in California. And I 

asked him for relief. I asked the Vice President to do something to 

rein in this speculative manipulation that was obviously going on. 

And I will never forget because he looked at me and he says, ‘‘You 

know what your problem is? You just don’t understand economics.’’ 

Well, I think it turned out that we did understand economics. 

And I think we do understand liquidity, and we do understand excessive speculation. And we now understand what happens when 

we remove the protection of the consumers by creating this Enron 

loophole. And we are experiencing the results of that today. 

So I am very appreciative of the chairman’s peeling back and 

shedding a little light. Here is one economic principle that I know: 

Bad things happen in the dark. And that is where these markets 

are right now, they are in the dark. And it is time to shed a little 

light on them, and I am looking forward to this hearing. 

Thank you. 

Mr. STUPAK. I thank the gentleman. 

Next, Mr. Walden for an opening statement, please, sir. 

OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON 

Mr. WALDEN. Thank you very much, Mr. Chairman. 

12 

And I appreciate the hearing that we are having today and the 

list of very distinguished witnesses that we will hear from. And 

hopefully we will all emerge from this better educated about the 

markets and the problems associated with them and ways that we 

might address them thoughtfully and in a way that will help our 

consumers and this country. 

As I read through the testimony, it reminded me of the GAO investigation I called for several years ago, which was completed and 

revealed issues involving the market last fall. And I think, for 

those who haven’t read it, you may want to get a copy of it, ‘‘Commodity Futures Trading Commission: Trends in Energy Derivative 

Markets Raise Questions About CFTC’S Oversight.’’ I was not 

alone in requesting that. A lot of other folks got involved, as well. 

But I think it is a very good report that outlines the problems that 

are out there. 

And as I read some of the testimony, it becomes clear that different experts have different opinions on how much speculation is 

involved in this market. Clearly it has grown dramatically. Clearly 

it is having an effect. And the question is, how do we get transparency, how do we get appropriate regulations, so that we don’t 

have a repeat of what we saw with Enron, as my colleague from 

Washington State—I being from Oregon, I have folks who suffered 

similarly. And I think transparency and proper regulation is important. 

But I also know, in reading through the testimony, that those 

who dismiss supply and demand and international troubles as the 

reason for the run-up in price basically say those things have all 

been counted in the market a long time ago. And so it seems to me, 

if you want to stick it to the speculators who are inappropriately 

manipulating the market, then you do market reforms but you also 

add to supply. 

And I, for one, have supported increased mileage standards. I 

drive hybrid vehicles. I believe in conservation, investment in new 

technologies. But I also agree with the Ranking Member that I 

think it is time to develop America’s resources. 

Now, you will hear that that is a fool’s errand because it might 

be 7 or 10 years before that oil would ever come to market. And 

yet I believe that markets respond to signals. And had President 

Clinton not vetoed the bill that Congress, before I got here, passed 

to allow America to access oil reserves in Alaska that President 

Carter had set aside up on the very northern part of that State, 

that was 1996, if it took 10 years, we would have 2 years of oil that 

would have been coming out of Alaska now. 

So the decisions we make today will affect the markets. I think 

if we indicated a change in American policy to allow us to access 

our Outer Continental Shelf and to allow us to develop other 

sources of oil, we would have an effect on the market. 

Unfortunately, this committee, at some point in the Energy Bill 

of 2007, which I ultimately voted for, stuffed in a little provision 

that even precludes the use of oil fuel derived from tar sands in 

Canada from being used for military purposes by the United States 

military. I am not quite sure what the scientific basis of that is, 

but it was a political decision that sent, kind of, a perverse signal 

to the market that we are not going to accept that kind of fuel. 

13 

At a time when fertilizer prices and inputs are up a couple hundred percent in my district, at a time when diesel is nearly double 

what it was a year ago, at a time when the underlying cost structure for farmers has artificially been inflated because of the runup in the input prices, we have to assess all of these issues: our 

access to supply domestically; invest in the new technologies; and 

make sure that the markets are working appropriately. And that 

means more transparency and more investigation into the system. 

So, Mr. Chairman, thank you for this hearing today and I look 

forward to hearing from all of our witness. 

Mr. STUPAK. Thank you. 

Mr. Melancon for an opening statement, please. 

OPENING STATEMENT OF HON. CHARLIE MELANCON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA 

Mr. MELANCON. Thank you, Mr. Chairman, for holding this hearing. 

I appreciate the opportunity, coming from Louisiana, a producing 

State that has been producing energy for this country for decades 

and without little reward or appreciation. Unfortunately, our prices 

are as high as everyone else’s. There has been a saying for years 

in Louisiana, if we can find that valve and turn if off, people would 

appreciate what we do in Louisiana; Texas, for that matter, and 

the other Gulf States that are producing off their shores. 

You know, I am here today to try and understand and to hopefully help in remedying the problem of high prices to the American 

citizens and, best I can tell in my recent conversations, to the people of this world. The cost everywhere is just going up, and we need 

to find what has caused it. We don’t need knee-jerk reactions. We 

don’t need to continue to try to blame the people in the past that 

took actions, because there are some moratoriums that are out 

there from other than Democrats and there were some actions by 

other than Democrats in the last Congress that dealt with not drilling off of Florida’s coast. So there is enough blame to go around. 

What we need to do is we need to sit down and hunker down together, as a Congress, as Americans, and try and figure out what 

it is that is wrong with the system and produce positive legislation, 

and hope that we can get the proper executive action that may be 

needed to stem the drastic rise of energy, and particularly gasoline 

and diesel fuel and other energies that are causing our businesses 

and business people and citizens throughout the country to suffer. 

It really has come home. When I do get home on weekends is 

when I hope to see my children. And when their excuse for not 

being able to see me is that, ‘‘Daddy, the price of gasoline is so 

much that we are trying to conserve, and we are not making trips 

just so.’’ And I keep saying, I would wish that this would be one 

of your priorities. However, I understand where they are coming 

from. 

And I appreciate, Mr. Chairman, you calling this hearing and 

hope that it will help us to understand better what goes on out 

there and to remedy that situation if it can be. 

I yield back my time. 

Mr. STUPAK. I thank the gentleman. 

14 

Mr. Burgess for an opening statement. 

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS 

Mr. BURGESS. Thank you, Mr. Chairman. And I, too, appreciate 

you holding the hearing today. I look forward to learning a great 

deal about this subject. We, of course, had the hearing in December, which was very instructive. 

Just to think back to my past life—I haven’t been here that long. 

When I was a simple country doctor, if someone asked me about 

futures, I really wouldn’t have known what they were. I wouldn’t 

have known that they are important. I wouldn’t have known that 

they were around so that they would excise some of the volatility 

from the market and they, in fact, performed a useful function in 

that arena. 

Speculation involves someone putting up capital and risking that 

capital. If the market doesn’t behave as intended, then that capital 

can be lost. If the market goes up, obviously that individual who 

is invested is going to be rewarded. But manipulation really has no 

place in our markets. 

And Mr. Chairman, back in September of 2000, I remember 

hearing on one of the financial programs on the radio that they expected the market—the market then was in a downturn, and they 

expected the stock market in general to recover after the presidential election, because they always do. And then several months 

later, listening to the same radio station and a similar radio show, 

the question was raised, well, why didn’t the market recover after 

the presidential election? A lot of reasons were given; perhaps the 

long length of time it took to decide the election. But the other 

thing that was brought up was that there was just an enormous 

amount of money sitting on the sidelines, that people were somewhat skittish about the market and were holding off reinvesting. 

Well, we now know where that money went. It went into oil futures. 

Now, it is my hope that, as a result of this hearing today and 

perhaps others that we will do in the future, again I don’t have a 

quarrel with the speculators, but I do hope that people realize 

when they bet against the United States of America they may well 

lose. And, in fact, I hope they do, because I hope we are able to 

bring prices down—mechanisms such as Mr. Barton suggested, 

mechanisms such as Mr. Walden suggested, things that will increase supply, and therefore bring down some of the price pressure. 

But we also have to have in mind firmly about the future. Now, 

one of the questions that is going to be posed in probably several 

different ways today is, should we increase the margins on these 

futures contracts? And currently my understanding is those margins are 5 to 7 percent. And perhaps they should be higher, much 

higher, in the range of 30 to 50 percent. 

Should we also look at the fact that when you buy an oil futures 

contract maybe you ought to have some place to put the oil that 

you’re going to buy? In other words, if you have no place to put it, 

then clearly you are only buying the contract to resell it and hopefully make a profit in the process. 

15 

We are going to hear a lot of information today about the lack 

of transparency, particularly the over-the-counter trading and the 

Intercontinental Exchange. I certainly can not drive around my district back home in Texas without hearing people wonder if it’s not 

the weakness of the dollar that has caused the price of oil to increase so dramatically. But when you dissect it out, the dollar has 

lost 30 percent of its value and the price of oil has increased 400 

percent. So clearly there is more going on than just the weakness 

of the dollar. 

So when we know—and we have heard other people reference it 

this morning—when we know, to some degree, how manipulation 

of the prices perhaps occurred, why have we not repealed that ability that was passed by Congress in 2000? 

A lot of people sitting on both sides of this dais actually voted 

for that bill. I have the roll-call vote here in front of me, if anyone 

is interested. Speaker Pelosi voted for that bill. This is the Commodity Futures Modernization Act, 19 October 2000. Chairman 

Dingell voted for this bill. Chairman Stupak voted for this bill. 

Well, now that we know what we know, what has taken us so 

long to repeal it? After all, we’re 18 months into a Democratically 

controlled Congress, and with all of the enlightenment that was 

supposed to follow that, why are we still now talking about it? 

Well, speculation does create liquidity. There is a troublesome aspect here. We were warned about these oil prices, we were warned 

in this Congress, in September of 2005, after Katrina and Rita. 

And Chairman Barton tried to do something about it. He introduced legislation in October that would’ve increased supply, 

would’ve increased refining capacity, would’ve increased new drilling capabilities, and he was rebuffed. 

So now it is incumbent upon this Congress to look ahead. And 

don’t just look at what’s going on right now. Let’s look 10 years 

into the future. We can see a day where demand will greatly exceed supply. If this is just an oil bubble right now, then so be it; 

maybe we can deflate it. If we do, I hope we do so gradually, because I don’t know that our economic system can contain another 

shock like it did with the banking industry. But nevertheless, we 

are looking at a world where demand will greatly exceed supply. 

So right now, right now, in a bipartisan way, let’s resolve this 

issue. Let’s resolve this issue so we are prepared for that future energy shock. 

And I would ask many of those who are going to be testifying in 

front of us today: Clean up your act. Let’s all declare victory. Because, after all, we know that business has to go on. And the economy could scarcely afford a rapid deflation of the oil prices. But, 

at the same time, we cannot sustain, our economy cannot sustain 

the price set at the current level that it is. 

Thank you, Mr. Chairman, for your indulgence. I’ll yield back the 

balance of my time. 

Mr. STUPAK. I thank the gentleman. 

Well, that concludes the opening statements of the members of 

the subcommittee. 

I’d like to recognize my colleague, Mr. Rogers. He’s a member of 

the full committee, and he is here to participate today, but unfortunately will not be able to give an opening statement. 

16 

Mike, do you have an opening statement you would like to submit for the record? 

Mr. ROGERS. I do, Mr. Chairman. 

Mr. STUPAK. OK, without objection, it will be submitted for the 

record. 

[The prepared statement of Mr. Rogers follows:] 

STATEMENT OF HON. MIKE ROGERS

Mr. Chairman, 

Thank you for holding today’s hearing. Mr. Chairman, we will hear a great deal 

of testimony today and I am going to keep my remarks brief. I appreciate your indulgence in allowing me to participate in today’s hearing and I am confident that 

the extensive witness list today will help this committee learn more about an important issue. Like most Members of this committee I want to see American’s pay less 

for gasoline. And like many members of this committee I believe that speculation 

does play a part in the cost of oil. I hope that today’s hearing sheds some light on 

just what the impact of speculation is on oil prices, and what Congress can do to 

bring down the cost of energy. 

That said, I do think we need to take a moment to think a bit about what the 

larger problem is here. The cost of oil is driven by supply and demand, and today 

demand is at or above supply. That means that every barrel of oil is going to be 

expensive, and even if we eliminate every speculator, something that I doubt we can 

actually do, the cost of barrel of oil is still going to be very expensive. 

Mr. Chairman, today’s hearing is important and helpful. But we are kidding ourselves and kidding the American people if we do not do much more to add supply, 

domestic supply, of oil and gas. 

Mr. STUPAK. I also expect—in fact, Mr. Ross from Arkansas has 

just landed. He will be here shortly. He is also a member of the 

full committee, and he will be participating this morning, also 

through questions. 

So we look forward to those two members participating with us 

here today. 

I’d ask the first panel of witnesses to come forward. 

On our first panel we have Mr. Fadel Gheit, who is Managing 

Director and Senior Oil Analyst at Oppenheimer & Company; Mr. 

Michael Masters, who is Managing Member and Portfolio Manager 

at Masters Capital Management, LLC; Mr. Roger Diwan, who is 

Partner and Head of Financial Advisory at PFC Energy; Mr. Ed 

Krapels, Ph.D., who is Director at Energy Security Analysis, Incorporated. 

Gentlemen, welcome. I know some of you, as well as many of the 

witnesses on the other panels, have traveled great distances to be 

here with us today. We appreciate your willingness to be here and 

share your knowledge with the committee. 

It is the policy of the subcommittee to take all testimony under 

oath. Please be advised that under the Rules of the House you have 

the right to be advised by counsel during your testimony. Do any 

of you wish to be advised by counsel? 

Everyone is nodding their head no; I will take it as a no. Therefore, I’m going to ask you to please rise, raise your right hand and 

take the oath. 

[Witnesses sworn.] 

Mr. STUPAK. Let the record reflect that the witnesses replied in 

the affirmative. You are now under oath. 

17 

We will now have a 5-minute opening statement from our witnesses. You may also submit a longer statement for inclusion in the 

record. 

So we’ll begin opening statements, go from my left, your right. 

Mr. Gheit, if you will begin, please, with an opening statement, 

sir. 

STATEMENT OF FADEL GHEIT, MANAGING DIRECTOR AND 

SENIOR OIL ANALYST, OPPENHEIMER & CO., INC. 

Mr. GHEIT. Mr. Chairman, good morning. My name is Fadel 

Gheit. I’m—— 

Mr. STUPAK. Can you move that forward? Just pull it forward 

there. 

Mr. GHEIT. Good morning. 

Mr. STUPAK. Good morning. 

Mr. GHEIT. We are on. 

Mr. STUPAK. It’s on. 

Mr. GHEIT. Over the last 12 months, as you all stated, oil prices 

more than doubled, but industry fundamentals have little changed. 

The same old factors—supply disruption in Nigeria, Venezuela, 

Iraq, Iran—all these factors were already embedded or reflected in 

oil prices a year ago when oil prices were $65. Nothing I can think 

of that changed over the last 12 months, with the exception of the 

devaluation of the dollar, caused oil prices to more than double. 

I have been for a while saying that oil prices are inflated. They 

are not supported by market fundamentals. And the reason I base 

my conclusion that oil prices are extremely high is that I have been 

in this business almost 30 years. I talk regularly to the COOs of 

oil companies, from the largest of them all to very small, independent oil and gas companies. They all come to the same conclusion, that oil prices do not reflect market fundamentals. In my 

view, we can produce oil profitably at less than half the current 

price levels. 

Now, there was no unexpected changes in the industry fundamental in the last 12 months when oil prices were $65. Now oil 

prices are double that today and are likely to go higher, because, 

again, the speculation will continue, the same tightness in the market will continue. 

We saw what happened yesterday in the gathering in Riyadh or 

in Jeddah. And basically the Saudi Government said that it is speculation, it is taxes by countries, as well as the devaluation of the 

dollar, and their continued demand increase in China and India. 

The changes in demand in China and India was not new. Actually, demand growth has been trimmed over the last 12 months because of the global economic slowdown. The oil industry, as I said 

before, can profitably produce oil at less than half the current 

price. 

Now, what do we do about speculation? A lot of people talk about 

speculation. Some people say it has very little to do with the spike 

in oil prices. Some people think it more than doubled—or the cause 

of doubling oil prices. 

As I recommended to the Senate panel in December of last year, 

we should raise the margins requirement to 50 percent, similar to 

what is required on stocks. We should bar companies operating in 

18 

the U.S. from trading oil futures on exchanges not in compliance 

with the regulators. We cannot close the door here and open a window outside of the U.S. 

We should set trade and volume limits by commercial in relation 

to physical needs, only those companies that will physically use the 

oil. We should set industry standards for airlines, for oil companies, 

for refiners, to see what is the appropriate level the physical inventory that they should hedge. 

Now, we should limit trading by financials to a percentage of the 

commercial volume. Yes, some people say we need the liquidity and 

these people provide service. But we don’t want them to control the 

market, as they have in the last few years. 

We should bar investment banks and other financial traders 

from owning energy assets. We should separate crude oil trading 

from other trading and investment services. We should require full 

disclosure by investment banks of oil trading results. We should 

impose stiff penalties, including jail terms, on violators. 

That is the end of my statement. 

[The prepared statement of Mr. Gheit follows:] 

19 

20 

21 

22 

23 

24 

25 

Mr. STUPAK. Thank you, Mr. Gheit. 

Mr. Diwan? 

STATEMENT OF ROGER DIWAN, PARTNER AND HEAD OF 

FINANCIAL ADVISORY, PFC ENERGY 

Mr. DIWAN. Thank you and good morning. I would like to concentrate today my remarks on the structural changes really that 

have occurred in the last few years in the oil market and how the 

mechanism of oil price recovery have shifted from the physical to 

the financial world. 

If you can pull my first slide, please. 

As you can see, actually, prices have moved in a narrow band 

until 2003 and were largely determined by the level of inventories. 

The main reason for this narrow band was due to the existence of 

a very large amount of unused capacity within OPEC, what we call 

in our jargon ‘‘spare capacity.’’ 

The system broke down in 2003, first and foremost because the 

world basically faced two consecutive shocks: a supply shock in 

2003 when problems in Venezuela, Nigeria, and Iraq reduced supply; followed by a demand shock in 2004 when global demand increased by over 3 million barrels per day. These two combined 

forces basically wiped out all the remaining spare capacity within 

OPEC and left only an estimated 2 million to 2.5 million barrels 

of cushion, most of it in Saudi Arabia. 

During that time, the benchmark, WTI, doubled from $35 to $70, 

as the world started to adjust to this concept of low spare capacity. 

The other important phenomenon during that period was the lack 

of growth in crude supply from non-OPEC countries despite the 

price rise. It is that fact that has really cemented the fundamental 

shift in perception from an era of plenty to an era of scarcity. 

This era of scarcity is now defined by a supply narrative that is 

firmly established in the oil market and, in particular, among the 

financial players. It is, in fact, that narrative that helped usher in 

what I call the ‘‘financialization’’ of oil markets. 

This ‘‘financialization’’ can be seen in three key developments between 2003 and 2006, all of them pointing to the fact that oil price 

discovery moved from the physical to the paper market. 

The first one is a dramatic increase in importance of the financial player in oil futures, with a multiplication by five of the number of financial companies trading on NYMEX and the rapid takeoff of the ICE exchange. As their number grew, their weight grew. 

And we have seen an increase in liquidity and money inflow. 

And, actually, during that first phase of financialization, we saw 

a very strong correlation between the net inflow of money to the 

futures and the oil prices. In the second phase, the financial player 

grew to become more sophisticated. And we saw another correlation between basically the net length of the noncommercial and oil 

prices. 

Clearly, the most troubling issue has certainly been the doubling 

oil prices in the last 10 months. And to understand that, we need 

to understand that, since August 2007, oil has become the hedging 

instrument against the weakening dollar and rising inflation. 

If you can see my second slide, please. 

26 

And what happened basically is, as the U.S. Fed started to ease 

monetary policy in September 2007 with zero interest rate cuts, the 

U.S. dollar weakened. As the dollar weakened, dollar-priced oil has 

emerged as natural hedge, not unlike gold. And we have a very 

strong negative correlation between oil and the dollar. 

So how did we get to the point where oil became a hedging tool, 

a new asset class, and not just the price of a commodity? The combination of increased liquidity, new players, and new instruments, 

such as the index funds, have allowed oil to become another asset 

class used by portfolio managers. 

By having oil futures and index funds as part of the portfolio of 

asset classes available to them, we have created linkages with the 

rest of the financial instruments and opened oil to be used as a 

hedging mechanism. So now oil prices are very much driven by 

what I call the macro fundamentals, such as interest rates, currency rates, or inflation expectation, through these portfolio effects 

as much as by the oil fundamentals, which are traditional supply 

and demand analysis. 

The instruments of choice for this transmission between oil and 

macro fundamentals are the commodity index funds. These index 

funds have become the primary tool for hedging, investing, or speculating commodities. They now represent the single largest component for futures. 

It is undeniable that the lack of position limits for these index 

funds has created the useful backdoor, allowing the financial community to invest more money in oil futures than the regulators intended originally. And since they are used to hedge potentially 

much bigger markets, like currencies, they have room to continue 

to grow. 

Now that oil has in effect become a new asset class, we should 

make sure to have the right regulatory framework and make sure 

that we do not give incentives to invest in one asset class over the 

other, be it through regulatory loopholes or a lower transaction cost 

such as the margin calls. 

Thank you. 

[The prepared statement of Mr. Diwan follows:] 

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Mr. STUPAK. Thank you. Mr. Masters please, for an opening 

statement. You’ll want to turn on that button there. Make sure the 

green light’s on there. There we go. 

STATEMENT OF MICHAEL W. MASTERS, MANAGING MEMBER 

AND PORTFOLIO MANAGER, MASTERS CAPITAL MANAGEMENT, LLC 

Mr. MASTERS. Mr. Chairman and members of the Committee, 

thank you for the opportunity to testify today on the topic of energy 

speculation. Commodities futures markets exist solely for the benefit of bona fide physical hedgers, not for speculators. The futures 

markets provide physical hedgers with two vital functions, price 

discovery and risk hedging. In fact, producers and consumers in the 

energy markets priced nearly all spot market transactions at the 

futures price plus or minus the differential. 

As an example, the heating oil distributor buying from their local 

wholesaler pays the nine max futures price, minus a local differential. That means that when the futures price rises by a dollar, then 

the spot price will also rise by a dollar. Price changes for energy 

commodities originate in the futures market and then are transmitted directly to the spot markets. So what happens in the futures 

markets does not stay in the futures markets. 

Index speculators, a group that I define in my written testimony, 

have driven up futures prices and damaged the price discovery 

function. Slide one. 

Index speculators have poured billions of dollars into the commodity futures markets, speculating that commodity prices will increase. As the slide shows, assets allocated to commodity index 

trading strategies have risen from $13 billion at the end of 2003 

to $260 billion by the middle of March of 2008. 

Mr. BARTON. Would the gentleman suspend? Mr. Chairman, 

could you have the big screen put down? 

Mr. STUPAK. We were just talking about that. 

Mr. BARTON. Because I can’t see that, plus the glare, it’s hard 

to see. 

Mr. STUPAK. Kyle, could you we get the big screen down? 

Mr. BARTON. Thank you, Mr. Chairman. 

Mr. STUPAK. Hang on, Mr. Masters, so we can get it up there 

and—— 

We’ll get going here. It’s on page 5 of Mr. Master’s testimony, 

that same chart if you want to follow along. Mr. Masters, if you 

want to continue where you left off. Thank you. 

Mr. MASTERS. Sure. Thank you. 

As you can see from the chart, the prices of the 25 commodities 

that compose these indices have risen by an average of 183 percent. 

Index speculators have bought more commodities futures contracts 

in the last 5 years than any other group. If they had been the largest buyer of futures contracts, is it not reasonable that they would 

have had one of the largest impacts on futures prices? Importantly, 

physical hedgers are motivated by only one thing: risk reduction. 

Producers and consumers only trade futures in order to hedge their 

actual physical production and consumption. Their trades are always based on actual supply and demand fundamentals that they 

42 

are experiencing in the real world. Their trading decisions 

strengthen the price of discovery function. 

In contrast, index speculators invest in a broad basket of commodities and therefore do not express a view on any single commodity. They do not trade based on underlying supply and demand 

fundamentals. Therefore, their trading decisions damage the price 

discovery function. In fact, if a pension fund decides to allocate 

$100 million to a commodity index, the $40 million that consequently flows into West Texas Intermediate crude oil has nothing 

to do with the real world supply or demand for crude oil. Every single WTI futures contract that is traded for any reason other than 

the supply and demand of physical crude oil is a contract that 

weakens the price discovery function. In 1998, physical hedgers 

outnumbered speculators by a 4:1 ratio. Today index speculators 

are the 800-pound gorilla that dominates the futures markets. Together with other speculators, they now outnumber physical hedgers by a 2:1 ratio. 

There are three steps that Congress can take to immediately reduce excessive speculation and strengthen the price discovery function. First, I recommend that Congress convene a panel composed 

exclusively of physical commodity producers and consumers for 

every commodity. This panel should set hard and fast speculative 

position limits at the control entity level. These limits must apply 

to every market participant whether they directly access the futures markets or trade in the over-the-counter markets through 

swaps and other derivatives. 

Second, the panel should numerically define what exactly constitutes excessive speculation as a percentage of open interest. 

Third, Congress should eliminate the practice of investing through 

passive commodity index replication because of the damage that it 

does to the price discovery function. Another avenue might be 

found in the Commodity Exchange Act which states, when discussing speculative position limits that ‘‘such limits upon positions 

in trading shall apply to positions held by and trading done by two 

or more persons acting pursuant to an expressed or implied agreement or understanding the same as if the positions were held by 

or the trading were done by a single person.’’ 

Since index speculators are all acting in express agreement by 

following the exact same index trading methodology, they should 

all be collectively subject to the speculative position limits of a single speculator. If this provision of the Commodity Exchange Act 

were enforced, then the amount of money allocated to index replication strategies would have to drop from the current level of $260 

billion to a limit of a single speculator, approximately $4 billion. 

In closing it is important to realize that Wall Street is very good 

at inventing and promoting novel investment strategies. Unfortunately, they are not good at foreseeing the long-term consequences 

of the instruments that they create. The recent subprime debacle 

which has now grown into a worldwide financial crisis shows us 

where unbridled financial innovation can lead. 

This concludes my testimony. 

[The prepared statement of Mr. Masters follows:] 

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Mr. STUPAK. Thank you, Mr. Masters. Dr. Krapels, if you will, 

for an opening statement please. I should note for the record, Congressman Gene Green from Texas has joined us. 

STATEMENT OF EDWARD N. KRAPELS, PH.D., DIRECTOR, 

ENERGY SECURITY ANALYSIS, INC. 

Mr. KRAPELS. Good morning, Mr. Chairman and members of the 

Committee. Thank you for your invitation to participate in this 

panel. I’ll try to avoid duplicating what my predecessors have said. 

And I don’t have pictures that are any better than theirs. So let 

me try to make four or five of what I think are commonsense statements. 

First of all, let me agree with Congressman Barton that it isn’t 

just speculation that’s driving up the price of oil. There is a very 

comprehensive set of physical market fundamentals that have led 

to tight markets. Trying to figure out precisely how much of today’s 

price is physical versus financial is a very difficult exercise and one 

that’s, at the end of the day, not terribly productive. 

Having said that, though, I agree with my fellow panel members. 

And I would say that there are four things that we should look at 

when we think about the effect of the financial markets on the 

price of oil. First of all, there are always bubbles in financial markets, right? Arguing that this is not a bubble in the oil market or 

that oil markets are somehow exempt from having bubbles is not 

productive. Globally, there is so much money in today’s investment 

world that where the money flows affects the value of the assets 

that the money flows to. And money, clearly, has flowed into commodities and into energy. That effect has had an effect on energy 

prices. 

There’s a wonderful book that came out a year or so ago called 

A Demon Of Our Own Design, by a name Richard Bookstaber from 

Morgan Stanley. And he wrote something that Michael has just 

said. I quote him: ‘‘more often than not, crises aren’t the result of 

sudden economic downturns or natural disasters.’’ Virtually all 

mishaps over the past decades had their roots in the complex structure of the financial markets themselves. We do create instruments 

that are so sophisticated and so difficult to understand in their 

interaction with one another, and that has happened in the oil 

business. 

My second point is that in the commodities sectors, as Roger and 

Michael have said, index and sovereign fund managers have increased their exposure to financial energy contracts. There is no 

question about that. The data speak for themselves. 

The third point is that those who say this has no effect on prices 

often argue—and I’m sure you have heard this phrase—well, 

there’s a short for every long. Well that’s true. But at what price 

does a short have to be short in order to meet the demand? And 

it is like any other commodity. If we lived in a small town and we 

had all owned a house and suddenly a person that has much more 

money than the rest of us moved in and bid up the price of our 

houses, the increase in the size of the funds that these people have 

is so enormous that there can be no doubt that this increase in the 

demand for paper barrels has bid up the price for paper barrels. 

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Finally, the potential market power of large entities—and we’re 

talking now about market power in the old-fashioned FERC sense 

of the word—is enhanced by the generous leverage that’s allowed 

for commodity trading. 

Now, a couple of points about how those of us in the analysis 

business try to keep up with this. For years, we have had the Commodity Futures Trading Commissions’s Commitment of Traders’ reports. Those have been very useful. But the data in that report are 

so imperfect that until very, very recently, we didn’t know how 

much of the effect of speculation was actually shown as commercial 

rather than noncommercial. And these changes in the transparency 

of the data have been very, very important to help us understand 

what’s really going on in the oil market. 

Finally, I agree with most of the recommendations of my fellow 

panel members. I think that it is time for Congress to require 

much greater disclosure from all exchanges that deal with U.S.- 

traded commodities. I think it is time to require all exchanges in 

OTC markets to impose and enforce limit positions. And I think it 

is time to reduce the leverage that are allowed in commodity trading, and particularly oil. 

Let me make a final statement. We like to blame other people 

for our problems. We blame the Chinese. We blame the Saudis. We 

blame OPEC. But I remember earlier this morning the statement 

from that great American philosopher Pogo, who said many years 

ago, ‘‘we have met the enemy, and he is us.’’ 

Mr. STUPAK. Thank you. Thank you all for your testimony. 

[The prepared statement of Mr. Krapels follows:] 

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Mr. STUPAK. We will begin questioning. I think we’ll probably go 

one or two rounds with this panel. So we’ll try to keep it at about 

the 5-minute point. 

Mr. Gheit, if I may, your testimony says that the doubling of 

crude oil prices in the past year was mainly due to excessive speculation, not due to an unexpected shift in market fundamentals. 

What do you mean by excessive speculation? 

Mr. GHEIT. Well, we look at the base case. A year ago, oil prices 

were about $60, $65, and everybody expected that oil prices would 

probably come down, not go up because we started the year, if you 

recall, at almost $50 oil. Actually the end of, 2006, I believe, that 

OPEC had to cut production to prevent a meltdown, as you called 

it, in oil prices. 

So last year, as oil prices went to $60 or $65, all of a sudden we 

had finally outages and that was because—or at least that was 

what the speculators put as the reason for why we should put oil 

prices up. But the fact of the matter, even—oil prices should be 

going down, not up. Because there was not enough refining capacity to use the excess oil on the market. 

Mr. STUPAK. So if we have excess oil now on the market, and in 

your testimony you go on and you say, large investment banks 

keep fanning the flames by making exaggerated price predictions 

that they believe they can help achieve, given the Government’s 

unwillingness or inability to hold them accountable. As you know, 

Goldman Sachs recently predicted that oil prices of $150 to $200 

a barrel and yet are probably the largest commodity dealer on Wall 

Street. Without singling out any particular company, is there an 

actual or apparent conflict of interest in an investment bank taking 

up the price of commodities through its research arm while speculating on it at the same time? 

Mr. GHEIT. Absolutely. Unequivocally and absolutely. I mean, it 

becomes a self-fulfilling prophecy. When the largest trader predicts 

the price of a commodity, guess what’s going to happen to the 

price? 

Mr. STUPAK. It’s going to go up. 

Mr. GHEIT. It’s going to follow the leader. 

Mr. STUPAK. Let me ask you this. The Securities and Exchange 

Commission prohibits insider trading by requiring disclosure when 

investments exceed 5 percent in a stock. However, there’s nothing 

comparable for commodities. What would be the best way for Congress to address this matter? Should all investment banks and 

other noncommercial interests have to make public their holdings 

of oil futures or inventories? 

Mr. GHEIT. Absolutely. Absolutely. Disclosure is the best thing. 

As somebody has said, they operate well in the dark. When you 

shed the light on them, there’s no place for them to hide. There are 

a lot of conflicts of interest. They create this financial instrument 

that nobody really knows how it works except they themselves. 

They create—this is the black box, if you will. And it pulls on currency, it pulls on the stocks, it pulls on other things. So once you 

catch one, the other will go unnoticed. So it’s impossible for us to 

quantify the impact because it has a lot more to do than only the 

commodity. 

98 

Mr. SESTAK. Thank you. Mr. Masters, how much do you estimate 

that crude oil prices have been inflated by excessive speculation 

above supply and demand fundamentals? In raising concerns about 

the multitude of commodity index investing, are you suggesting 

that supply and demand fundamentals have no role in oil prices? 

Mr. MASTERS. Thank you, sir. Basically what I’m suggesting is 

that there is supply and demand fundamentals. But in this case, 

what we’ve got is we’ve got supply and demand and demand. We’ve 

got financial investor demand that we’ve never really seen before 

in these markets. And that long-only financial investor demand has 

come into these markets, has altered the price discovery function 

of the markets, and has altered the price. 

So when we talk to physical producers, refiners, consumers of energy, they all tell us basically the same thing, that they think that 

crude oil should trade somewhere around the marginal level or 

equilibrium level of the cost to produce, the marginal cost of production, which they tell us is in the neighborhood of $65 to $70 a 

barrel. 

Mr. STUPAK. So it should be at $65 or $70 a barrel now before 

the speculators get to it? 

Mr. MASTERS. That’s what they tell us. I mean, one of the important points here is that—just as I can’t specifically tell you what 

the number is from the speculators, I can’t specifically tell you, or 

neither can anybody else, what the specific level of prices would be 

from China or India or any other component in the price. But I 

think there’s clearly a great deal of the price that is coming from 

excessive speculation. 

Mr. STUPAK. Let me—Kyle, turn to number two if you will, 

please. Let me ask you this question, I’m using Commodity Futures 

Trading Commissions’s data now. And we estimate that 71 percent 

of the trading on the West Texas Intermediate crude oil contract 

is done by speculators. And only 29 percent by physical hedgers. 

The CFTC weakened its regulations in 1998 by allowing its 

changes to set soft accountability levels instead of hard position 

limits for commodities like oil. 

You recommended in your testimony setting hard speculative 

limits for immediate month in the cumulative for all the months. 

Those speculative limits effectively wring out the excessive speculators without damaging the important role traditional speculators 

play in the commodity markets? 

Mr. MASTERS. I think so. The analogy I would use here is, it’s 

like filling up your tires with tire pressure. If your tire pressure— 

if you need 30 pounds of tire pressure in your tires and you only 

put 10 pounds of air in there, you need more or you’re not going 

to be driving very well. 

What we’ve got here—— 

Mr. STUPAK. Wait a minute. It’s just going to buzz for a second 

here. 

OK. Go ahead. 

Mr. MASTERS. So what we’ve got here is a situation in which people are trying to put 60 or 90 or 120 pounds of pressure in the tire. 

You know eventually the tire’s going to explode. It doesn’t work. So 

we need sufficient speculation. But we don’t need unlimited speculation. A little speculation helps grease the engine, helps grease the 

99 

wheels, if you will, allows the purpose of the futures markets to 

work, which is price discovery and risk reduction for actual physical hedgers. The genius of the 1936 Commodity Exchange Act was 

that it allowed the functioning of the markets, it allowed speculators to participate in the markets, but it didn’t let speculators 

dominate the markets. So position limits allow enough speculation 

to occur to grease the wheels but they don’t allow speculators to 

dominate the price discovery function of the market, and that’s the 

idea. 

Mr. STUPAK. One last question, and then I’ll go to Mr. Whitfield. 

And we’ll go a second round because I do have questions for Dr. 

Krapels and Mr. Diwan. Both Secretary Paulson and Secretary 

Bodman have argued speculation is playing no role in the rising oil 

prices, the CTFC seems to agree with them. What are the costs of 

inaction, in your view, if Congress fails to address this matter? Will 

it correct itself? 

Mr. MASTERS. Caines had a great expression. He is a famous 

economist. He said, ‘‘In the long run, we’re all dead.’’ This is a situation in which this crisis needs to be solved. If this is an acute crisis. You know, what we have got here is we have got someone that 

is morbidly overweight. That person clearly—there are chronic solutions to his problem. He probably needs to diet. He probably 

needs to exercise. There’s a lot of things that he needs to do. But 

right now he’s having a heart attack. And if we don’t take action 

right now, then we’re going to have a real problem. This is an 

acute problem right now. 

And this is a problem that can be solved very quickly with 

changes in the regulatory framework. So I think, as I’ve said in my 

testimony, I think the time for studies and examination has 

passed. You know, like the FDA does, let’s do the studies before we 

allow the approval of a drug to come to market. 

So basically, I think that if we do some of these actions, some 

of the things that I’m talking about, we can greatly deal with this 

amplification of prices created by excessive speculation. And then 

we’ll have time to deal with some of the chronic solutions for the 

energy infrastructure in this country. 

Mr. STUPAK. Thank you. Mr. Whitfield for questions please. 

Mr. BARTON. Parliamentary inquiry, Mr. Chairman. We normally 

do 10 minute questions, rounds. You took almost 10 minutes in 

that one. Are we doing 5 minutes just because of the number of 

panels? 

Mr. STUPAK. By number of panels, number of people who are interested, we’ll probably go two rounds. 

Mr. BARTON. OK. Thank you. 

Mr. WHITFIELD. Mr. Masters, you just indicated that this problem could be solved rather quickly if we took steps regarding the 

regulatory monitoring of speculators in the market. Let’s say the 

Congress passed legislation adopting these regulatory changes and 

the Senate passed it and the President signed it, how soon would 

we see a significant reduction in retail gasoline prices? 

Mr. MASTERS. Without being able to predict the future, my estimation would be within 30 days. 

Mr. WHITFIELD. Within 30 days of the President signing the bill? 

Mr. MASTERS. Yes, sir. 

100 

Mr. WHITFIELD. OK. Now I’m going to ask you another question, 

how much would they be reduced roughly? 

Mr. MASTERS. I’m not sure I have a crystal ball that great. I 

would just go back to what I said earlier. My sentiments is prices 

would probably drop over a reasonably short period of time back 

to somewhere closer to the marginal reduction cost of oil. 

Mr. WHITFIELD. Of $65 to $75 a barrel? 

Mr. MASTERS. $65 to $70, then I think it’s reasonable to conclude 

that that is about halfway where prices are today. I would think 

that gas pries would reflect that in relatively short order. 

Mr. WHITFIELD. So you are saying if we adopt these regulatory 

changes, we could almost cut the retail price of gas in half in a relatively short period of time? 

Mr. MASTERS. Yes. 

Mr. WHITFIELD. Dr. Krapels, what do you say? 

Mr. KRAPELS. To the chagrin of some of my colleagues at the 

company that I work in, I tend to agree with Mr. Masters. I think 

the amount of speculation is really substantial. And I don’t think 

it would take 30 days after the President signing the bill. I think 

it would happen more quickly than that. Once the market understood this was happening, I think a lot of the funds would withdraw their positions and try to liquidate in as orderly a fashion as 

they could. 

Mr. WHITFIELD. Mr. Diwan, what do you say? 

Mr. DIWAN. I don’t know how quickly it takes to get prices down. 

But it’s clear that prices will reflect closer to marginal cost of producing oil. I think the marginal cost is slightly higher than what 

Mr. Masters just said. But that could come fairly quickly. It can 

overshoot on either side. But what’s interesting is that the longterm price curve, so how futures, price of oil do 5, 10 years, right 

now is around $140. And that is the expectation, that prices continue to stay at these levels at a marginal cost, which doesn’t make 

a lot of sense. 

Mr. WHITFIELD. Mr. Gheit. 

Mr. GHEIT. Well, let me start—— 

Mr. WHITFIELD. Pull the mike up please. 

Mr. GHEIT. Let me start by saying the marginal cost is a moving 

target. Because of the chicken-and-the-egg situation. The reason 

that you have higher marginal cost is because where oil can be obtained very cheaply, we’re locked out, whether it’s Russia, whether 

it’s Iraq—Russia can produce oil under $10 per barrel. Iraq can 

produce oil at similar or even lower. So the marginal cost is a moving target. The fact of the matter is, if you look at the finding and 

development costs of the industry, in the last 5 years, it averaged 

less than $15. There is a rule of thumb that the price of the commodity is not sustainable at more than triple the replacement cost. 

So it should be around between $45 and $60. 

So, meeting with the head of most of the oil companies that we 

cover, only a year ago they were amazed at the sustainability of 

$60 oil. The chairman of the largest oil company in the world 5 

years ago said at the time he doesn’t see any justification for oil 

prices above $40. So the world has not changed significantly over 

the last few years to justify $140. And then you have people preVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00106 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
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dicting $200 oil. If we don’t do anything about it, their prediction 

will come true. 

Mr. WHITFIELD. But you’re saying the production of oil is way over $15 a barrel. I mean, production cost—— 

Mr. GHEIT. It’s just replacement costs of the reserve in the ground. There is another $15 or $20 to extract it. And then there 

is $15 or $20 per barrel which is the profit and taxes. That’s how 

it works. It’s the one-third rule. 

Mr. WHITFIELD. My time has expired. 

Mr. STUPAK. Mr. Inslee for questions, please. I should note Mr. 

Ross has joined us, a member of the full committee not the subcommittee. But we would appreciate it if you want to submit an 

opening statement, we’ll accept it and you will have time to ask 

questions. 

Mr. Inslee. 

Mr. INSLEE. Thank you. Mr. Masters, for my opening comments, 

you may have noted that I have minimal high regard for this administration’s capability of dealing with this problem. And I note 

that it was something like 9 days after you put out a suggestion 

in Senate testimony that we needed to have a more transparent 

market. Is there any reason for the CFTC not to have been engaged in this information gathering before your Senate testimony? 

Mr. MASTERS. Not that I can think of, no. 

Mr. INSLEE. And tell me what tools with existing statutes do you 

think the CFTC has to at least go in the right direction in this regard. 

Mr. MASTERS. One of the things which I read earlier in my oral 

testimony and it’s also in my written testimony is the Commodity 

Exchange Act enforcing that agreement—I won’t read it again. But 

we feel like if you treat index speculators, which are effectively acting very much like each other, they look like one large speculator. 

If you enforce the provisions of that Act through the CFTC—and 

maybe that would be through the FTC, I’m not sure—but effectively you would greatly reduce their ability to engage in index 

speculation. So that’s certainly something that you could do right 

away without—I’m not sure you really need much congressional action there at all to accomplish that. 

Mr. INSLEE. Isn’t it true that the CFTC, for years, had been 

issuing exemptions for these index positions and had full knowledge that there were massive positions being taken in these indexes? 

Mr. MASTERS. That’s correct. 

Mr. INSLEE. Could you—and this is an open question. Could you, 

gentlemen, compare and contrast the situation—Mr. Masters uses 

the term demand on demand as I think, as I understood his testimony about the pernicious effects of this. Does this demand on demand problem exist in other commodities? And could you compare 

this to other commodities? Should we compare it to other commodities? 

Mr. KRAPELS. I think a similar syndrome affects every commodity that’s subject to the GSCI. The demand for paper barrels, 

if you will, or for paper positions or for paper contracts is a separate issue from the demand for physical barrels. And for many 

years, we’ve looked at the demand for paper barrels and just asked 

102 

a question, what does it take to balance that market? If you have— 

if you remember Econ 101, if you have a sudden increase in demand for a commodity, it’s a shift in the demand curve to the right, 

if you remember those awful charts. And the only way that you can 

get that market to equilibrate is if prices go up an awful lot. So 

a demand shock, which is what Mr. Masters has described for us 

today, is exactly what’s occurred in the oil market as a result of 

the commoditization of oil. 

Mr. INSLEE. So could you explain the financialization for oil compared to the lack of financialization of other commodities? 

Mr. KRAPELS. Well, I think that other commodities have been 

financialized. What makes oil so interesting is that it is a global 

commodity. I think a lot of analysts of the correlation of oil prices 

with other economic indicators have concluded that oil makes a 

good portfolio addition for a lot of investors. So a lot of thought 

went into the pension fund’s movement to commodities. And when 

they move into commodities, they move largely into energy. From 

their perspective, it’s a rational strategy and unlike a lot of other 

speculators, there’s no malice aforethought here. They simply do 

what they have to do to keep their pensioners happy. So it’s a kind 

of an accidental overflow, if you will, into a relatively small commodity market. 

Mr. INSLEE. Thank you. Mr. Gheit, I want to ask you as far as 

the timing of impact, if our options are to drill in some other places 

that we haven’t drilled domestically in the United States, which I 

am told will take several years or decades, and taking some action 

to reign in some of this excessive speculation, which would have a 

quicker response? 

Mr. GHEIT. We can put—we can put an end to speculation very, 

very quickly. We cannot produce oil out of those untouched areas 

very quickly. It will take 3 to 5 years, realistically speaking, if we 

start today to have a meaningful impact on our supply or demand 

function. But speculation, we can put an end to it in 30 days. If 

there is a will and there is a way to do it, we can do it. 

Mr. INSLEE. There is a will. And we’re looking for a way. We 

hope to get both. Thank you. 

Mr. STUPAK. Mr. Barton, for questions please. 

Mr. BARTON. Thank you, Mr. Chairman. I could ask questions all 

day. So I’m going to try to limit myself. My first question, I just 

wanted to make sure I understand generically what you guys do. 

Do you risk your own money or do you advise others on how to risk 

their money? 

Mr. GHEIT. I will start. I don’t risk my money or other people’s 

money. I don’t risk anybody’s money. 

Mr. BARTON. You don’t risk any money. So you don’t advise anybody? 

Mr. GHEIT. I’m a research analyst. I cover 22 oil and gas companies here in the U.S. I talk to those companies regularly. I have 

been for almost 22 years. 

Mr. BARTON. I have limited time. I just need to know if you’re 

advising or—— 

Mr. GHEIT. We advise investors. We don’t advise—we don’t advise anybody to buy or sell crude futures. We advise investor to buy 

which stocks we think—— 

103 

Mr. BARTON. I would like the next gentleman to answer. 

Mr. DIWAN. I never invested in the oil market. I’m an advisor to 

a lot of people. 

Mr. BARTON. Thank you. 

Mr. MASTERS. The answer to your question is, we do take risks 

both with our own money and with other people’s money. Not in 

commodities futures, though. 

Mr. BARTON. OK. 

Mr. KRAPELS. We are consultants to the oil industry, not traders. 

Mr. BARTON. OK. So you’re not playing in the market in the 

sense that you’re putting your own money up or down. You’re trying to give good advice in what the market is. The next question 

is to Mr. Diwan. If we had 100 million barrels of oil production capacity available in the world market right now, in other words, we 

could produce 100 million barrels a day, is it your opinion that 

price would be based on the price of production as opposed to the 

marginal demand price that we have today? 

Mr. DIWAN. Well, prices would be significantly lower because basically the market will be constantly facing the risk that some of 

the OPEC producers will overproduce and increase the stocks. This 

is what happened in ’98 when demand collapsed. When you have 

a large spare capacity, you give incentive to anyone who owned 

that capacity to produce. 

Mr. BARTON. Which is what we had until about 5 years ago, according to your chart. 

Mr. DIWAN. Exactly. And we built that spare capacity, if you 

want, by accident, over the ’80s when we significantly reduced demand. And—or when prices were very high and we were able to 

invest to increase production. The problem we have right now here 

is we have very high prices, but that has not changed the supply 

function. We have not been able to increase our supply globally 

outside of OPEC over the last 5 years which tells me there is a 

problem and that problem in a way is what’s attracted a lot of 

money into the oil complex. 

Mr. BARTON. I want to go to Dr. Krapels next. And I’ve had conversations with all the major CEOs of the American oil companies 

in the last 4 or 5 years, in some cases, the last 4 or 5 weeks. And 

what Mr. Gheit said earlier about—he didn’t mention by name. But 

I know who he’s talking about because I had that same conversation 2 years ago when the prices started jumping up in the $70 to 

$80 a barrel range, I was told that those prices couldn’t last, and 

so the majors didn’t make the capital investments. In some cases 

they didn’t have places to invest in. And in other places they just 

didn’t believe that the high prices were realistic. Dr. Krapels, do 

you believe now that there’s enough evidence over the last 2 years 

that it would make sense for the major privately owned oil companies of the United States to make these huge investments based on 

$100 a barrel oil or $120 a barrel oil? 

Mr. KRAPELS. No, sir. I don’t think they’re going to make those 

investments. I think they will be looking at on the margin, something like the Tarsans in Canada as perhaps the marginal—the 

large source of marginal supply. And that could be recovered in the 

$60 per barrel category. I don’t know a single oil company that 

104 

would make $100 investments because I think they believe this 

price is unsustainable. 

Mr. BARTON. Let me ask the next question. Since you gentlemen 

are reputedly some of the most expert people in the United States 

on where the oil markets are, if you were advising Exxon-Mobil or 

Chevron Texaco or Conoco-Phillips, what price would you advise 

them on to base their investment decisions on in terms of major 

capital investments for new production? What’s the price you would 

advise them on? 

Mr. GHEIT. Let me take this question since I talk to these compa- nies on a regular basis. I would say between $45 to $60, no more 

than $60. Actually, they said themselves they do think that any oil 

company that spends an oil price above $60, they would be very 

disappointed 

Mr. BARTON. Forty-five to sixty. Thank you. Mr. Diwan. 

Mr. DIWAN. Well, it is the chicken-and-the-egg thing here, because what you have at the same time oil prices rising to $140, but 

if you invest too much money, Wall Street will slam you because 

you are overinvesting. If you are investing, if you believe these 

prices will stay. So you have—if you want the mechanism. I think 

certain marginal projects right now are invested at $100 in the oil 

sand. And the reason I think the prices are much higher is because 

we need the very big energy input. 

Mr. BARTON. What price would you put your reputation behind? 

Mr. DIWAN. Below $100. 

Mr. BARTON. Below $100. OK. Next, Mr. Masters. 

Mr. MASTERS. That’s not going to be my field of expertise but I would think that price would be below $100. 

Mr. BARTON. OK. Below. Dr. Krapels. 

Mr. KRAPELS. Congressman Barton, did you see the movie There 

Will Be Blood? 

Mr. BARTON. I have not. I do know who Pogo was. I’m one of the 

few people old enough to remember Pogo. 

Mr. KRAPELS. There is a wonderful scene in that movie of a man 

in California digging a deep well until he reaches oil. And I went 

to the movie with my wife. And we said, that’s the marginal producer. He’s dug a well by hand and that’s the $130 per barrel oil 

right there. I’m in the $60 camp. 

Mr. BARTON. Are we going to have another round, Mr. Chairman? 

Mr. STUPAK. Yes. 

Mr. BARTON. I will yield back. 

Mr. STUPAK. Thank you. Mr. Green for questions. 

Mr. GREEN. Thank you, Mr. Chairman. Like my colleagues, I 

apologize for being late because this is an issue that’s so important 

to our country. And I’d like to ask unanimous consent that my 

statement be placed into the record. 

Mr. STUPAK. Without objection. 

[The information follows:] 

STATEMENT OF HON. GENE GREEN

Mr. Chairman, thank you for holding this second O&I hearing today on energy 

speculation. 

This hearing could not be more timely. 

105 

Gas prices are hovering over $4 a gallon nationwide, and every day I hear from 

constituents back home asking me what Congress can do to bring down the skyrocketing cost of energy. 

As a Representative from Houston, Texas—the energy capitol of the world—I 

know there are no easy answers or quick fixes. 

Energy prices are set on the world stage and are influenced by a variety of factors. 

Global crude prices, increased demand from India and China, reduced energy supplies, extreme weather conditions and geopolitical events all play a part in price formation. 

While I agree that as a nation we should both conserve and invest in renewable 

sources of energy, I also believe we need a long-term strategy of increasing domestic 

oil and gas supplies to help mitigate basic supply and demand fundamentals. 

I hope with today’s prices many of my colleagues will agree to this basic tenant 

of a balanced energy policy. 

What also concerns me are reports by several economists and analysts that question whether the standard economic principles of supply and demand are no longer 

the primary factors affecting energy prices. 

In recent years, the percentage of physical hedgers who actually rely on the market to lock in future selling prices is being dwarfed by the entrance of speculators 

who never take physical delivery of oil and gas supplies. 

Some estimate that commodity index speculation has increased 1900 percent since 

2003, and the number of futures contracts has also hit record levels. 

Commodity index speculators -- comprised of sovereign wealth funds and pension 

funds -- are entering the market in droves to diversify their portfolio assets and 

hedge against inflation. 

Foreign boards of trade, which operate outside of the jurisdiction of the Commodities Future Trading Commission, are also heavily trading West Texas Intermediate 

futures contracts here in the U.S. 

If energy prices are indeed being manipulated by the influx of speculators and unregulated foreign boards of trade, the consumer runs the risk of paying distorted 

prices to drive, fly, and heat and cool their homes. 

Legislation has been proposed in this Congress, including by my good friend 

Chairman Stupak, that seek to bring more accountability to commodity transactions. 

Our highest priority in Congress should be to foster fair, open, and transparent 

markets for American consumers, businesses, industry, and utilities. 

Mr. Chairman, I hope today’s panel will help flesh out these very complex issues, 

and I look forward to working with you and other members on improving the transparency of our energy markets. 

I yield back the balance of my time. 

Mr. GREEN. Mr. Masters, according to the CFTC data, ag institutional investors are overwhelming on the wrong side of the market 

in ag subsidies in betting that prices will continue to rise. Do you 

think that’s true with energy as well? If so, why is that given that 

many analysts believe prices are too high and are due to a downward correction? 

Mr. MASTERS. So the way that institutional investors today are 

predominantly investing in the commodities futures markets is 

through a strategy called index replication. This is based on the 

Goldman Sachs and the Dow Jones AIG index of commodities. In 

the Goldman Sachs index, for instance, there are 25 key commodities. When they invest, they invest in every one of these commodities simultaneously many times. I mean, they’re buying an index. 

And so whatever weight that index is, is for that specific commodity future, is in that index, is what they’re going to invest in 

that specific commodity. 

So, for instance, West Texas Intermediate, they’re going to put 

40 percent of every dollar they put in the index into West Texas 

Intermediate because 40 cents of the dollar goes in there by virtue 

of the index. 

106 

For some of the other commodities, like wheat, I believe, that’s 

2 percent. 

Mr. GREEN. I only have 5 minutes. We may have a second round. 

But if you could give us a more concise—I have questions for the 

other panelists. 

Mr. MASTERS. OK. 

Mr. GREEN. But that’s generally the idea? 

Mr. MASTERS. That’s generally the idea. 

Mr. GREEN. Has rapid run-up in oil prices adversely affected oil 

producers who have sold their production at lower pricer earlier? 

And has this led margin costs? And how costly has this been? 

Mr. MASTERS. That’s been a very big issue. You know, some of 

the investment banks have said, well, we should really be applauded for helping drive up prices because this has allowed other 

hedgers to be able to hedge at higher prices. And I agree with them 

that they’ve helped drive up prices. More importantly though—— 

Mr. GREEN. I think they would probably be in a really small minority in our country, even from the oil patch where I come from. 

Mr. MASTERS. Yes, sir. Right now the problem is, as you suggest, 

many people that used to hedge because of the price volatility 

that’s been created in these markets are now not hedging. So some 

of that supply that would have come on the market is not coming 

on the market because people are literally afraid to hedge. We’ve 

talked to a lot of physical producers, some of which did hedge at 

much lower prices and have had to cover or rebuy what they sold 

at much higher prices which has had a very—in some cases force 

them out of business. 

Mr. GREEN. OK. I have a question for all the panelists, John 

Hofmeister, the previous CEO of Shell, recently suggested by restricting access to domestic supplies, U.S. policymakers are sending 

a signal to investors that output would be constrained, thereby 

driving up the price. He said, ‘‘there is no confidence that we can 

explore and produce more barrels given the United States is not 

letting us do it, and that it’s preventing people from having optimist outlook on oil futures. So it looks like demand will continue 

to run ahead of supply.’’ Do you agree with this assessment? And 

would increasing domestic supplies of energy here at home send 

the right signals to investors, for that matter, foreign nations that 

the U.S. is serious about meeting its own energy needs, thereby reducing speculative prices? 

Mr. GHEIT. I agree. 

Mr. DIWAN. They think the problem is bigger than just the 

United States being able to produce more. The question is, can the 

world produce more and where is that oil going to come from. 

Mr. KRAPELS. I agree with Roger. There’s a limit to how much 

more we can produce. Even if we open everything up—all of our 

frontiers areas. But it sure would send the right signal if we did. 

Mr. MASTERS. I would just go back to what I said before about 

there’s an acute problem and there’s a chronic problem. And the 

chronic problem is long-term energy security. The acute problem is 

financial speculation in the commodity futures markets. 

Mr. GREEN. Mr. Chairman, I know I’ll wait for the second panel. 

But I appreciate the opportunity. There are a lot of things we can 

do. And I think your effort is in one of them as we look at the specVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00112 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
107 

ulating market. But there are other things that we can do that 

would actually make the price of fuel much cheaper for our constituents. Thank you. 

Mr. STUPAK. Thank you, Mr. Green. Mr. Burgess is not here. Mr. 

Walden for questions. 

Mr. WALDEN. Thank you, Mr. Chairman. I appreciate that. You 

know, farmers are very good at reducing the price of their crops. 

They do so by reacting to price signals and when wheat or corn 

prices are high, they all rush out and plant wheat or corn, whatever is high. As a commodity, the oil market is not much different. 

It would—you’d think that with prices at this level, there would be 

avid exploration so you could take advantage of it. Mr. Diwan, is 

that not the case in the oil market? 

Mr. DIWAN. Well, you need to have access to areas which have 

good reserves to explore and to produce. And this is really the first 

time when you have such an increase in prices where we have not 

had a response on the supply side. And there’s a lot of reason for 

that, not only that you don’t have access to the best basins in the 

world, 77 percent of the world reserves are closed basically to oil 

companies. 

Mr. WALDEN. Where are best basins? 

Mr. DIWAN. In OPEC countries or in Mexico or in a number of 

areas where you do not have access to the reserves. The other issue 

is, you have a lot of aging fields where the decline rates are accelerating. So even if you are bringing a lot of new supply on the market, it is just replacing what we’re losing every year. So to recall 

on our jargon, the wedge, and that wedge is growing bigger and 

bigger every year. So if you bring 4 million barrels per day of new 

supply this year, you basically stay put because you have lost 4 

million barrels per day. 

Mr. WALDEN. So supply and demand does play a significant role 

in the decisionmaking by those in the market? 

Mr. DIWAN. Absolutely. And there’s a supply narrative, this notion that we don’t have supply increase in the future which has 

brought up a lot of the financial players in the market because basically they’re not taking a lot of risk here. Due to the way I describe it is you really have two types of news in this market. You 

have the bullish news, when something happens in a small country 

or you lose a little bit of production or the very bullish news when 

something big happens like in Nigeria. You don’t have risk on the 

downside. And that shift of the risk from all upside to little downside is what’s attracting the speculators to the market. 

Mr. WALDEN. And by that—I’ll wait. You see you won the prize 

for the best answer. There will be six of them. We’re adjourning the 

House right now, I think. 

So by that, you’re saying that there’s little risk that we’re going 

to add significantly to supply, which is why then the speculators 

continue to bet long saying, I don’t see the price coming down. 

Mr. DIWAN. Correct. What can bring really the prices down in 

this environment is a demand going down, and for demand to go 

down as we see it right now, it takes prices to increase. So as the 

more you push prices, the more you’ll increase risk. But we—it’s 

difficult to manage in the demand collapse if you don’t have an economic collapse. 

108 

Mr. WALDEN. Well I’ll tell you, in my part of the world, there are 

people who are beginning to think we are having that economic collapse. When you look at the doubling of the price of fertilizer and 

diesel and every other input and then you go to the grocery store 

and the price of food’s going up. I’ll tell you, family budgets are in 

pretty bad shape. 

Mr. DIWAN. But in the rest of the world, demand is still growing. 

So we still have a decent demand growth right now despite these 

prices. And the reason is price subsidies. So if you look at the demand growth in the world, it’s really concentrated in two areas of 

the world. It’s in China. It’s in the Middle East. And it’s in some 

countries which have large mining operation because you have the 

commodity boom. So the demand in these areas is not very responsive to prices so it continues to grow. 

Mr. WALDEN. Because demand in the U.S. has actually gone 

down, hasn’t it, at the steepest curve since World War II. It used 

to be if that happened, we’d affect the market and the price, right? 

Mr. DIWAN. But that’s been the trend if you want over the last 

6 years. If you take the global growth and demand over the last 

6 years, the cumulative growth of demand over the last 6 years, 

over 80 percent has happened among the OECD countries. So the 

OECD countries, developed countries have a smaller impact on the 

demand side because of the price signals, because of policies being 

put in place, et cetera, et cetera. While where you have price subsidies, demand keeps growing because you have population growth 

and economic growth. 

Mr. WALDEN. So it looks like you have a three-part problem here. 

One is the weak dollar which is related to our economy. Two is the 

transparency, perhaps, in the trading itself and new investors coming in that never planned to take possession of the oil or the gasoline. And three is this belief and probably based in reality that nobody’s turning up the spigot or they can’t. 

Mr. DIWAN. They can’t. 

Mr. WALDEN. Because some of those fields are actually going 

down, not up. And meanwhile the United States puts 80 to 85 percent of its offshore oil potential out of reach by Federal law and 60, 

70, 75 percent of the onshore is not accessible by Federal law. And 

there’s no evidence we’re going to change those laws. So from a 

U.S. perspective, unless we change the law, which I think we 

should, and at least send a signal that we are serious about becoming more energy independent, we’re going to continue to see these 

high prices. 

Mr. DIWAN. Correct. But the way we look at it, we try to look 

at it globally. It’s very difficult to imagine how the world is going 

to produce 15 million barrels per day more than what we are producing now, and how that world is going to be able to consume 100 

million barrels per day. 

Mr. WALDEN. And one final question, if I could, you said earlier 

I believe—I had to step out for a minute—but in terms of price signals for the future, something under $100, right? 

Mr. DIWAN. Correct. 

Mr. WALDEN. How far under $100? $30? $99? 

Mr. DIWAN. To produce energy it requires a lot of energy. So the 

higher the price, the higher the marginal cost. We are seeing right 

109 

now some investment where the companies are assuming prices 

over $80. 

Mr. WALDEN. Wow. 

Mr. DIWAN. And if prices shoot down below that or below, at $60, all the marginal projects above $60 will immediately stop and that, 

again, will impact on the supply and it will further reduce supply 

and accelerate the decline rates. 

Mr. WALDEN. All right. My time has expired. Mr. Chairman, 

thank you. Thank you to our panelists. 

Mr. STUPAK. Thank you. Mr. Ross for questions, please. 

Mr. ROSS. Mr. Chairman, thank you for including me, allowing 

me to be a part of this subcommittee for the purpose of this discussion today because this is, in my opinion, a very critical issue facing our country and, quite frankly, the world. I think from what 

we’re seeing happening in the energy market has a lot to do with 

this economic recession that we’re in and how fast we get out of 

it. 

Mr. ROSS. My question for any of you who—in any form or fashion—participate in either trading or encouraging others to trade in 

the futures market, could I just get a show of hands? Which ones 

of you are involved in that, anyone? No one will admit it? So let 

me ask you this: do you know people who trade in the futures market? 

Mr. DIWAN. Sure. 

Mr. KRAPELS. Of course. 

Mr. ROSS. Everybody does. In your opinion, doesn’t have to be 

scientific, but based on your expertise, what percent of those who 

play the market could actually accept delivery of diesel fuel or gasoline if they had to? 

Mr. KRAPELS. It’s a tiny fraction. It’s less than 1 percent of all 

the trades that are done physically. 

Mr. ROSS. So all the people playing the markets on diesel and 

gas and oil and all that, you’re telling me that that’s the 1 percent 

of all those that are doing that could actually set delivery if they 

had to? 

Mr. KRAPELS. That’s correct. 

Mr. ROSS. Everybody agrees to that? 

Mr. MASTERS. I think it may be a higher number than that. Because many physical players could accept delivery but they typically don’t accept delivery. They typically are just using the futures 

markets as a hedge. 

Mr. ROSS. What would happen to oil and gas prices if only those 

that could accept delivery were able to—— 

Mr. DIWAN. Well, you can go back to a very small market. But 

if you have also a very small market, it’s much easier to manipulate. So liquidity is very important. If you have only a few producers and a few consumers, the big producer or the big consumer 

could have enough muscle on that market to have a big impact on 

prices. So reducing market dramatically I’m not sure is a way to 

avoid manipulation. 

Mr. ROSS. Mr. Chairman, I would—— 

Mr. STUPAK. If I may—— 

Mr. ROSS. I yield to the Chairman. That’s the only question I had 

for this panel. 

110 

Mr. STUPAK. Let me ask this question, and it’s a little bit along 

the lines of what Mr. Ross was just asking. And Mr. Walden 

brought it up about other areas that should be open to exploration 

in the market. But there is a proposal right now that there are 40 

million acres on the Outer Continental Shelf that’s not being used 

for exploration tied up in these leases. Should those leases, much 

like we do on timber sales, you can only hold them for 5 years, if 

you don’t use it, then you lose that lease? Would that help this situation? They are talking about go and drill elsewhere, but we have 

40 million acres that are tied up that no one’s drilling on. Should 

we use-it-or-lose-it type proposal? Mr. Gheit. 

Mr. GHEIT. This is definitely a good thing to keep oil companies’ 

feet to the fire. If they don’t develop the technology, if they are not 

willing to invest, I have no problem to renew the leases every 5 

years. Let somebody else take a shot at it. You just don’t hold it 

for future technology 20 or 30 years from now. Hoarding land is 

just as bad as anything else. 

Mr. DIWAN. Well, again, I think this is a bit simplistic. If you 

look at what’s happening in the U.S. the service sector is totally 

overheated. We don’t have enough people. We don’t have enough 

companies. We don’t have drill shifts. We don’t have enough of everything. We went through 20 years of underinvestment. Now 

we’re back into the super cycle of investment. The industry is really working very hard. The notion that they’re just sitting on the 

land and hoarding, I mean, when you work with oil companies, 

they’re looking constantly where to put more money in the ground 

to produce more oil at these prices. If they’re not willing to produce 

oil at these prices, they should be in a different business. 

I don’t know a lot of oil companies who are not willing to invest 

at these oil prices. The question is, are the land they are sitting 

on propitious for production? Do we have technology to look? Do we 

have technology to drill? Do we have the technology to hook up all 

of these things? 

Mr. STUPAK. Why should the Federal Government put up more 

land if you are not drilling on the land you already have leased? 

Mr. DIWAN. Well, the question is, are the lands that they have 

right now good land or not, or cow pasture? That is the question 

and when you look at an oil company every year they have a budget to spend and they are trying to push that budget as much as 

possible. They take the best land they have and they drill those 

first. And the next year they do the same and the same and the 

same. 

Mr. STUPAK. But obviously they thought there was some value 

there or they never would have bid for the lease rights to begin 

with. 

Mr. DIWAN. Right. If you look at the economics of exploring and 

producing oil, the cheapest part is the land. So it’s easier to get a 

lot of land than get a lot of drill ships. 

Mr. GREEN. Mr. Chairman, if you would yield just briefly. 

Mr. STUPAK. Sure. 

Mr. GREEN. Having owned pine trees before and comparing that 

to an oil lease, pine trees can grow up very well on an acre of 

ground, but obviously we don’t want to put a derrick on every acre 

of ground. And if you have 1,000 acres, you’ll go where you think 

111 

your seismograph is the best. So I think it’s a false comparison. 

And we’ll debate that probably on the floor pretty quick. But to 

compare this, I don’t mind a use-it-or-lose-it because if somebody 

is sitting on potential production, I want them to do it. But I think 

the numbers are probably not as—compared to a timber lease as 

you would. 

Mr. STUPAK. It’s a good analogy. That’s why you call it paper 

barrels. 

Mr. ROSS. Mr. Masters, do you care to comment on that, or Mr. 

Krapels? 

Mr. KRAPELS. No. I think Roger has it right. 

Mr. STUPAK. OK. I go to Mr. Burgess for questions. Mr. Burgess, 

please. 

Mr. BURGESS. Thank you, Mr. Chairman. 

Mr. Masters, if I could, on your four-point plan that you’ve outlined for us, and thank you for doing that, step four you talked 

about investigate physical hoarding of commodities by investors. 

Do you have current evidence of this occurring? 

Mr. MASTERS. Yes. 

Mr. BURGESS. And have you made it available to the committee? 

Mr. MASTERS. I think we have, yes. 

Mr. BURGESS. All right. Mr. Chairman, I would just respectfully 

ask that that be shared with us if for some reason I don’t have 

that. 

Mr. MASTERS. That wasn’t in the footnotes. It’s in the footnotes, 

but the actual documents we’ve submitted to the Chairwoman. 

Mr. BURGESS. All right. Bloomberg on their print side in the 

June 16th—in the June 16th article, they talk about 15 supertankers stationed in the Persian Gulf capable of storing more than 

30 billion barrels of crude, according to ship-tracking data compiled 

by Bloomberg. Do you have any information about that? 

Mr. MASTERS. I’ll defer to Roger. 

Mr. DIWAN. Yes, we do actually. You have 15 or more tankers 

full of uranium crude. It’s a very heavy crude, it’s very difficult to 

sell, and there’s no market it for it right now. So the Iranians have 

two options. One is to store it or to shut the field; and the other, 

store it and wait for the demand to emerge when the refiners come 

back for maintenance. It basically outlined that some segment of 

the market, the one for heavy crudes, is actually very sloppy, and 

there’s not a lot of demand for it. 

Mr. BURGESS. Now, I guess one of the things I’ve never understood is in this whole run-up of gas prices, is why diesel shot up 

so much faster than refined gasoline, and would this type of crude 

not be suitable for recovering diesel fuel? 

Mr. DIWAN. If you have the refinery tools to do it, yes. The problem is in spring in general refiners go under maintenance. But 

there’s a different reason why diesel is doing well and gasoline not 

doing very well. Gasoline is a U.S. fuel. So if U.S. demand for gasoline is down, global gasoline prices are not going to do very well. 

Diesel is really a global commodity, and when you have high 

growth rates in China and the Middle East, it’s mostly for diesel. 

So diesel is a broader commodity than gasoline in that sense. And 

the strength and demand both in China and the Middle East is 

really about diesel. 

112 

Mr. BURGESS. OK. Thank you. 

Staying on the four-point plan if we could for just a moment. Dr. 

Krapels, do you have an opinion on the step one that established 

limits that apply to every market participant? I assume here we’re 

talking about the amount that must be put up for margin and the 

ability to take possession of a commodity where the contract is bid 

upon. 

Mr. KRAPELS. Am I in favor of position limits? 

Mr. BURGESS. Yes. 

Mr. KRAPELS. Yes. 

Mr. BURGESS. And is that—of all the four proposals that are 

there before us, is that the one that is likely to have the most immediate and profound impact on the price? I know Mr. Masters 

thinks so because he wrote it and put it first. I read Dr. Krapels. 

I would be interested in your opinion. 

Mr. KRAPELS. I think it would, of the four different recommendations that are practical, and they’re likely to be acceptable. I think 

that is one that would get the biggest bang for the buck. 

Mr. BURGESS. So it has a score, scores high on the practical 

scale. It doesn’t seem to me to be that difficult, but then I’m not 

a great student of petroleum engineering. Would this be difficult to 

enact and create or create and enact? 

Mr. KRAPELS. From a legislative or regulatory standpoint? 

Mr. BURGESS. From a regulatory standpoint. 

Mr. KRAPELS. I would think not. 

Mr. BURGESS. I wouldn’t either. And if step one by itself were 

taken without all the other steps taken, would that move us closer 

to that marginal price that we’ve heard talked about this morning 

on the panel? 

Mr. KRAPELS. I think it would help. And the devil is in the details. How quickly would we establish those limits; would it be 

phased in or an immediate approach? 

Mr. BURGESS. Well, and that’s actually one of the things I wanted to ask about. What is the danger in enacting this too quickly? 

If we’ve already seen some of the difficulties we’ve had in the financial sector of our economy, is there an unforeseen consequence 

of moving too quickly in this regard, or should we just simply work 

to get this, at least step one, enacted and bring the cost down close 

to the marginal cost of production? 

Mr. KRAPELS. I may be different from my fellow panelists here. 

I think you would want to take your time and give people some 

time to unwind their positions. And I think if you don’t give them 

time, I think there could be substantial damage. 

Mr. BURGESS. What is the timeline likely to look at? 

Mr. KRAPELS. I would give market participants a year in which 

these sorts of limits would become enforced. 

Mr. BURGESS. And are our other panelists in agreement with 

that? 

Mr. MASTERS. I think that’s too long. I don’t think that’s necessary. 

Mr. BURGESS. A year is not necessary? 

Mr. MASTERS. A year is more—I mean, that’s—look, I mean, one 

of the things that’s important to understand is that because commodities are uncorrelated with other asset classes, and then I don’t 

113 

consider commodity futures an asset class to begin with, so I’ll just 

say that on the record, but they typically behave in ways that are 

different from other parts of one’s portfolio. So it’s very likely that 

prices of commodity futures, and therefore prices of commodities, 

would come down relatively quickly. 

Now, the interesting thing about that, because today the vast 

majority of institutional investors’ funds are still in stocks and 

bonds, it is also very likely that those prices would go up relatively 

quickly. So, yes, they’re going to lose on their commodity position, 

which on a gross average is roughly 1 percent of their portfolio, but 

with a 50 percent or more position in common stocks and fixed income, they’re going to way offset that in the benefit that they get 

in the rest of their portfolio. So this would actually have a very 

powerful positive effect on their portfolio. 

Mr. BURGESS. Unless they were invested in the financial sector. 

Thank you, Mr. Chairman. I’ll yield back the balance of my time. 

Mr. STUPAK. Mr. Rogers for questions. 

Mr. ROGERS. Thank you, Mr. Chairman. Thank you for allowing 

us to participate today. 

Can you give me some comparable asset classes to oil and how 

they might be regulated? And I’ll open it up to any panelist. Is 

there anything comparable to oil, Mr. Masters? 

Mr. MASTERS. Commodity futures, we don’t consider that an 

asset class to begin with. They’re not capital markets. One of the 

issues here is that capital markets investors have sort of imputed 

some biases on the commodity futures markets. Commodity futures 

markets are much smaller. They have a different set of regulations 

than capital markets, and because of that, they should be treated 

on a much different basis. 

Mr. KRAPELS. I think within the energy sector natural gas seems 

a little bit like oil, if that’s the drift of your question. 

Mr. ROGERS. And it’s regulated differently? 

Mr. KRAPELS. I think it’s regulated in many of the same ways as 

crude oil is. And it has some of the same characteristics in terms 

of the inflation of potential speculator positions in the natural gas 

market. 

Mr. ROGERS. And so what I heard today was that it’s not just 

speculators. Speculators are certainly a problem in the market. But 

we do have a demand and supply issue as we move forward. So 

something comprehensive both on the demand and the supply side 

is probably the best policy as we would move forward if we wanted 

to impact both prices and our ability to be immune, if you will, 

from governmental changes on demand. Is that correct? I mean, 

nuclear, coal-to-liquids, alternative energy, hydrogen, lithium ion 

battery, all of the things that we talk about now, including impacting supply, that would be on the demand side. But impacting supply with production would be helpful, wouldn’t it? 

Mr. KRAPELS. If I may, may I just take 2 minutes on that? I completely agree. If you remember Roger’s graph where the price went 

to $65 and then $75 and then $80, and then it shot up in the last 

$50 to $60 of price escalation. As a commonsense matter, it’s an 

issue of degree of price pressure. At $70 and $80 a barrel I think 

we will develop a lot of alternative technologies in the electric 

space. I think we’ll develop a lot of conservation initiatives in the 

114 

transportation sector. It’s the $80 to $130 that it just seems as a 

matter of degree unreasonable and not very useful. And it’s not 

being priced into the investment decisions of most companies that 

we know. 

Mr. ROGERS. Go ahead, sir. 

Mr. GHEIT. I just want to make a comment. The oil markets are 

not free markets. Let’s start with that. The reason that oil prices 

do not respond to supply and demand fundamentals is because supply and demand fundamentals are also dictated by government 

houses and politics. When Russia shuts off its resources, when 

Saudi Arabia and the rest of OPEC said, you can’t come in here. 

So there are artificial supply constraints, if you will. 

On the demand side, as Roger said, OPEC and China and other 

countries subsidize oil prices, so therefore consumers do not feel 

the pressure that we are feeling here. So government policies obviously have a tremendous impact on why oil and gas supplies fundamentally do not respond to market rules. 

Mr. ROGERS. And so you had a whole bunch of people pulling out 

of equities, you had a market that clearly is shown by government 

policy we were not going to increase supply, at least made an attractive market for these folks to jump into, rightly or wrongly, 

helped create the problem, didn’t it? 

Mr. GHEIT. But one more thing. For us to think there is one silver bullet, if you will, that’s going to take care of all this problem, 

we’re kidding ourselves. 

Mr. ROGERS. I agree. So you agree that it has to be a whole series of things, and there’s not a silver bullet; it is a bullet? 

Mr. GHEIT. It has to be the complete course of fuel. 

Mr. ROGERS. Including more domestic supply? 

Mr. GHEIT. Everything should be on the table. 

Mr. ROGERS. And I happen to agree with you 100 percent. And 

I just want to make sure we don’t have unintended consequences. 

I know there’s a lot of public pensions involved in this. And, Mr. 

Masters, I know you said that you could do it in less than a year. 

I mean, I know you’re in the Virgin Islands. I assume you made 

that decision based on tax issues. I mean, that’s an unintended 

consequence. We don’t want you to be in the Virgin Islands. We 

would like you to be here. So government policy has that impact. 

What happens to that $260 billion that you say screws up the 

discovery point, and how do you get from $260 to $4 billion without 

some of these public pension plans really getting turned upside 

down within a year? That concerns me. 

Mr. MASTERS. Well, the way that happens is that, again, as I just 

described, these allocations in many cases are less than 1 percent 

of the portfolio. You’re talking about a portfolio, if you will, across 

the board of these institutional investors that’s roughly $29 trillion. 

So $260 billion, while it sounds like a lot of money, and it is, it’s 

a lot less than $29 trillion. 

And so just the way the math works is let’s say that you’ve got $15 trillion in equities, and that $260 billion goes to zero; let’s say 

the price of commodities goes to zero. That $15 trillion is going to 

go up probably by at least 10 percent. So you’re up $1.5 trillion on 

your portfolio, you’ve lost $260 billion on your commodity side, 

you’re still ahead by $1.2 trillion. That’s not a bad trade. 

115 

Mr. ROGERS. But that doesn’t have industry-specific consequences. I look at the airline industries as an example. That 

$260 billion is only a small fraction of the $29 trillion; however, it’s 

having 1,000 percent impact on their ability to compete and survive. And it’s not just them. It’s trucking organizations, it’s small 

midline and shortline haulers. And so that $260 billion may be a 

small part of the overall investment scheme, but it is having a tremendous impact, I would argue, on what advice and counsel you’re 

giving people in the equities market, isn’t it? 

Mr. MASTERS. Well, I think that having commodity prices come 

down, and the airline people can speak to this later, would be a 

great benefit to the truckers and to the airlines. 

Mr. ROGERS. And to consumers. 

Mr. MASTERS. And definitely consumers. So you would have a 

much greater effect. 

And just to make a point, the likely reason that the equity market would go up in value was because investors would rightly understand that, hey, this is a good thing for the economy, this is 

going to help things move forward. 

Mr. ROGERS. Thank you, Mr. Chairman. 

Mr. STUPAK. Mr. Dingell for questions, please. 

Mr. DINGELL. Mr. Chairman, thank you. 

Mr. Gheit, your testimony has been most helpful. I believe you 

said that we could end excess speculation in 30 days if we had the 

will to do so. Now, I would really like to know what is it that we 

should do to accomplish that purpose, please. 

Mr. GHEIT. Well, the first thing we should do is to raise the margins requirement to 50 percent. That will slow the volume significantly. Two, you put a trading limit that will also curtail a trading 

volume, and then force all the financial players to fully disclose 

their position. That will also have an impact. 

So it is going to be step by step, but if we put this legislation 

and we give these people 30 days to get out of their position, that’s 

plenty of time. After all, they are big boys, they made a lot of 

money. And as other people on the panel said, an impact on the 

rest of their holdings would be significantly greater than the downside from their oil holdings. But we definitely can get this thing 

done very quickly. 

Mr. DINGELL. Now, I believe you have said then that we should 

attack margins; is that right? 

Mr. GHEIT. The margin requirements. 

Mr. DINGELL. Margin requirements. All right. That runs about 5 

percent now? 

Mr. GHEIT. Yes. 

Mr. DINGELL. But there are loopholes that permit it to be done 

at lower or no margin whatsoever. Now, what should we raise that 

margin to, and how should we go about doing it? 

Mr. GHEIT. Well, a margin on stocks is 50 percent. Commercial 

players, like airlines and the oil industry, should still keep the low 

margin requirement, which is 5 to 7 percent. 

Mr. DINGELL. Because those are people who are honestly hedging? 

Mr. GHEIT. Correct. They need that to protect against the commodity risk. But those who are coming here just to hold an elecVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00121 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
116 

tronic barrel in the hopes of getting the price higher, they are absolutely, in my view, no value. They don’t create an economic value 

in the process. What they do, they make money themselves, but obviously that is at the detriment of the rest of the economy. It’s basically the few make a lot of money, but a lot of people lose a lot of 

money. 

Mr. DINGELL. Of course, that’s true with the commodities markets anyway. That’s a place where the little guy gets skinned, and 

the big guy does fine? 

Mr. GHEIT. Yes, right. 

Mr. DINGELL. Now, what should the margin go to? You’re indicating 50 percent. 

Mr. GHEIT. Fifty percent. 

Mr. DINGELL. Fifty? 

Mr. GHEIT. 5-0, correct. 

Mr. DINGELL. Now, the other things, if you would come back 

again and address them, please, again, Mr. Gheit. You said there 

were other things. Is the margin requirement the only thing? 

Mr. GHEIT. The margin requirement is the most critical, and 

then the volume limitation. 

Mr. DINGELL. OK. 

Mr. GHEIT. We should hold the financial players to a percentage 

of the physical market. If the physical market is trading whatever, 

a million contracts a day, we should establish a limit for the financials, no more than 10 percent of the physical market. You don’t 

want the financial market to be bigger than the physical market 

basically. 

Mr. DINGELL. All right. Now, I have a couple of other concerns 

which I find very difficult. First, the foreign board of trade loophole, that’s been called the London loophole by my friend Senator 

Levin. This allows foreign boards of trade, such as ICE Futures, to 

trade futures in the United States, but avoid registering as a designated contract market. They get this loophole from the CFTC 

through a, quote, ‘‘no action letter.’’ Once exempted, the exchange 

is not subject to the requirements imposed on U.S. exchanges by 

CFTC. 

Now, there are a couple of others here. The Enron loophole. As 

a part of the Commodities Future Modernization Act of 2000, the 

Enron loophole created an exemption for large energy traders over 

$10 million in assets to trade futures on unregulated markets 

called exempt commercial markets. ICE has exploited this loophole, 

and so its markets grow rapidly. This is also, by the way, known 

as the Goldman Sachs—no, I’m sorry. We’re going to come to Goldman Sachs. 

Then the swaps loophole, which is the Goldman Sachs loophole. 

Commercial operations like oil producers or farmers are exempted 

from speculation position limits if they have a bona fide price risk 

tied to the purchase or sale of a physical commodity. These speculative position limits are there to prevent excessive speculation. 

However, in 1991, CFTC began to classify swaps dealers on Wall 

Street as bona fide hedgers—I’m curious how they did that—and 

based on the argument that they have a price risk tied to financial 

investments in commodity index investments. Now, there are 15 inVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00122 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
117 

vestment banks and funds with CFTC exemptions under this as it 

has grown. Would you address these, Mr. Gheit? 

Mr. GHEIT. Basically what I am suggesting is that we cannot 

close the door and leave the windows open because these people 

have a way to conduct their trading outside of the U.S. So unless 

and until we have a level playing field, it is not really going to bear 

fruit. So we have to apply the same rules that we have here in the 

U.S. to the ICE or any other market. 

Now, the regulators in the U.K. Claim that if they clamp down 

on traders on ICE, they are going to go to Dubai or other places. 

But again, my recommendation here is to require any company 

doing business in the U.S. to only do their hedging on exchanges 

that are sanctioned by U.S. laws; otherwise it’s an illegal business, 

it’s money laundering. Basically that’s it. 

Mr. DINGELL. Thank you. 

Other members of the panel, I want to express my thanks to 

each of you gentlemen for your assistance to us. Would you each 

give your comments on the questions that I have raised to Mr. 

Gheit, please? Do you agree, disagree, do you have other comments 

that you would like to lay before us, please? 

Mr. DIWAN. Well, the problem is we don’t have data to make 

clear judgments. We don’t know how many of these index funds are 

using the loophole, and we don’t know if they are above the limits 

that they are supposed to own. So if we put the limits, we don’t 

know. There’s a few large indexes with very big positions, and if 

we close the loophole on the limits, they’ll come below that. Or if 

there is a lot of pension funds with small positions, then imposing 

a limit doesn’t do much. We don’t know that. We don’t have the 

data. 

So I think it will be important to close all the loopholes, because 

then you have a level playing field, and we’ll see what happens. So 

you go incrementally, change the margin calls, close the loopholes 

and see where we are. 

Mr. DINGELL. Mr. Masters, I want to commend you for your comments and your help to the Committee. What are your thoughts on 

the matters we are discussing? 

Mr. MASTERS. Thank you, sir. 

In general I agree with the suggestions. The margin requirement, I think, doesn’t work as well as position limits do. 

Mr. DINGELL. You say it doesn’t? 

Mr. MASTERS. I don’t think it does. I think that—I think it certainly is, if it’s applied to speculators. 

Mr. DINGELL. Would it be helpful? 

Mr. MASTERS. I think it could be helpful depending on how it 

was written. 

Mr. DINGELL. I’m not sure we’re going to get a cure-all here, but 

I’m trying to figure what package we’re going to get. So you agree 

that a margin requirement would be helpful, but not as helpful as 

I would like it to be. What others with regard to the three loopholes that we have discussed? 

Mr. MASTERS. You know, with the position limits, one of the interesting things about, for instance, crude oil right now is there 

really aren’t any position limits, so you’ve got what’s called accountability limits. You need some position limits. And the reason 

118 

we suggested coming up with a committee of exclusively physical 

commodity hedgers and producers, consumers, is that we feel like 

that that group will do nothing to jeopardize their liquidity, but on 

the other hand they, better than anybody else, because the market 

is for them, will choose appropriate position limits. 

The exchanges right now are for profit entities. The investment 

banks are for profit entities. They both benefit from larger amounts 

of speculation. So those entities should be excluded from this panel. 

The panel should be exclusively physical commodity producers and 

the consumers. And I think if you do that, you’ll do a lot in terms 

of making position limits really work and really get to what Roger 

was saying, get to everybody they need to get to in the sense of 

making them small enough. 

And for many of the small speculators, you will go back and put 

the large speculators back on a level playing field with the small 

speculators, because the small speculators still have to deal with 

position limits on many commodities. So this is on a commodity-bycommodity basis. 

And then with regard to our other solutions, looking at an overall 

level of speculation which could be dictated by that same panel 

would also allow markets to function for bona fide hedgers, but not 

be excessively speculative. 

Finally, my solution number three, that’s a way of doing things 

relatively quickly. That could be phased in over some short amount 

of time. But clearly that would have the effect of greatly reducing 

index speculation, which we think is distorting the price of discovery mechanism. 

Mr. DINGELL. Thank you. 

Mr. Krapels, I hope you don’t feel I’ve been discourteous to you. 

If you please. 

Mr. KRAPELS. I generally concur with the observations that my 

fellow panelists have made. I worry about two things. One is the 

law of unintended consequences that if we write the regulations 

wrong, then we’re going to see things that we had not anticipated. 

Mr. DINGELL. That’s an area of peculiar expertise to the Congress. 

Mr. KRAPELS. And it is available for free. So I worry about that. 

And I don’t think you can make these changes as quickly as Mr. 

Masters suggests. I think you want to take your time. You’re dealing with public pension funds, by and large, as the primary culprits 

in this story, so you want to give them time to unwind their positions. 

But generally having bigger margin requirements makes a ton of 

sense to me, position limits and much, much more disclosure. 

Mr. DINGELL. Gentlemen, thank you. 

Mr. Chairman, you’ve been extraordinarily courteous to me. 

Thank you. 

Mr. STUPAK. Thank you, Mr. Dingell. 

Let me just go a second round here. Just a couple of quick questions, if I may. I think we’ve established that the excessive speculation is probably 30 to 50 percent of the cost of a barrel of oil right 

now. And Mr. Gheit indicated that if we pass comprehensive legislation, maybe like 6330, H.R. 6330, we might be able to burst this 

bubble. And if we burst the bubble, there are concerns that it 

119 

would have a devastating effect on the economy. Some people have 

expressed that interest. 

Now, Mr. Masters, you didn’t seem to think so. You think that 

it would just shift, and the amount is so small right now because 

it’s 1 percent, but if it moved to 5 percent, because we really don’t 

know how big it is because we don’t have the information, CFTC 

has not provided that information—if it goes to 5 percent, if it is 

around 5 percent, would that change your thought, and is there 

some devastating effects we have to be careful of? 

Mr. MASTERS. I think that to a certain extent what we’re talking 

about here with speculation, the right terminology really isn’t a 

bubble, it’s really more like a tumor, and it grows and grows and 

grows. And in this case it’s hurtful as it expands. So the time to 

act is before it gets any worse. And so when you discover a tumor, 

you take it out immediately. And so I think that if we were to let 

this continue to go on further and further, that there could be more 

unforeseen consequences on the economy. 

Mr. STUPAK. Mr. Gheit, did you want to comment on that, or you 

don’t think it would have much impact if we in 30 days brought 

down these prices 30 to 50 percent if we passed comprehensive legislation and have the CFTC close these swap loopholes? 

Mr. GHEIT. You have to understand there are obviously winners 

and losers. The losers are going to be the winners of the last 4 or 

5 years, and the winners are going to be the consumers that are 

paying for gasoline up to their noses, the farmers. These are the 

people that are hurting and hurting pretty badly. If oil prices are 

cut in half, that is not the end of the world. Actually it will make 

most industries—the airlines will have a lot more opportunities, 

then the manufacturers, and everybody. 

So I think there are going to be benefits that clearly outweigh 

the cost. And for the pension funds of all the people that invested 

very heavily, it’s still—as Mr. Masters said, it’s still a small percentage of the total portfolio. And by definition, if oil prices go 

down $30 or $40, the stock market is going to go up by thousands 

of points, and everybody will be happy. So at the end of the day 

I think putting an end to the speculative bubble, or tumor, as Mr. 

Masters put it very eloquently, I think we should have done that 

a year ago. It’s not too late, but we should do it as soon as possible. 

Mr. STUPAK. Well, let me ask this then. You’ve been mentioning 

pension funds, so I’ve been circling in on that. But one major investment bank told the committee that 12.5 percent of their commodity investments were held by sovereign wealth funds, yet the 

CFTC tells us they know of only one sovereign wealth fund investing in the futures market. Clearly there’s a disconnect here with 

the information. Do you think it’s important for the CFTC and 

Congress to have a clear view of the role of sovereign wealth funds 

in futures markets? 

Mr. GHEIT. This is part of the recommendation. I said disclosure; 

the best thing is full disclosure. I mean, they have to break down 

exactly who the largest holders are, what their positions are, and 

how much money they are making. So before they make this outrageous forecast for oil prices, we should know exactly how much 

do they have to gain by it. 

120 

Mr. STUPAK. Let me ask everyone this question, if I may, and I’ll 

end with this one. How much liquidity does the commodity market 

need to perform its price discovery and hedging function? How 

much liquidity is too much liquidity? Is the market drowning in liquidity when 70 percent of an open interest in oil is held by speculators? Kyle, I think it is chart number 2 in my testimony where 

you see that 70 percent of that open interest liquidity. What is the 

right percentage it should be? 

Mr. GHEIT. Well, the right percentage should be really discussed 

with the physical hedgers. These are the people who need to know. 

Some of these trades are going to be done principle to principle, 

and all you need is just an intermediary. This intermediary should 

not dictate the price, should not take physical possession, if you 

will. All they have, like a broker—put the buyer and the seller, but 

do not get in the middle to profit from the transaction. So you 

know the airline, the oil companies and all these people can sit 

down and say how much liquidity in the system we need to have 

an efficient market. So I don’t believe it’s going to be double or triple the physical market. I would venture to say it’s going to be less 

than 20 percent of the physical market. 

Mr. STUPAK. Less than 20. 

Anybody else care to comment? Mr. Diwan. 

Mr. DIWAN. Yes. I remember when I started working with Ed a 

few years ago that actually we had a very liquid market, and we 

had exactly the same problems. So I would be really careful here 

about saying that we do not need any of the financial on the market. I think it will be a tremendous unintended consequence to the 

market. What we need is to have position limits and everybody 

abides them no matter which window or which door they come into 

the market. Then everybody has a playing field, and we know 

what’s going on. But banning certain types of players or limiting 

as a percentage of the market I don’t think makes a lot of sense 

because then you will have a two-tiered market. 

Mr. STUPAK. Well, the market always needs speculators, doesn’t 

it? I mean, when oil was at a reasonable price, let’s say $40 a barrel, $8 to $9 was probably the speculator’s fee or the risk premium 

or whatever you want to call it. Now we’re at $65 or $70. 

Mr. DIWAN. Correct. But if you go to see the pension fund, they 

say we’re not speculating, we’re hedging the portfolio. 

Mr. STUPAK. And what business is the pension fund hedging 

against? 

Mr. DIWAN. Well, it’s hedging against the declining dollar. They 

hold huge assets in dollars which are declining in value. 

Mr. STUPAK. But isn’t the exception supposed to be for a bona 

fide exception; not speculation or hedging on the cost of the dollar, 

but rather the airline industry or trucking industry who really 

needs that hedge? 

Mr. DIWAN. Well, if you have a pension fund, and the value of 

the stocks you’re owning are going down, you’re not going to be 

very particularly impressed by the manager of your pension fund, 

and you want him to do something about it. And the one thing he 

discovered how to do over the last 2 years is to hedge part of his 

portfolio on other commodities which are rising as the dollar declines. Gold is one, oil is another one, et cetera, et cetera. 

121 

Mr. STUPAK. Sure. 

Mr. DIWAN. My point is about the unintended consequences that 

Ed was talking about. If you reduce the market, you have other unintended consequences. 

Finally, about the liquidity issue. I don’t know if you have 71 

percent of speculator here in the market, it means it is more liquid. 

I can say it is probably less liquid, because a lot of the players are 

coming only on one side of the market. Actually what you have 

here is a lack of liquidity. You have a lot of buyers. You don’t have 

a lot of sellers. And the question is how do you rebalance that, how 

do you make these pension funds be willing to play both sides of 

the curve, not only one side? 

So I don’t think we’re struggling through too much liquidity. I 

think we’re struggling through too little liquidity. 

Mr. STUPAK. Mr. Masters, Mr. Krapels, do you care to comment? 

Mr. MASTERS. Sure. So the issue with pension funds trying to 

hedge, I mean that whole issue, I mean pension funds are capital 

markets investors, and they are looking at the commodity. They 

are trying to look at the commodity markets as a place for buying 

and holding. The whole concepts, buy and hold, long term, we’re investors, don’t apply to the commodity futures markets. These are 

capital market concepts. They’re not commodity futures concepts. 

Commodity futures expire, in some cases monthly. The reason 

they expire monthly is because they have a physical delivery 

functionality that allows physical delivery participants to theoretically take delivery. That’s why they expire. So the way pension 

funds do this is they buy a futures contract, and then they sell 

when it gets ready to expire, and they exchange it for another contract. So effectively what it is is like a lay-away in the commodity 

futures markets. They never actually take delivery. 

So there’s other ways that they could hedge inflation, or there’s 

other ways that they could make a bet against the dollar. But certainly if they’re involved in the commodities futures markets, let’s 

have them involved in a strategy. Give the money to a CTA, give 

the money to a CPO, but let’s have them involved in a buying and 

selling strategy rather than a one-way, long-only allocation strategy. And if they do that, let’s make sure that they and every other 

participant in the futures market abides by very strict position limits. 

Mr. KRAPELS. I would only add that futures markets are incredibly valuable parts of our economy. We do not want the oil futures 

markets to go away. They need more than 20 percent speculation 

to survive. They need multiples of the physical markets trading to 

survive. 

What we have here is a matter of degree. The markets in the last 

couple of years have just become excessively the home of the speculation that Mr. Masters has talked about. We do not want to regulate the futures market out of existence, we want to regulate it 

back to the point where it was in the 1990s, which was an excellent, excellent market for hedgers. 

Mr. STUPAK. My time is up. 

Mr. Whitfield for questions. 

Mr. WHITFIELD. Thank you, Mr. Chairman. 

122 

I was reading a newsletter recently from a gentleman covering 

the European market regarding supply and demand, and he made 

the comment that he was predicting that all production would be 

going down between 3 and 4 and 5 million barrels a day. And then 

I noticed that T. Boone Pickens testified in the Senate a couple of 

days ago, and he was talking about he thinks the oil production 

has peaked, and that it will be going down around 8 percent in the 

years to come on a yearly basis. And, of course, you all have testified this morning that if we adopt some regulatory changes relating 

to speculating in the futures market in oil, that we can have a significant reduction relatively soon. 

But overall we know that supply and demand is going to be the 

real answer and questions that we have to address. So I would ask 

you all, do you all agree with this peaking theory that I referred 

to; one, the fellow at the European Union saying he thinks it’s 

going to be going down 4 to 5 million barrels a day, Boone Pickens 

saying 8 percent a year in production? Would you agree with that, 

Mr. Gheit? 

Mr. GHEIT. One of the problems is that the higher oil prices, they 

provide no incentive whatsoever for oil-producing countries to open 

their resources. 

Mr. WHITFIELD. You say the higher? 

Mr. GHEIT. Higher oil prices do not help supply at all. 

Mr. WHITFIELD. Why is that? 

Mr. GHEIT. It’s very simple: Because they have no incentive 

whatsoever to give access to the resources to oil companies. 

ExxonMobil is sitting on $45 billion in cash that is earning 3 percent. They are not—this is one of the smartest companies, but they 

have no access to resources, OK. Russia is kicking out BP. Every 

time you open the newspaper, you see Russia has another problem 

with BP. Why? Russia has no incentive to increase production. 

Since their budget was based on $25 oil 5 years ago, now it’s $140, 

they have so much money, they don’t know what to do with it. 

Mr. WHITFIELD. And is Russia still the number one producer in 

the world of oil? 

Mr. GHEIT. Excuse me? 

Mr. WHITFIELD. Russia is the number one producer of oil in the 

world? 

Mr. GHEIT. Yes. Russia is now the largest oil producer in the 

world. 

Mr. WHITFIELD. What about the rest of you, do you have any 

thoughts on this peaking issue? 

Mr. DIWAN. I agree with Fadel here, that the problem is access 

to resources. The problem is its capacity of production, it’s not 

about peak oil. There’s plenty of molecules on the ground, and 

every time the prices increase, we have more oil in the ground because it’s an economic concept, it’s not a physical concept. There’s 

plenty of oil. At different prices we have more oil. If it’s $300 oil, 

we’ll find a lot more oil. It just costs more to go get. 

So the issue here is really about capacity of production. This is 

an industry which has lived with low oil prices and, because of 

that, low returns on capital and has not invested over the last 20 

years. And now we’re in a situation which is a Catch-22. We do not 

have spare capacity, and it’s unlikely that anybody will accept to 

123 

build spare capacity just for the fun of it. We are asking producers 

to invest hundreds of billions of dollars to create a capacity that 

they will not choose to bring down the price of their own commodity. It’s not going to happen. 

Mr. WHITFIELD. What percent of the oil reserves are held by governments today? 

Mr. DIWAN. The reserves that are held by government that we 

do not have access to are 77 percent in our latest calculation for 

oil. 

Mr. WHITFIELD. Seventy-seven percent? 

Mr. DIWAN. Yes. 

Mr. WHITFIELD. Is there anyone else? 

Dr. Krapels. 

Mr. KRAPELS. I think the problem of accessing the resource space 

is the number 1 problem. It shows a supply in elasticity to price. 

You can let the price go up, but the supply does not follow. However, I don’t take the next step, which is, I think, what Boone Pickens has done, and to argue that you’re going to see an 8 percent 

decline in worldwide oil production per year. That is not the case. 

Every responsible oil-forecasting organization I know has oil production going up over the next few years, not going down. So it’s 

just a question of supply and demand are tight, but supply isn’t 

falling off the cliff. 

Mr. WHITFIELD. Maybe he meant fields were going down, production fields were going down. 

Mr. KRAPELS. Yes. In certain areas that’s going to happen. 

Mr. WHITFIELD. OK. Thank you very much. 

Mr. STUPAK. Did you want to answer? 

Mr. MASTERS. Sure. I was just going to make one point. One of 

the reasons that financial investors have had such an impact on 

the price of oil here is because of the supply inelasticity in the oil 

market. And so having that supply inelasticity in combination with 

an enormous amount of investment flows coming into that commodities futures market has led to an explosion in prices. And so 

that’s the real issue you’ve got. You’ve got both things that have 

allowed prices to really move. 

Mr. STUPAK. Mr. Inslee for questions. 

Mr. INSLEE. Thank you. 

We’ve talked about five actions closing three loopholes, including 

the Enron loophole, position limits, margin requirements. But some 

have argued that if we take what I consider fairly commonsense actions, that it would simply drive these dark markets offshore overseas. This would not solve the problem. What is the response to 

that? Why should the United States act even though we don’t have 

total global hegemony over this regulatory climate? 

Mr. KRAPELS. In my opinion, there are only two places in the 

world where you can trade oil in this way, and that’s the United 

States and the U.K. If those two countries adopted similar policies, 

there’s no other place they can go. 

Mr. INSLEE. Why do you say that? 

Mr. KRAPELS. Because the tradition of having liquid futures markets has not extended to other countries. People would not park billions of dollars in Dubai. 

124 

Mr. MASTERS. I would just make a comment. When people say 

that, I think it’s an empty threat, and the reason that is is because 

the physical delivery functionality that our markets offer is very 

important. That helps anybody that’s doing business in the United 

States, its transacting, and their trading partners stay in the 

United States. We are the largest producer of food in the world. We 

are the largest consumer of energy in the world. So physical producers want to use, and consumers want to use, delivery terminals 

potentially in our markets. And having the physical people in our 

markets allows for better price discovery. If you take away the 

physical folks, and you just operate an exchange overseas, like you 

can with financial futures, it’s a much different proposition. In fact, 

it will be you just get a casino in the sky, and it doesn’t have any 

real bearing on what the actual price of crude oil or other physical 

commodities should be. 

Mr. INSLEE. You have all portrayed an incredibly dramatic picture; I mean, if we’re talking about 30 or 50 percent reductions in 

the price of oil, the economic ramifications that are obviously stunning. And all of us understand what’s on the table here. 

I want to contrast that to if we have relatively small increases 

in domestic production. You’ve had parameters each of you have 

talked about somewhere in the 30 to 50 percent reduction price associated with excess speculation. If you had increased production, 

say, in the next 10 years, worldwide, of, say, 1 percent, which represents if everything optimistically was perfect drilling everywhere 

in the United States, from offshore to the Arctic to the National 

Mall and the South Lawn of the White House, you might get an 

increase of maybe 1 percent of increased crude production in the 

worldwide market. How would that, by contrast, decrease the price 

of oil? Is it anywhere close, I guess is the question, of 30 to 50 percent reductions we’re looking at in dealing with excess speculation? 

Mr. DIWAN. Well, the question is how much demand is growing. 

And I could suggest that if it’s growing at 1 percent, probably demand would be growing at least at the same level. I mean, prices 

will equilibrate. 

The issue here is really it’s very important to understand that if 

you do not have spare capacity, you have a problem in this market, 

and this market basically is inherently bullish, because what you’re 

creating is any problem happening anywhere in the world at any 

time means that you’ll have less supply than what you expected. 

And every time you have less supply than what you expected, and 

no matter what your expectations are, it means that prices will go 

up. 

Mr. KRAPELS. If I can put a different take on the question, and 

it’s a very good one, is there anything that gives you more bang for 

the buck in the short term than what we’re discussing today in 

terms of relief for consumers? And the answer is, no, I think this 

is the biggest bang for the buck in the short term. It’s where we 

have misgoverned our own commodity markets, and that’s why I 

use the Pogo quote. Long term, though, we absolutely have to do 

things to reduce demand and to increase supply, and I think everybody understands that, but you do that at an $80 price level and 

not at $150 price level. 

125 

Mr. INSLEE. And by the way, I think if we really wanted to increase supply, we need alternatives to oil. We haven’t talked about 

that much today. We’ve talked about a few more holes in the 

ground. But if you really want to decrease the demand for oil, provide Americans an electrified transportation system. Use the A123 

battery company to drive our cars electrically. Use the Sapphire 

Energy Company which has found a way to develop ATSM-certified 

gasoline from algae. 

If you really want to decrease the price of oil, get an alternative 

to oil. And I can report to you that’s going to happen here because 

the U.S. Government ultimately is going to drive those innovations. 

We’re going to start work on that shortly. Thank you. 

Mr. STUPAK. Thank you, Mr. Inslee. 

Mr. Barton for questions. 

Mr. BARTON. Thank you, Mr. Chairman. I’ve got some questions, 

but I also have some comments. 

I have listened as we have talked about this issue, and I have 

to respond a little bit to what my good friend from Washington 

State just said. I could hypothesize that we could produce 1 million 

barrels a day out of Alaska that we’re not doing, a half a million 

barrels a day off the coast of California that we’re not doing, 1 million barrels a day out of the eastern Gulf of Mexico that we’re not 

doing, probably another million to 2 million barrels a day off the 

Atlantic coast where we haven’t even looked, 2 million barrels a 

day in shale oil that we’re not developing, and 1 million to 2 million barrels a day to from coal-to-liquids that we’re not doing. 

Now, if we were doing that right now, we would double the domestic oil production equivalent in the United States of America, 

and, given the tightness of the world oil markets, we would have 

a much different supply and demand. 

Now, we’re not doing it, we’re not doing it. I’m on a bill with 

Chairman Dingell on oil speculation. I’m on an independent Republican bill that the CFTC has basically implemented since we introduced it. I think speculation is a problem. And I agree with what 

Dr. Krapels said that in the short term it’s the easiest thing to do, 

although it’s not easy, but it is easier than physically going into the 

field and developing some of our domestic resource space. 

But to say that the only answer is purely to make it much more 

difficult to play in the futures market in the commodities, or specifically oil, is disingenuous because the futures market track reality in the world, and the reality in the world is we have a tightness in the demand-supply situation that speculators are taking 

advantage of, because, as one of you gentlemen just said, if you’re 

watching the value of the dollar decline 1 percent a month or 2 percent a month, you can’t put a lot of money in the stock market. You 

go into something that has the ability to be a hedge against inflation and the decline in the value of the dollar. And if there are no 

limits in the futures market, it’s a rational decision for these hedge 

funds and these other funds to put a lot of money into the futures 

market. It’s rational. People are rational with money. 

Now, my question is, can we physically—in the U.S. market can 

we discriminate between a physical player who is either selling a 

real barrel or buying a real barrel and a nonphysical player? Can 

126 

you in an open society have different rules based on why people are 

in the market? Is that possible? Anybody? 

Mr. GHEIT. Yes, it’s possible, because they have different goals 

and objectives. A physical hedger, what you want to manage again 

is the commodity risk. They are in the business not to make 

money, they are in the business not to lose money. But the financial players are in the business for one thing only, and that’s to 

make a lot of money in a short spurt of time. 

Mr. BARTON. But everybody on the panel agrees that we can 

have different rules for different types of potential investors in the 

futures market. 

Mr. KRAPELS. And we’ve done so for decades. 

Mr. MASTERS. That’s always been the case. 

Mr. BARTON. OK. Now, do you agree or disagree on the suggestion that we could require a higher margin for a nonphysical investor in the futures market? Do you all agree with that? 

Mr. KRAPELS. Yes. 

Mr. DIWAN. Yes. 

Mr. GHEIT. Yes. 

Mr. BARTON. Now, to go to the question that Mr. Inslee raised, 

I have been in reasonably close contact with the makers of the U.S. 

market in Chicago and in New York, more in New York than in 

Chicago. I’m told that if we tighten up, require more transparency, 

higher margins, position limits, eliminate exemptions, that a large 

number of the so-called speculators, the paper barrel people or the 

video barrel people, are just going to go to the ICE market or some 

other market. 

Now, two of you gentlemen seem to indicate they won’t go there 

because they don’t have the—those markets may not have the financial stability. But I think when the New York Merc guy testifies later, he’ll show you that the ICE market has grown almost exponentially as compared to the New York market. 

So how can we regulate in the United States in a way that does 

some of the good things we want to do and have that roll over into 

the ICE market, in the Dubai market, and maybe even the Hong 

Kong market for that matter? How do we do that? 

Mr. GHEIT. The two markets account for almost 90 percent of the 

trade. If we control both markets, we basically control 90 percent 

of the whole market. 

Mr. BARTON. Under the current system. But if we change the 

market condition in the United States, what’s to say that we 

won’t—— 

Mr. GHEIT. It has to be simultaneous. We change the rules in the 

U.S., and simultaneously we’ll have to require a rule change on the 

ICE market. Or we can—as I said before in my recommendation is 

that any company doing business in the U.S. must play by the U.S. 

rules, period, whether it’s on the ICE or in the NYMEX. 

Mr. DIWAN. I think you need to regulate those two markets, and 

that takes care of that. 

There is a third market which is important, which is the overthe-counter market, which is a gray market that we don’t know 

much about. 

Mr. BARTON. We sit here in Washington and we think whatever 

we do rules the world, but we have a global—we certainly have a 

127 

global market in oil. And I’m still not sure how we—if we do what 

we think is the right thing, how we get the rest of the world to follow suit? How do we get the British Parliament to put the same 

rules in place for the ICE exchange that while it’s physically in Atlanta, it’s based in London? And how do we make sure that Dubai 

or Kuwait or wherever don’t create their own market because they 

can have lower margins and less transparency? 

Mr. DIWAN. I think most of the financial players will only put 

money in a market which is regulated, stable, that you know 

what’s happening. So I don’t imagine that the liquidity would move 

offshore. I believe you actually do have to regulate those both exchanges in the same way, and then you close most of the issues 

here on the future exchange. 

The way I look at the oil market, it’s like a huge iceberg, and 

we see only the tip, which is the future market. But there is also 

what’s happening below the water level, which is the over-thecounter market that I don’t think you can do much about, or at 

least I do not know how you would go about it. 

Mr. BARTON. But everybody agrees that we can some way require 

comparability or conformity with the U.S. market regulations; that 

it’s legally, constitutionally, realistically possible? 

Mr. MASTERS. Currently any futures contract that calls for delivery inside the United States, we’re the largest consumer of energy 

in the world, is automatically subject to CFTC regulation. Any futures contract that cash settles against a U.S. contract with physical delivery provisions is also automatically subject to CFTC regulation unless specifically exempted. If not exempted, then no person 

inside the United States may lawfully trade that contract. So I 

don’t think that there’s anywhere in the world that wants to lose 

U.S. speculators or U.S. physical players. 

The 60 percent of the volume on the cash-settled WTI crude-oil 

contracts on the International Continental Exchange, the ICE, is 

traded by U.S. entities. If the CFTC had not exempted the ICE 

from regulation, then those U.S. entities would not be able to trade 

that contract, and it would have been very difficult for that contract to ever get off the ground. 

Mr. BARTON. Mr. Chairman, can I ask one more question? I know 

my time is expired. 

Mr. STUPAK. You bet you. 

Mr. BARTON. If we were to set a different margin requirement by 

law or by regulation in the U.S. market for nonphysical traders in 

the oil futures market, what’s a ballpark figure on what that is? 

Because it’s not an equity market like Mr. Masters has pointed out. 

This is an option to purchase or sell at a given price at a given 

time. So instead of 5 percent or 3 percent like it is today, what 

would that be? Do you want it to be as high as 50 percent, or do 

you want it to be 10 percent, 25 percent? Just a general ballpark 

figure for nonphysical players in the oil futures market in the 

United States. 

Mr. GHEIT. I go for the whole thing. I go for 50 percent. 

Mr. BARTON. Fifty percent. The same as stocks then. 

Mr. KRAPELS. I would get to a lower number more slowly. I 

would gradually increase the margins over a period of time and 

maybe get to a one-third requirement. 

128 

Mr. BARTON. Thirty-three percent. 

Anybody else? Does anybody vote to keep it the same? You all 

think it needs to go up? 

OK. Thank you, Mr. Chairman. 

Mr. STUPAK. Thank you, Mr. Barton. 

Mr. Melancon for questions. 

Mr. MELANCON. Thank you, Mr. Chairman. 

I just recently visited on a congressional trip with all oil ministers in the Middle East. And, of course, we were at first kind of 

taken aback when they said they would much rather see the price 

between $70 and $80 than where it is now. I grew up in the sugar 

industry, and my dad always said the only people that make money 

when sugar moves up or down are the brokers because there’s a 

reason to sell, and I guess that’s what we’re dealing here. 

One of the things, Mr. Diwan, I was looking at, on your chart 

that you gave us with oil prices and structural trends, it showed 

that the price started moving up around January of ’04, got up to 

about $80 apparently in the early part of ’06, and then dropped out 

and then took off. Is there a point in here that you can point to 

that the CFTC quit regulating the ability of the people to hedge? 

Mr. DIWAN. Not that I know of. 

Mr. MELANCON. Is there someone? 

Mr. DIWAN. I think the price movement is explained more by the 

physical here. 

Mr. KRAPELS. Do you mean in the last quadrant of the one 

that—— 

Mr. MELANCON. Yes. Looking at the graph that was there, we 

had movement upward, then we had a spike down, and then it took 

off. 

Mr. DIWAN. The spike down was really because oil stocks were 

building very fast. And after that oil, basically OPEC cut some production to reduce supply to tighten stocks a little bit. This is what 

happened in 2006 when we saw prices declining to $52. 

Mr. KRAPELS. We saw it mostly as an increase in the positions 

of funds, frankly, that there was just a large increase in those 

funds’ positions that drove the price up to the last $135. 

Mr. MELANCON. And I guess that’s what I was trying to find out 

is if that is a direct correlation. And that’s why I was asking about 

the date when the exceptions were being made by the CFTC. 

Mr. KRAPELS. It’s very hard to track that precisely. 

Mr. MELANCON. When did ICE open up its doors and start trading here? 

Mr. KRAPELS. 2000. 

Mr. MELANCON. 2000. 

Mr. KRAPELS. I think ICE started in 2000, and really took off 

after the Enron collapse. 

Mr. MELANCON. And the Enron collapse was about—— 

Mr. KRAPELS. About 2002. 

Mr. MELANCON. 2002. Yes, that’s about when the margins started actually. It looks like it really started moving on a steady climb 

around January of ’04, a little bit before January, maybe midyear 

of ’03. 

Do any of you all have the price for gasoline or fuels by countries 

or regions? I have people back home, of course they think they’re 

129 

the only ones impacted. And I pick up bits and pieces on the news. 

In Saudi Arabia, obviously they subsidize, Dubai, Abu Dhabi, the 

UAE. But in places in Europe and South America or wherever, do 

we know what the price is? 

Mr. GHEIT. The Europeans are paying exactly double what we’re 

paying. China is paying probably more than half what we’re paying. The difference between what we pay and what the Europeans 

are paying are basically government taxes on fields in Europe. The 

difference between what we’re paying and what the Chinese are 

paying are basically government subsidies. So it is government 

policies that really influence the price. Now, the over-the-counters, 

obviously they are totally subsidized. Their gasoline is cheaper 

than water, so they don’t really come into the picture at all. 

Mr. MELANCON. One of the questions that’s always been out 

there, and I heard some—I think Mr. Barton had talked about if 

we were producing in all our offshore areas, we could probably be 

producing the additional millions of barrels of oil that we need. If 

in fact that did happen, what happens to us with the capacity to 

refine and process jet fuel, diesel fuel, gasoline? Do we still get 

mired? Do we have enough capacity to move it into fuels, or do we 

have some inverse action on the market? 

Mr. GHEIT. It would definitely have an impact. Increased supply 

definitely will cool off prices. The prices will come down. Two ways: 

we can increase supply or reduce demand, or better, we could do 

both, and they will have the same impact. Prices will have to go 

lower. 

Mr. MELANCON. Worldwide what’s the capacity of refining? 

Mr. GHEIT. Refining, about 80 million barrels. 

Mr. MELANCON. And what’s the daily production of oil? 

Mr. GHEIT. Production is about 85 million. 

Mr. MELANCON. So it produces about 5 million barrels a day 

more than we’re processing for usage. And the reserves are about 

how much a percent of total? 

Mr. GHEIT. The reserve? 

Mr. MELANCON. Yes. Worldwide, do you know what the reserves, 

oil reserves, are? 

Mr. GHEIT. Oil reserves are 1.4 trillion barrels. 

Mr. MELANCON. No, excuse me, I didn’t mean what’s left in the 

ground or estimated. What do we have that’s in excess of what’s 

out there going through the process? 

Mr. GHEIT. Basically most of the excess is in Russia, the Middle 

East and basically OPEC countries. And the numbers flow between 

2 to 3 million barrels a day. 

Mr. MELANCON. Thank you, Mr. Chairman. 

Thank you, gentlemen. 

Mr. STUPAK. Thank you. 

Mr. Walden for questions, please. 

Mr. WALDEN. Thank you, Mr. Chairman. 

Are the processed reserves, I guess that which has been extracted from the ground and in the pipeline, if you will, or in storage, are they going up or going down for gasoline, for oil, for natural gas? 

Mr. DIWAN. The short-term stock changes as the product are increasing, but the crude is decreasing. 

130 

Mr. WALDEN. So if the processed product is increasing, then you 

would think that—is it increasing at a rate that keeps pace with 

demand, or is the rate of demand outstripping the rate of increase 

in the processed product? 

Mr. DIWAN. The processed product in the United States, the average inventories are above their 5-year average. So we have a little bit more stock than we usually do at this time of the year. However, this market, the price discovery of this market is really crude 

led, it’s not product led. 

Mr. WALDEN. Now, I think you indicated, and correct me if I got this wrong, that $35 of the price of a barrel of crude could be 

tagged the incoming money of the nonphysical traders? Is that 

what you all said or somebody said? 

Mr. GHEIT. I would say more. 

Mr. WALDEN. More? 

Mr. GHEIT. Much more than that. 

Mr. WALDEN. How much? 

Mr. GHEIT. I would say the decline in the dollar probably had be- tween $10 and $15 in the price spike, and everything above $65, 

the difference between that and the current price is pure speculation. 

Mr. WALDEN. So $10 to $15 is the price of the dollar, value of 

the dollar? 

Mr. GHEIT. $10 to $15 tied to the currency. And the difference between $65 and $130 or $125 would be basically speculation. 

Mr. WALDEN. And do each of you agree with that analysis? 

Mr. KRAPELS. I think we each have our own thoughts on it. Fadel 

is probably at the low end of the range of—at the high end of the 

range in terms of the speculative impact. I had guessed somewhere 

in the 30s or 40s. 

Mr. WALDEN. Mr. Masters, do you have any? 

Mr. MASTERS. I think the answer is that nobody really knows. 

When I talk to refiners, that’s what they tell me is that the price 

should be in the neighborhood of $65, $70. 

Mr. WALDEN. OK. There have been some rather senior members 

around this institution who have—individuals that have called for 

nationalizing our refinery system. Do any of you think that’s a good 

way to—for the market or to reduce costs? 

Mr. GHEIT. A very bad idea. 

Mr. WALDEN. Mr. Diwan? 

Mr. DIWAN. I don’t think we have a particular problem in refining right now. 

Mr. WALDEN. Mr. Masters. 

Mr. MASTERS. The interesting—I don’t agree at all. 

Mr. WALDEN. OK. Neither do I. 

Mr. MASTERS. I would make one point. One of the interesting 

things that’s happening with refineries is that on the one hand 

they’ve got, as I said, demand and demand. They have investor demand helping to drive up their input cost, which is what they have 

to buy crude oil. And on the other hand they’re trying to sell gasoline, which is driven by consumer demand, which in the U.S. has 

gone down in price. So it’s hard for them to go out and build new 

refineries when they’ve got a situation in which crack spreads are 

going down. It’s in part because of investor activities. 

131 

Mr. WHITFIELD. Mr. Krapels. 

Mr. KRAPELS. Refiners are not the problem. Trying to build a refinery in the United States today is practically impossible. So nationalizing it will only make that worse. 

Mr. WHITFIELD. All right. I’m glad to hear you all say that. I concur, but you are the experts here. 

There are some Members around this body that think that’s the 

way to go. Everybody is trying to find an answer here. So if we 

were to move forward and require some sort of limitation on how 

much you can—nonphysical traders can—do and some more transparency, A, how long do you think that would have to be in effect 

before we saw a real change in the price of crude oil, and so, how 

much and how long? 

Mr. GHEIT. Well, if we assume that speculation is playing a 

major role in the jump in oil prices, these people can switch their 

position very quickly from long to short, but other members of the 

panel said you might take a longer time. But the market would be 

very efficient very quickly, and it will come to an equilibrium 

where prices will go a lot faster than many people think. People 

are not going to wait to lose money; they will bail out as soon as 

possible. 

Cut your losses and bail out. And that’s exactly what the market 

is going to do. 

Mr. WHITFIELD. Sort of like what is happening in the housing 

market? 

Mr. GHEIT. I would say 30 to 60 days we will probably see an 

immediate impact. 

Mr. DIWAN. Well, if you change your regulation, and the expectation is that you are going to have to change your behavior, you 

have an interest to do it as quickly as possible before everybody 

else. And probably they are doing it already, but that’s the idea. 

But then you can allow more time to adjust if need be. But I think 

the bigger impact will be quite immediate. 

Mr. WHITFIELD. OK. 

Mr. Masters. 

Mr. MASTERS. Just to Roger’s point, one of the interesting things 

I saw last week where commodity prices have come down, and on 

the wire some people had said that was because of the threat of 

potential congressional legislation. So when the news wires were 

saying people were already reacting to that, I think that’s a pretty 

powerful statement. 

Mr. KRAPELS. I agree. While I would like people to give time to 

make these important adjustments, my guess is that there will be 

quite a stampede to liquidate positions quickly. 

Mr. WHITFIELD. OK. So if we did that piece, more transparency, 

different positioning requirements, and all, and if we passed legislation saying we’re going to allow access to domestic supplies onshore and offshore, which do you think would have the most value 

in the marketplace to consumers? 

I realize one would be very quick, one would be long term, but 

both would send signals to a market that’s a little dysfunctional 

right now, correct? 

Mr. Gheit. 

132 

Mr. GHEIT. Both are needed, but one is immediate and one 

longer term. But both are needed. There is no one better than the 

other. 

Mr. WHITFIELD. All right. 

Mr. GHEIT. They are both needed, and we should start them now. 

Mr. WHITFIELD. So one better than the other, both are needed, 

one has an immediate impact, one has sort of a long—— 

Mr. GHEIT. In terms of energy security the latter is much more 

important. 

Mr. WHITFIELD. OK. 

Mr. Diwan, do you agree with that? 

Mr. DIWAN. No. I don’t know anybody who would buy or sell oil 

today, because we will have a new supply in 7 years on the market. 

I think they will wait to see what happens and they will see what 

happens to demand and the supply in the rest of the world, et 

cetera. I don’t think that people will signal buy or sell on that— 

on that change. 

Mr. WHITFIELD. Mr. Masters. 

Mr. MASTERS. I would just go back to my example of the person 

losing weight. We have a chronic issue, which is energy security, 

that can be solved with legislation. We’ve also got an acute issue 

where we have a patient that’s dying. We need to save the patient 

first, so—— 

Mr. WHITFIELD. So maybe not a crash diet, but a long-term rebalancing of what we do? 

Mr. MASTERS. I think in this case that we’re trying to save the 

patient first. 

Mr. WHITFIELD. Right. 

Mr. MASTERS. I think that we want to use the quickest means 

available to help save the patient. Then we can deal with the 

longer-term issue of diet and exercise. 

Mr. WHITFIELD. Right. So crash diet for immediate weight loss, 

change of—yes, Doctor? 

Mr. KRAPELS. I would hate to see the two actions linked. I think 

it would be nice to do them separately, because I think the first 

one, the one we’re talking about here today, is actually fairly easy 

to do. I think releasing reserves for future production is a much 

more contentious and difficult issue. 

Mr. WHITFIELD. Contentious or not, is it the right thing to do for 

the country’s energy security and for the price for consumers in 

America? 

Mr. KRAPELS. It is. If you can get the legislation passed, that 

would be great. 

Mr. WHITFIELD. Thank you. 

Mr. STUPAK. Mr. Green, questions? 

Mr. GREEN. Thank you, Mr. Chairman, and I appreciate the second round. 

Mr. Gheit, your testimony calls for setting volume limits for commercial traders such as oil companies or refiners, that are related 

to their physical needs. Would you explain the purpose of this recommendation, because it seems like that is not the problem that 

this morning’s talked about? 

Mr. GHEIT. No, basically this was the basis for setting trading 

limits for the noncommercial. 

133 

What I am saying, let’s start with the physical traders first, the 

people who are going to own a barrel of oil, whether it is going to 

be an airline or refinery companies or whatever, and then set what 

is needed for the financial market in terms of volume. 

So the basis should be the physical market, and then we should 

study, we should examine how much more liquidity is needed to be 

provided by the financial market. And based on that—I don’t want 

to put any trading limits before I know exactly what that oil industry need, what the airline industry need, what the chemical industry need—then of the collective volume, if you will, we set the volume of their financial market. 

Mr. GREEN. In this next two questions for everyone and—one of 

them is, on June 6th there was an $11 increase in the crude oil 

price. In terms of the fundamental factors of supply and demand, 

how do you explain that and what explanation for that kind of 

movement is there, for that $11 on that 1 day? 

Mr. DIWAN. I think there were two events that day that were important. One was the discussion by the head of the European Central Bank to increase interest rates, so it has an immediate impact 

to lower the value of the dollar, increase the value of the Euro. So 

you had a lot of people who were selling, actually, oil because they 

felt the fundamentals were weak, who were cut short and had to 

cover. 

The other was the comment by an Israeli minister saying that 

an attack against Iran is unavoidable. And these two events have 

pushed oil prices much higher. 

Mr. KRAPELS. If we live in a world where an obscure statement 

by an Israeli politician can make the price of a vital commodity like 

oil go up by $11, then we’re in deep trouble, and we need to do 

something about it. 

Mr. MASTERS. I don’t think there was any case that was driven 

by speculation. 

Mr. GREEN. Well, let me give you an example. And I know yesterday Saudi Arabia had producing nations there and our Secretary 

was there. About 2 weeks ago Saudi Arabia mentioned that they 

were at an increased production of about 200,000 barrels. 

And about a week ago there was a rig off the coast of Louisiana 

that BP had called the Thunder Horse, that had been hurt during 

Katrina and had to be hauled in. And it is actually producing 

250,000 barrels a day, and that had no impact at all on the market. 

Mr. DIWAN. We have been waiting for Thunder Horse for 3 years 

or 4 years, so it has been in the news for 4 years. 

Mr. GREEN. Well, it is producing now, but wait until another 

hurricane. I guess that’s the concern. Because, like you said, somebody can—an Israeli air official can say something. 

Some of us are so frustrated. We have almost 700 million barrels 

in the SPR. Some have said well, what if the President mentioned 

that we’re going to start releasing, without a timetable, from the 

SPR. That would impact. And without a timetable, though, it could 

be tomorrow, it could be next week. What would that do to the 

speculators? 

Mr. GHEIT. It would definitely cool off speculation. I cannot quantify it, but it is definitely going to cool off speculation. 

134 

History has shown that when President Bush did it in the Gulf 

War, it had an immediate impact. When President Clinton—had an 

immediate impact. It is a psychological impact on the market. Remember, it is a market that runs on speculation and expectation, 

not the physical, not the physical. 

For example, Petrogas made a discovery offshore Brazil, and all 

of a sudden oil prices dropped. Why? This field, if developed, will 

take 5 years before we will see a drop of oil on the market. But 

guess what, the market cooled off immediately. 

It is a knee-jerk reaction to something that is going to happen 

years from now. It is not physical market; it is all expectation. 

Mr. DIWAN. If I can answer that, I can have exactly the converse 

scenario, which means if this President releases oil from the SPR 

right now, the market will believe that we are going to be attacking 

Iran later on, and oil prices will increase immediately. 

OK, so if you release oil by this President, without any reason, 

from the SPR, I can assure you oil prices will jump up. 

Mr. GHEIT. Just in this market it moves up, good news or bad 

news. When rebels kidnap oil workers in Nigeria, oil prices go up. 

Mr. GREEN. Frankly, Congressman Melancon has constituents 

that are getting kidnapped in Nigeria in the offshore rigs. 

But—I understand it is volatile, but that was just some discussion from folks who actually come from the oil patch who said, 

what would we do if just the President made this determination 

that, OK, over the next months we are going to start releasing it; 

we’re not going to tell you when. But what would happen? And I 

would hope it wouldn’t signify that we’re preparing to attack anybody. 

Thank you, Mr. Chairman. 

Mr. STUPAK. Thank you, Mr. Green. 

Mr. Burgess for questions, please. 

Mr. BURGESS. Thank you, Mr. Chairman. 

Mr. Masters, I want to thank you and commend you for putting 

many of the arguments in terms of medical terminology. It makes 

it much easier for me to understand the tumor versus the bubble: 

excise the tumor, treat the underlying obesity, but you have to take 

care of the heart attack now. 

On the issue of the longer term, the supply-demand, I think, Mr. 

Gheit, you mentioned it as well. Is it fair to say that market fundamentals include facts not just about our current supply, but expectations of future supply and demand? I think you referenced 

that as far as the Brazil field was concerned. 

Mr. GHEIT. Yes. 

Mr. BURGESS. Did we—I say ‘‘we’’ in the sense of the United 

States Congress, House of Representatives—invite speculation by 

failing to take measures that would result in increased domestic 

supply? 

Mr. GHEIT. Yes. 

Mr. BURGESS. And again, this needs to be a two-pronged approach, that of the position limit for the immediate effect, the immediate beneficial effect it would have, as well as all of the other 

methods that have been outlined as far as increasing domestic production. Is that correct? 

Mr. GHEIT. Yes. 

135 

Mr. BURGESS. And is there any reason to proceed with only the 

position limits currently and ignore the increased supply activities 

that we’d know we will surely have to undertake within 8 to 10 

years’ time? 

Mr. GHEIT. No, that is not going to get the results that we are 

hoping for. It has to be full court press. It has to be a combined 

near-term and long-term strategy. We just cannot stop and go. It 

has to be a long-term strategy that will be implemented over a long 

period of time. 

But immediately we have to do what’s possible to burst this bubble. 

Mr. BURGESS. Well—and I appreciate your saying that because 

I firmly believe that an all-hands-on-deck philosophy is really 

what—what is required here. And so often we seem to be fighting 

ourselves up here. This has been a refreshing exchange this morning, or this afternoon, and I really appreciate everyone’s participation. 

You know there is another committee that meets just across the 

hall that tends to be perhaps a little more flamboyant in attracting 

the press coverage, and they brought in all the oil company executives. Is it safe to say that we’ve moved beyond the point where we 

vilify the oil company executives? 

Mr. GHEIT. I’ve been in this business almost 30 years, and I can 

tell you, the oil companies get blamed for something that they have 

absolutely no control over. They are price takers. They don’t have 

any—it’s not a brand name; they are basically in the market every 

day whether oil prices are $10 or oil prices are $140. Yes, $140 or 

$130 oil creates this huge profit, and everybody is blaming the oil 

companies for creating this bubble, or the run-up in oil prices. 

But the fact of the matter is, believe it or not, the stocks of the 

large, integrated oil companies have been down for the year despite 

$140 oil. So shareholders of the large, integrated companies are not 

happy at all with $140 oil. 

Mr. BURGESS. Well, does anybody on the panel disagree with that 

philosophically? 

Is there anyone on the panel who believes that creating a situation where we tax our domestic oil companies to a greater degree 

will result in more energy being available at a lower price to the 

consumer? Can anyone envision a scenario where that would work? 

We hear discussion of legislation that is going to be before this 

Congress before the end of year where we will increase the taxes 

on our domestic oil producers, the idea being that we will now be 

able—by doing that, we will be able to lower the price to the consumer and increase the amount of supply. 

Does anybody believe in a rational world that that will work? 

Mr. GHEIT. That’s totally, totally irrational. 

Mr. BURGESS. OK. Well, I appreciate your candor. 

And, Mr. Chairman, we’ll revisit that again at the appropriate 

time. It has been a long morning. In the interest of time, I’m going 

to yield back the balance of my time. 

Mr. STUPAK. I thank the gentleman. 

Mr. Dingell for questions. 

Mr. DINGELL. No, Mr. Chairman. I thank you for your courtesy. 

Mr. STUPAK. Thank you, Mr. Chairman. 

136 

Well, that concludes all questions of this panel and I want to 

thank each of you for coming on a very important testimony and 

it certainly has helped us out quite a bit. Thank you. 

Mr. BURGESS. Mr. Chairman, if I may, if there are questions that 

come up as a result—— 

Mr. STUPAK. Put it in writing. 

Mr. BURGESS. OK, thank you. 

Mr. STUPAK. And as always, we’ll submit them in writing if 

someone has further questions. We usually keep the record open 

for 30 days after a hearing to allow opportunity. 

I thank you all for your expertise. Thank you. 

Mr. STUPAK. I will call our second panel of witnesses to come forward. 

On our second panel we have Mr. Doug Steenland, who is President and CEO of Northwest Airlines; Mr. Eugene Guilford, Jr., who 

is the Executive Director and CEO of the Independent Connecticut 

Petroleum Association; and for our third introduction, I will yield 

to my friend, Congressman Mike Ross of Arkansas, to introduce 

Mr. Williams. 

Mr. Ross, would you like to introduce Mr. Williams, please. 

Mr. ROSS. Again, Mr. Chairman, thank you. I’m a member of the 

full committee, not this subcommittee, and I appreciate your selecting an Arkansan as one of our witnesses today. And if my projections are correct—I’m on the Energy and the Health Subcommittees, and I think sometime around 2029, I will get to chair one of 

those, and I will certainly return the favor to you at that time. 

I would like to thank my fellow Arkansan, Mr. Steve Williams, 

for coming before the Committee to testify today about his extensive experiences with rising diesel prices. Mr. Williams is the 

Chairman and CEO of Maverick USA, which operates the second 

largest company-owned flatbed truck fleet in the United States. In 

addition, he has served as both the Chairman of the Arkansas 

Trucking Association and the American Trucking Association. 

Steve is also on the Executive Committee of the American Transportation Research Institute and the Transportation Research 

Board of the National Academies of Science. 

Mr. Chairman, I think it is important that we have Steve on the 

panel today, because we have trucking businesses that are going 

out of business because of these high diesel prices; and we also all 

know that it directly relates to the recession we’re in, because we’re 

all paying more for products. Because if you think about it, just 

about everything you buy ends up on the shelf by way of a truck 

that’s typically running on diesel. 

So, Mr. Chairman, thank you for your interest in this issue. 

Thank you for this hearing today. And thank you for including an 

Arkansan that has nationwide experience in the trucking industry 

as part of this panel. I look forward to Steve’s and everyone else’s 

testimony. 

Mr. STUPAK. Thank you, Mr. Ross. And if you’re going to be subcommittee chair in 2029, I think you’ll have to take that up with 

Mr. Dingell; he will still be running the Committee then. 

It is the policy of this subcommittee to take all testimony under 

oath. Please be advised that witnesses have the right under the 

137 

Rules of the House be advised by counsel during their testimony. 

Do any of you wish to be advised by counsel? 

The witnesses are indicating that they do not. Therefore, I ask 

you to please rise and raise your right hand and take the oath. 

[Witnesses sworn.] 

Mr. STUPAK. Let the record reflect that the witnesses replied in 

the affirmative. You are now under oath. 

Mr. Steenland, we’ll start with you, please, for an opening statement. We have 5 minutes set aside; if you have a longer statement, 

it will be submitted for inclusion in the hearing record. 

Mr. Steenland. 

STATEMENT OF DOUG STEENLAND, PRESIDENT AND CEO, 

NORTHWEST AIRLINES 

Mr. STEENLAND. Thank you, Chairman Stupak, Chairman Dingell, Ranking Member Barton. Thank you very much for the opportunity to appear here today. I do so wearing two hats, one as 

Chairman of the Air Transportation Association, the trade association of U.S. airlines, the other is as the President and CEO of 

Northwest. 

Having listened to the experts on the original panel, that was a 

very thoughtful discussion. As an industry we support their recommendations, and we would urge the Congress to adopt them expeditiously. Rather than to repeat what they’ve just gone through, 

I think it would be more helpful from the committee’s perspective 

to focus on the real impact that this incredible increase in the price 

of oil has had on the airline industry. 

Specifically, oil is now 40 percent of the total cost of the airline 

industry. For U.S. carriers from 2007 to 2008 the oil bill has gone 

from $41 billion per year to $61 billion per year, a $20 billion increase. For Northwest alone, in 1 year our fuel costs have gone up 

by $2 billion. The U.S. airline industry this year is forecasting a 

loss well in excess of $10 billion. 

In this instance, the challenge is not so much—is as much the 

speed with which the increase has occurred as the magnitude. If 

you look back over the years from 2005 to 2007, oil went from approximately $26 a barrel to $72 a barrel. While those price increases were difficult, given the time period over which they occurred, they were, by and large, manageable. In 2007, with oil in 

the $70 range, the airline industry was profitable, and we would 

love if 2008 came even close to looking like 2007 was like. 

However, when the price of oil over the course of 10 months goes 

up $70 a barrel and every dollar, in Northwest’s instance, costs us 

$42 million a year of additional costs. When oil goes up almost $11 

in 1 day, when you have volatility in any given day of, well in excess of $3, you are really living in an entirely different world. 

The consequences of this are dramatic. So far this year, eight airlines have shut down, two have filed for Chapter 11, and all of the 

major network carriers are in the process of significantly shrinking 

their capacity. In Northwest’s case, we will be between 8.5 and 9.5 

percent smaller in the fourth quarter of this year than where we 

were last year. Other airlines are shrinking in similar magnitude. 

138 

Why is this happening? It is happening because we have no 

choice but to take these price increases and pass them through to 

our customers. 

We’ve been through significant restructurings. In Northwest’s 

case, we have taken $2.5 billion a year out of our cost structure 

and through increasing our revenue; so, therefore, we need to pass 

these prices through. As they get passed through, the consumer is 

going to be traveling less, because as prices go up, just like with 

anything in society, demand will go down. And when demand 

comes down, we need to adjust the supply to reflect what that demand is. 

So, unfortunately, communities will lose service, the level of service will go down, inconvenience will increase, and adjustments in 

employment will have to take place. And given the impact, the incredible impact of air service on the economy, that is then going to 

ripple through and have a correlative effect on other businesses 

and other things that we do. 

For those reasons, we would urge that the Congress act quickly, 

agree on a bipartisan measure that can address the issues that got 

raised by the panel this morning. And we would hope that we 

would be able to see legislation passed by the Congress by the August recess. 

Thank you very much. 

Mr. STUPAK. Thank you. 

[The prepared statement of Mr. Steenland follows:] 

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Mr. STUPAK. Mr. Williams, your opening statement. I would ask 

you to pull that mike up there a little bit. 

STATEMENT OF STEVEN R. WILLIAMS, CHAIRMAN AND CEO, 

MAVERICK USA, INC. 

Mr. WILLIAMS. Mr. Chairman and members of the subcommittee, 

my wife and I started our company in 1980 with one truck. We employ nearly 2,000 people today and operate a little over 1,500 tractors. And our company serves the steel, building materials, and flat 

glass industries. 

In 2007, despite revenues of 300 million, we lost money for the 

first time in our 27-year history of the company. Our fuel bill increased $12 million between ’06 and ’07, and we were not able to 

recover this increase due to the weak economy and, frankly, a loss 

of pricing power. 

The national average price of diesel, of diesel fuel, on June 16th 

was $4.62. If this price remains constant for the rest of the year, 

our company’s fuel bill will increase by 49 million this year, from 

66 million to 115 million, a 72 percent increase. 

The fuel crisis is having a dramatic effect on the trucking community at large. Tom Albrecht, an analyst with Stephens Inc., 

wrote in June that these fuel prices could force as many as 14 to 

16 percent of the trucking industry to cease operations. Not only 

will this further reduce capacity in the market, it will make the 

used truck market even worse, for, you see, there are few domestic 

buyers for used equipment, and over the last year we as a company 

have been forced to wholesale our tractors to Russia and to Vietnam. 

But the implications to the U.S. economy obviously are of much 

greater concern. Energy experts can certainly lend more to this debate than I on the impact that speculation is having on the energy 

markets. But, for example, Professor Greenberger testified on June 

the 3rd before the U.S. Senate Commerce Committee and said, ‘‘By 

any objective assessment, the crude oil market is now overwhelmingly dominated by speculation.’’ We’ve heard an awful lot about 

that already today, but at a minimum, energy trader statements 

continue to be, at a minimum, self-fulfilling prophesies. 

Additionally, oil prices simply do not reflect the fundamentals of 

supply and demand. Tim Evans, an energy futures analyst at 

Citigroup, wrote on June 5th that if demand growth is faltering 

and supply is rising, just as economics would predict should occur 

in the face of rising prices, just why are prices remaining so persistently strong,’’ end of his quote. 

I would like to thank the subcommittee’s interest in examining 

ways to regulate this activity. And to whatever degree commodity 

prices are affected by speculation in the market, we must eliminate 

this unnecessary burden on our economy and we must do so quickly. I would emphasize ‘‘quickly.’’ 

I believe that our efforts to deal with the current costs of fuel 

must be part of a comprehensive strategy, and the strategy must 

first focus on the factors that are driving the cost of diesel. 

Second, the strategy must include regulatory policies that will 

allow our industry to be better stewards of resources that we have, 

149 

a strategy that could reduce our dependence on foreign oil and improve the quality of our environment. 

We need an overall strategy that can improve fuel efficiency and 

safety while serving the U.S. economy that will be twice its current 

size within the next 20 years. Trucks will continue to deliver most 

of our Nation’s goods; however, in order to meet the demands of 

our society, 87 percent more trucks will be required than are currently on our highways. This will further increase congestion, air 

pollution, and will burn even more fuel. 

In order to meet this challenge, we must consider policies to limit 

vehicle speeds, create incentives for limiting—for adopting environmental and safety technologies, invest in highway system capacity 

to reduce highway congestion, and safely improve vehicle productivity. 

We must encourage the use of renewable fuels, but as a part of 

a sensible national fuel standard. We must assess the true value 

proposition of renewable fuels, such as corn ethanol and biodiesel. 

We must understand the implications of their productions and the 

conditions of their use. Increased domestic exploration and increased refining capacity must be encouraged when they can be expanded in an environmentally responsible fashion. 

I have voluntarily invested tens of millions of dollars in virtually 

all of the fuel-saving, safety-improving technologies that are available in the market today, but it is going to take much more than 

that. It requires a globally competitive regulatory change to enable 

the continued evolution of the trucking industry to safely meet our 

Nation’s needs. 

I have authored and offer a comprehensive strategy to meet the 

challenges that we face. And this document has been—as a part of 

this attachment, this document details specific action items, and it 

is titled U.S. Freight Transportation Sustainability Initiative. 

I appreciate this opportunity, Mr. Chairman, to offer my insight 

into measures that this Nation should take to address the high cost 

of petroleum. Thank you. 

Mr. STUPAK. Thank you, Mr. Williams. 

[The prepared statement of Mr. Williams follows:] 

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Mr. STUPAK. Mr. Guilford, your opening statement, please, sir. 

STATEMENT OF EUGENE A. GUILFORD, JR., EXECUTIVE DIRECTOR AND CEO, INDEPENDENT CONNECTICUT PETROLEUM ASSOCIATION 

Mr. GUILFORD. Thank you, Mr. Chairman, members of the committee. 

In March of 2004 our association went to Connecticut First District Congressman John Larson with concerns about the behavior 

of the energy commodity markets, the enormous daily volatility we 

were seeing in those markets, and asked if our congressman 

couldn’t work with other Members of Congress to initiate a Government Accountability Office study of the authorities of the Commodities Futures Trading Commission to determine if the CFTC had 

sufficient authority and resources to properly oversee all energy 

complex trading activities. 

Our members, on behalf of our heating oil consumers in our 

State, are physical traders. We offer to our consumers the opportunity to lock in their heating oil prices for the summer—for the 

winter, rather—so this is an extremely important issue to us and 

to our customers. 

When that study’s results came back, we learned that the CFTC 

had multiple loopholes in its statutory authorities without reason, 

not the least of which we now know to be the Enron loophole, the 

swap trade loophole, and the foreign board of trade loophole, effectively blinding the CFTC to more than half of the daily activities 

in the daily complex. 

In short, we learned that the CFTC did not have sufficient authority and resources, and while Congress recently closed the 

Enron loophole, we know we have more to do. 

The evidence of the need of this inquiry here and elsewhere in 

Congress is clear. On Black Friday, June 6th, 2008, crude oil hit 

an all-time high of $139.12 a barrel. Heating oil and gasoline hit 

new highs of $3.98 and $3.55 a gallon respectively. The total crude 

oil traded on the NYMEX that day equaled over 1 billion barrels, 

or 12 days of world consumption and 214 days of U.S. consumption. 

Four billion barrels of heating oil were traded, equaling half of the 

total U.S. consumption of heating oil in 1 year. 

Wall Street’s justification for sending this multibillion dollar energy bill to America pointed to: A, one Morgan Stanley analyst’s 

view of crude oil going to $150 a barrel by the 4th of July after 

having declined $15 a barrel in the previous week; B, European 

central banks worrying about inflation and increasing interest 

rates driving down the value of the dollar, increasing the billions 

flowing from investment banks and hedge funds into commodities; 

and C, the Israeli Transportation Minister threatening Iran over 

its nuclear program. 

Not even when Hurricanes Katrina and Rita actually did damage 

to America’s energy production did prices rise as much as on June 

6th, 2008, and nothing that happened that Friday had any bearing 

on energy production. It was entirely speculation-driven fear on the 

part of Wall Street. 

The average service station operator we represent had to spend 

$8,000 for a load of gasoline in 2002 and now, for that same load 

165 

of gasoline, spends over $25,000. The average 2.5-million-gallon 

heating oil distributor that had to capitalize just over $1 million for 

the heating season in 1998–99 for wholesale heating oil, will need 

to capitalize over $9 million in the coming heating season, more 

than three times the net value of the company itself. In 1 month, 

next January 2009, this average local heating oil retailer will sell 

20 percent of its annual volume, requiring $2 million in credit, just 

to buy wholesale heating oil for the general public, in 1 month. 

Now, in a world of trillions and billions, that may not seem like a lot, but multiply that times 300 heating oil retailers needing $2 

million each, and pretty soon that’s real money. And we’re a small 

State. Multiply that times 25 oil-heat States, and you a have tremendous amount of capital that’s going to be needed just to get us 

through this coming season. And we face the same credit crunch 

as every other American when it comes to attempting to borrow 

these staggering sums just to be able to serve our customers. 

These crushing prices hurt not just the least well off of our customers, whose annual low-income energy assistance benefit paid for 

less than half of last year’s energy needs and it will pay for less 

than a quarter of next year’s energy needs based on where prices 

are headed, but these prices now drive the middle class to taking 

longer to pay their bills as they rely increasingly on using credit 

cards just to get by. 

More than a quarter of our customers were over 45 days late in 

paying their energy bills at the end of the recent heating season. 

In short, America was drowning in a sea of red ink trying to cope 

with energy costs, from airlines to trucking companies to large and 

small businesses, agricultural and everyday Americans. 

We advocate strong and immediate actions to close the foreign 

boards of trade and swap trader loopholes in current law. We advocate for strong and immediate actions to substantially reduce the 

role of noncommercial energy complex investors as they are now 

buying more paper contracts than physical energy. And where they 

cannot accept physical energy itself, their role in the energy market 

trading should be severely restrained. 

You will hear that such actions will reduce liquidity and potentially drive prices higher. We are all drowning in the liquidity 

pumped into this system from hedge funds, investment banks, 

index funds, and derivatives traders. 

We had no liquidity issues in 2002 in a market that operated 

with greater stability and certainty as the point of price discovery 

that it was meant to be with significantly less participation from 

noncommercial financial interests. This debate, to us, is about the 

liquidity we lack in being able to serve our customers, and our customers’ lack of liquidity in being able to afford the energy they 

need to run their businesses, to use transportation, and to heat and 

cool their homes. 

Our members are taking strong advantage of alternative fuel opportunities that this Congress has provided them; more than 30 

percent are involved in biofuels. Our State has been the first in the 

Nation to create a fuel oil conservation fund and board specifically 

designed to reduce the amount of fuel oil that is used in our State 

by upgrading old, inefficient heating systems to new, high-efficiency heating systems by taking advantage of some of our indusVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00171 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
166 

try’s best technology. So we’re trying the best we can on the demand side. 

Finally, this isn’t just about oil and gasoline. The December 2008 

NYMEX contract for natural gas has increased in value 83 percent 

since January, a harbinger of higher electricity and heating costs. 

In the coming months, just around the corner for natural gas users, 

prices have already started to rise for end-user consumers of natural gas. So there doesn’t appear to be anywhere anyone can go in 

order to escape the reality of higher energy costs in America. 

Thank you. And I would be happy to answer any questions you 

might have. 

[The prepared statement of Mr. Guilford follows:] 

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Mr. STUPAK. Thank you. And thank you all for your testimony. 

Mr. Steenland, at the outset let me note, your testimony contains 

a number of helpful recommendations: reduce excessive speculation 

in energy market such as closing the Enron loophole, or the London 

loophole as some call it; closing the swaps; and sealing off some of 

the exemptions that have contributed to the rapid run-up in oil 

speculation. 

Is dealing with the impacts of market speculation the highest 

priority for the airline industry? 

Mr. STEENLAND. I think the highest priority is to tackle the overall price of fuel, given the fact that it is now 40 percent of our total 

cost pie. 

And when we look at it, we think the solution is a multifaceted 

solution and that clearly addressing the financial speculation, I 

think, is the most immediate thing that the Congress can do. 

I think we would also recognize, as the first panel did, that there 

are longer-term issues that have to be addressed in the form of 

supply, in the form of conservation. We ourselves are investing $6 

billion in terms of a new fleet that will be more cost effective, but 

when you think about the kind of impact on the price of crude that 

the remedies for financial speculation were talked about, whether 

it is $30 or $40 a barrel or whether it is $60 or $70 a barrel, and 

the fact that those changes, those price impacts if they are true are 

likely to happen very, very quickly, that’s what brings us to the 

point of recommending that the Congress act with alacrity and look 

to tackle on these reforms promptly, hopefully prior to the August 

recess, so we can see some of the price rollbacks happening now. 

Because the impact of those price increases is truly devastating. 

Mr. STUPAK. What percentage of the increase in your oil costs 

can you actually put on a ticket, pass on to the consumer? Do you 

pass it all on? Do you pass part of it on? 

Mr. STEENLAND. Clearly, we have not passed all of it on. Partly 

it is due to the speed with which this has occurred. If you just look 

at our first quarter, for example, our fuel bill for operating basically the same size airline went up by about $450 million. And our 

pretax profit. This year, we had a pretax loss versus the pretax 

profit. That gap was about—we deteriorated to the tune of about 

$250 million. Our energy costs went up $450 million. Our profitability swung by about $250 million. 

Mr. STUPAK. So what would you say to the consumer out there? 

How much has their airline ticket gone up because of oil prices— 

20 percent? 30 percent? 40 percent? 

Mr. STEENLAND. It probably depends where you are. So some 

places, it probably has gone up 20 or 30 percent; others, it has not 

gone up very much at all. 

The unfortunate reality is that it hasn’t gone up enough to offset 

the price increases that we have seen so far. So if you take the 

prices that are now in the market and you simply carry them forward, because we’ve been sort of chasing this price going up, and 

if you assume that these are the prices for the next 12 months, the 

next 24 months, the price of air travel is going to materially increase over what it is today. 

Mr. STUPAK. What happens if it stays at $140 a barrel? Is there 

going to be an airline industry left? 

178 

Mr. STEENLAND. Well, I think there will always be an airline industry, but I think the industry will be much smaller than what 

it is today simply because the number of consumers that can afford 

what air travel is going to be at those rates is clearly going to be 

less; and the industry is going to have to right-size itself to deal 

with the fewer number of people that will be traveling. 

Mr. STUPAK. Thank you. 

Mr. Williams, with diesel at about $5 a gallon, how many firms 

have gone under? And what’s the outlook for your industry? 

Mr. WILLIAMS. Well, the only time this has occurred prior, where 

there has been a significant loss in capacity, was in 2001. But all 

the records would indicate that we’re in uncharted waters here. 

The acceleration of failures is increasing. Again, the 10 to 15 percent would represent 150 to 200,000 individual units, and the numbers are hard to get because—I think it is important for people to 

understand, when they think of the trucking industry—91 percent 

of what we would call ‘‘the capacity that exists in the market’’ is 

made up of carriers that have 20 trucks or less; the remaining 9 

percent maybe represents 60 percent of the overall capacity. So it’s 

a very fragmented community. 

A lot of those people that have gone out of business, they don’t 

send out press releases and say, we’ve quit. You will just find the 

truck in a yard, or you will find the truck on a used truck lot somewhere, so it takes a while for that data to come in. 

But it is going to get much worse as—there are an awful lot of 

mid-sized carriers that are—that have failed, but due to credit extensions and the fact that there is such a tremendous amount of 

used equipment sitting with no buyers in this market, that situation will get much worse before it gets better. 

Mr. STUPAK. Let me ask you what I asked Mr. Steenland, on 

the—how much can you actually pass through to the customer? 

You said you haul steel. How much of that cost—do you pass the 

whole increased cost to the company you’re hauling the steel for? 

Mr. WILLIAMS. In 2007, when our fuel prices increased and the 

economy was extremely soft, we were not able to pass that on, and 

therefore, we had—again, our first net loss. 

Mr. STUPAK. First loss, yes. 

Mr. WILLIAMS. This year, things are better. We’re actually holding our own. We are almost back to break even, which I never 

thought would look good. But it is simply a—the economy is not recovered in those segments that we serve; it is simply because of capacity that has gone out of the market. Therefore, we have our 

pricing power again. 

I think I can respond to that a little easier by saying, for example, the steel industry, whose prices of their steel maybe are up 

threefold this year and are doing quite well, still cannot move their 

product to market because of capacity. 

The building material side of the business, business is off 30 percent compared to last year. And last year was a horrible year. They 

can’t move what little shipments they have. They have trouble 

moving it. 

And certainly the flat glass industry is suffering from a lot of the 

same issues. 

179 

So the impact and the supply/demand equation for us simply is 

being driven by a lot of capacity leaving the market. And those people that remain will be able to raise their prices to recover that 

fuel. 

Mr. STUPAK. A lot of our constituents are saying, when I go to 

the store, things cost more, cost more because of that, the transportation cost. Is that a fair statement? 

Mr. WILLIAMS. We are and continue trying to pass our costs on, 

and it will vary from market segment to market segment depending on the capacity that is still in that marketplace. 

Customers—again, in ’07 it was the same situation, but in ’07, 

did not keep this as whole as they currently are. And you will see 

the price in the various products we haul will certainly have to increase as the cost of fuel continues to rise. There is no doubt about 

it. 

Mr. STUPAK. Mr. Guilford, you recommend that Congress take a 

look at heating and oil futures contracts, and you suggest heating 

oil may skyrocket far in excess of supply and demand simply because diesel costs are hedged against the price of heating oil, even 

though diesel volumes far exceed heating oil volumes. 

Has your industry raised this with NYMEX or the Commodities 

Futures Trade Commission? 

Mr. GUILFORD. Yes. We’ve explored the idea of separating the 

heating oil and the diesel fuel contract, but we are not exactly certain what the consequences of that would be yet. 

Mr. STUPAK. Were they receptive to this idea of splitting them? 

Mr. GUILFORD. Sure. I think that they are receptive to listening 

to the idea about whether or not the contract should be separated, 

but we all understand the responsibility to make sure we understand what the potential consequences of doing that would be before it’s actually done. 

So it’s important to us that we understand that first, and I think 

one of the examples of why it is important to continue that discussion is what happened on June the 6th. The heating oil contract 

went up $0.29 that day, the heating oil contract on the eve of one 

of the most severe heat waves in the northeastern United States. 

Clearly, it wasn’t driven by demand—not a lot of people using heating during that period of time. So it seems to us reasonable that 

we would want to explore that. 

Mr. STUPAK. Thank you. 

Mr. Whitfield for questions. 

Mr. WHITFIELD. Thank you, Mr. Chairman. 

Mr. Steenland, did I understand you to say that your jet fuel 

costs over the last year increased by $420 million in 1 year? 

Mr. STEENLAND. If that were only true. We expect our 2008 costs 

to be almost $2 billion more than our 2007 costs. 

Mr. WHITFIELD. This is fuel costs only? 

Mr. STEENLAND. This is fuel costs, right. And for the U.S. carriers we expect costs to be over $20 billion higher in ’08 versus ’07. 

Mr. WHITFIELD. Well, obviously you can’t operate very long with 

fuel costs that high, I would assume. 

But what steps can you take, as CEO, under the current market 

conditions to address this issue? What steps are available to you? 

180 

Mr. STEENLAND. Well, the most immediate effect is to look to try 

to pass these costs through, onto the customer, and that’s not always effective because customers—passengers don’t always have to 

fly. And when the price of air travel gets a little too high, some 

elect to drive in lieu thereof, take alternative vacations. Business 

travelers may elect to stay home. So there is clearly an elasticity 

here. 

Other options are to look to recognize that demand is going to 

go down and fly less. 

Mr. WHITFIELD. So can you cancel routes on your own, or do you 

have to get some regulatory approval to do that? 

Mr. STEENLAND. You can do it on your own. And every major 

U.S. Airline has announced significant capacity reductions in the 

fourth quarter when you measure the size they are going to be this 

year versus the size they were going to be last year. 

Mr. WHITFIELD. Mr. Williams, in the trucking business, what 

percent of your business would be under contract and what would 

be what I would refer to as a ‘‘spot market’’? 

Mr. WILLIAMS. Oh, unlike the pre-deregulation market where it 

was more regulated, almost everyone still operates under what 

would be characterized as a contract—— 

Mr. WHITFIELD. OK. 

Mr. WILLIAMS [continuing]. Market. But it is handled—the discipline functions more as a ‘‘spot market,’’ quite frankly. 

Mr. WHITFIELD. So under the terms of the contract, you cannot 

readily pass on those fuel costs to the shipper? 

Mr. WILLIAMS. No. 

There is traditionally a fuel surcharge mechanism that’s a function of that, but unfortunately, the way the price of fuel has moved, 

it has never kept us whole. Prices continuing to increase were always behind and then the burden of cash flow, certainly for many 

of the operators, is a burden as well. 

Mr. WHITFIELD. You said your fuel costs increased by $12 million 

last year? 

Mr. WILLIAMS. That was between ’06 and ’07. It actually has 

gone up—we’re projecting it to go up $50 million this year. 

Mr. WHITFIELD. $50 million? 

Mr. WILLIAMS. $50 million. 

Mr. WHITFIELD. Well, I know that both of you do support the proposals to reform that the first panel had suggested, and we certainly are looking into that. 

I want to approach this from a little different perspective, Mr. 

Williams, and that relates to—I was reading an article that said 

that the U.S. has the stiffest diesel emission standards in the 

world, and that trucks meeting those standards get on an average 

of 3 miles per gallon. 

Now, is that accurate or is that misstated? 

Mr. WILLIAMS. I would say that’s been misstated. 

Mr. WHITFIELD. OK. 

Mr. WILLIAMS. The facts are that as we have met the most recent 

APA mandates, I believe in ’02, ’07, we’ll have a 2010 coming. In 

the first two series of those, we actually lost fuel efficiency as we 

were achieving the goal of improving the exhaust emissions. 

181 

We support that, and we have tried to invest in technologies and 

systems that would enable us to have an offset. We certainly want 

to continue to support that, but the reality is, we actually ended 

up running the same miles, burn more fuel to accomplish the cleaner environment. 

Mr. WHITFIELD. So you’re—— 

Mr. WILLIAMS. But the numbers more—my fleet average is 6.7 

miles per gallon. 

Mr. WHITFIELD. 6.7 miles, OK. 

Mr. WILLIAMS. So the 3 would be—there’s actually, unfortunately, probably equipment that still remains in the fleet that 

would maybe operate at that level. 

Mr. WHITFIELD. Well, I think it is important that we talk about 

this, because we do all want to protect the environment. But we 

also know that, in doing that, it is raising our costs, and it is going 

to raise fuel costs. 

And I read this quote in an article comparing trucking in China 

and trucking in America. And it talks about in China a $23,000 

diesel engine would meet Euro 2 requirements. The Euro requirements go up to 4. And in the U.S. the trucks that we buy are in 

the neighborhood of $47- to $50,000 per diesel engine, and yet 

we’re getting like 6 miles to a gallon. I mean—yes, 6 miles to a gallon. 

But I just appreciated your comments on that, because I didn’t 

know what the actual facts were. 

Mr. WILLIAMS. Well, I think it’s important that we’re missing— 

it is interesting, listening to the previous panel’s remarks and the 

fact that we have—it has taken $5 diesel and $4 gas for us to be 

talking about this. And yet there are so many things we have within our control regardless of the price that will allow our fleets to 

be much more efficient, but we have chosen to not accept the challenge of trying to make the regulatory changes that need to be 

made. 

But the U.S. has the most restricted truck size, weight policies, 

of any industrialized nation on this planet. 

Mr. WHITFIELD. Right. 

Mr. WILLIAMS. And it will be interesting to see if we’re still enamored with doing the right thing if prices fortunately were to 

come down. Because I think quite frankly there is a motivation to 

do an awful lot of things we need to be doing regardless of the 

price, going to the point about emissions and overall sustainability 

of our industry; and I think that we need to spend a lot of time 

talking about those as well. 

Mr. WHITFIELD. It affects our competitiveness with countries like 

China and so forth. Thank you. 

Mr. MELANCON [presiding]. Thank you, Mr. Whitfield. 

Chairman Dingell is coming. Do you have any questions? 

Mr. DINGELL. Mr. Chairman, thank you. Mr. Steenland, welcome. 

You served the committee of the country well, and I am very grateful to you. 

Mr. Steenland, as I understand it, Northwest Airlines uses a futures market to hedge its fuel costs. However, I believe you are 

now encountering a market that has been thrown so far out of 

182 

bounds by pure speculation and speculators that prices no longer 

reflect the true fundamentals of supply and demand. 

Is that statement correct? 

Mr. STEENLAND. We believe that that is true, Mr. Chairman. 

Mr. DINGELL. What is the practical effect of that? 

Mr. STEENLAND. The practical effect, as we have seen, is an in- crease over the last 10 months in the price of oil, over $70 a barrel, 

which puts oil in completely uncharted waters and threatens the 

integrity of the airline industry as we know it. 

Mr. DINGELL. But in your view, the market no longer exists as 

a proper hedging tool for you and for the rest of industry because 

of the fact that it has gotten so distorted; is that correct? 

Mr. STEENLAND. Well, I think it is primarily the financial players 

that are in the market that are—whether it is the ‘‘video barrels’’ 

or ‘‘paper barrels,’’ whatever you call them, that’s clearly had the 

sort of the retro-rocket impact on the price of fuel. 

We hedge today where we can. It is not very attractive at these 

prices, but when you consider what the run-up is, we look to basically buy some insurance policy against prices going even higher. 

So we do that, and the market’s available to do that, and it is an 

important piece of the energy process, but it is clearly the financial 

players that have had the impact that we’ve all testified to and 

talked about this morning. 

Mr. DINGELL. On page 8 of your testimony you gave us some superb recommendations, but just to try to summarize, would raising 

market margin requirements on speculators have a positive effect 

on the market? 

Mr. STEENLAND. We believe it would. 

Mr. DINGELL. To what degree and why? 

Mr. STEENLAND. Well, I think by taking some of the leverage out 

of the business so you’re not just putting up 5 percent, but you’re 

putting up 50 percent or 33 percent, depending upon the recommendations. That may mean that there will be less liquidity and 

less pressure coming in on the futures market, which clearly—as 

that price continues to move up, it affects the spot price that we 

have to pay. 

Mr. DINGELL. Mr. Williams and Mr. Guilford, would you like to 

comment on that last question? 

Would raising margin requirements to speculators have a positive effect on the market? 

Mr. GUILFORD. Yes, we think that it would, although we have a 

question about, if you’re operating a $5 billion hedge fund in Fairfield County and, for example, you have the ability to invest a million dollars at 9 o’clock in the morning to leverage $100 million 

worth of heating oil and you cash out that position at 4 o’clock in 

the afternoon and book $3.6 million profit, whether increasing just 

the margin requirements is going to be sufficient. Because frankly, 

if you gave me that deal, I’d probably take it every day even if I 

had to put more money on the table. 

Mr. DINGELL. Mr. Williams. 

Mr. WILLIAMS. I would have to defer to the previous panel to respond to that. 

But I think it is important to note in regards to the earlier comments related to hedging. The trucking industry operates on such 

183 

narrow margins that the notion that there is significant hedging in 

our marketplace, I think would be wrong. 

Mr. DINGELL. So you can’t—what you’re telling us is, you can’t 

take advantage of the hedging market because of your margins? 

Mr. WILLIAMS. To whatever degree trucking is hedging, it is very 

minimal. And it has historically been that way, because we cannot—it is a risk to come to work every day. 

Mr. DINGELL. I don’t mean to cut you off, but I have many questions and little time. 

Starting with Mr. Steenland, would closing the London loophole, 

the swaps loophole, and the Enron loophole have a positive effect 

on the market? 

Mr. STEENLAND. We believe it would, by creating greater transparency and clear opportunities to regulate where appropriate. 

Mr. DINGELL. Mr. Guilford? 

Mr. GUILFORD. Yes, sir. 

Mr. DINGELL. How important is it, gentlemen, for the Congress 

to get their—the government to get its arms around the problem 

of excessive speculation in the energy markets? 

And you, Mr. Steenland, would this be a matter of high priority 

to the airline industry at this time? 

Mr. STEENLAND. Very high. And if you just think back to what 

our panelists said this morning, while they had differences of opinion, I think they ranged from $30 a barrel to $70 a barrel as to 

what they thought the impact would be of the series of recommendations that are on the table. 

Mr. DINGELL. Thank you. 

Mr. Guilford. 

Mr. GUILFORD. To put it in context with the 8 billion gallons of 

heating oil used in this country each year—and we have seen an 

increase of $2 a gallon just in the last 12 months—then it has cost 

consumers an additional $16 billion for our product. So—— 

Mr. DINGELL. So you’re telling me it’s a matter of urgent concern? 

Mr. GUILFORD. Yes, Mr. Chairman. Soon. 

TheCHAIRMAN. How about you, Mr. Williams? 

Mr. WILLIAMS. Urgent. 

Mr. DINGELL. I’m sorry. I thought you answered. 

Mr. WILLIAMS. No. I’m saying it is urgent and it is extremely urgent. And I thought it was interesting that a lot of the questions 

related to the implications for the manager and for the funds themselves. And I can tell you, there are a whole bunch of people in 

America driving cars and driving trucks that are having difficulty 

getting to work today and I would say we need to move extremely 

fast. 

And that would be my opinion, sir. 

Mr. DINGELL. I would love to ask you all this question, but I notice the clock has run out on me: what are the consequences if the 

Congress doesn’t act on this matter? May I have unanimous consent for 1 more minute? 

Mr. STUPAK [presiding]. Without objection. 

Mr. DINGELL. Thank you, Mr. Chairman. 

Mr. Steenland. 

184 

Mr. STEENLAND. I think the consequences, we’ll all be spending 

more for oil than we otherwise need to. 

Mr. DINGELL. Mr. Williams. 

Mr. WILLIAMS. I would agree. And there will be a tremendous 

loss of capacity within the commercial fleet, and those that remain 

will actually have a very difficult time meeting the shipping needs 

of the community. 

Mr. DINGELL. Thank you. 

Mr. Guilford. 

Mr. GUILFORD. Well, it’s oil, it’s natural gas, it’s gasoline, it’s people’s ability to get back and forth from work. It ripples throughout 

the entire economy. 

And, frankly, the $2.5 billion that Congress spent last year on 

low-income energy assistance is probably going to have to be more 

like $7 billion just to keep up, and that’s just for low-income energy 

assistance. 

Mr. DINGELL. Mr. Chairman, I thank you and my colleagues for 

your grace and kindness to me. 

I yield back the balance of my time. 

Mr. STUPAK. Thank you, Mr. Dingell. 

Mr. Barton for questions, please. 

Mr. BARTON. Thank you, Mr. Chairman. 

Mr. Steenland, I’ve been told that Southwest Airlines has had an 

advantage in the airline industry because several years ago they 

were prescient enough to hedge in the markets and get a fuel cost 

advantage, and that they’ve continued to maintain that advantage 

in this market. 

Is that a true statement? 

Mr. STEENLAND. Southwest made, in my judgment, one of the 

great bets of all time when it made its fuel wagers back in, I think 

it was the 2002–2003 time frame. And so they’ve enjoyed a significant advantage over the rest of us who did—either couldn’t or did 

not make that former bet. 

Mr. BARTON. Now, I understand that the first time Southwest 

did it, the rest of the industry didn’t see a need to, it wasn’t the 

fact that they couldn’t. But this time around, in speaking with Gerard Arpey, who is the CEO of American Airlines, that is 

headquartered within shouting distance of my district, he indicated 

that American is doing some hedging, but they just don’t have the 

financial ability to do as much as Southwest continues to do. 

Would you agree that generically Southwest just has—because of 

their cash flow position and their profitability, has had a greater 

ability to hedge than some of the other airlines who have been in 

bankruptcy or close to bankruptcy? 

Mr. STEENLAND. Well, they clearly have a balance sheet advantage over the rest of the industry. Back in that 2002–2003 time 

frame, that really allowed them to make that wager, where the rest 

of us really couldn’t because we didn’t have the balance sheet or 

the assets to provide counter-party risk. 

And so when one makes those kind of bets, sometimes you are 

right, sometimes you are wrong. You have a party on the other side 

who is making the counter. 

Mr. BARTON. Right. 

185 

Mr. STEENLAND. So being able to participate in hedging doesn’t 

automatically mean that your fuel bill is going to be lower. But in 

this instance, Southwest clearly was the beneficiary of a very brave 

and, in hindsight, very smart move. 

Mr. BARTON. Now, the last question on this subject before I go 

to the next subject. I always assumed that Southwest was playing 

in the futures market, but I was told this morning that they were 

actually buying options on the Chicago commodities market. 

Do you know if that’s true or not? 

Mr. STEENLAND. I don’t. 

There are any number of ways that one can participate in this, 

one can actually buy—buy options going forward. One can put in 

place collars so you have a protection against the runaway price on 

the top and, in return, you give up some potential upside if prices 

drop below a certain amount. So the cafeteria list of the ways in 

which one could hedge are an almost infinite list. 

And you can either—two ways of doing it are either by looking 

to actually buy the product going forward and locking in your price, 

or approaching it more like an insurance policy and looking to get 

protections against what otherwise might be a runaway price. 

Mr. BARTON. Are you testifying on behalf of the airline industry 

or just for Northwest? 

Mr. STEENLAND. I’m wearing both hats. 

Mr. BARTON. OK. 

Does the airline industry support the two-tiered system that we 

talked about in the first panel, where market participants who actually take physical possession and are willing to provide physical 

delivery would play under a different set of rules than nonphysical 

participants who were in it purely for the financial opportunity? 

Does the airline industry support that? 

Mr. STEENLAND. I don’t think we’ve specifically addressed that, 

Congressman. If it would result in lower prices and talking out 

some of the speculative activity by people that are purely playing 

on the ‘‘video barrel’’ side, I believe we would support that. 

Mr. BARTON. And aviation fuel that commercial airliners use, it 

is not gasoline, it’s not diesel. It is a form of kerosene, is that—— 

Mr. STEENLAND. That is correct. 

Mr. BARTON. And so I guess it is theoretically possible we could 

do something on that specific fuel type that might be of some help 

to the airline industry. 

Mr. STEENLAND. It all ultimately comes out of the crude oil barrel. But we’ve actually been faced with a double whammy where 

the crack spread to take that crude and refine it into jet has also 

been at historic highs over the course of the last several months. 

So when people talk about oil at $130 a barrel, a lot of times you 

have to add $30 to then refine it into jet. And so we’ve been talking 

about $160 a barrel for jet fuel. 

Mr. BARTON. Right now, if I were to go to a municipal airport in 

my congressional district where general aviation planes fuel up, 

what’s the approximate price they would pay for a gallon of aviation fuel? 

Mr. STEENLAND. I think well north of $4. 

Mr. BARTON. So it is higher? It’s similar to gasoline but not as 

high as diesel? 

186 

Mr. STEENLAND. I don’t know where diesel is trading. And sometimes what comes out of the FBOs tends to be a little higher because it has taxes and stuff built in it, but it will be north of $4. 

Mr. BARTON. OK. 

Mr. Williams, you own a trucking firm; is that correct? 

Mr. WILLIAMS. Yes, sir. 

Mr. BARTON. Those in your industry that are going out of business—and we were told that there are approximately 1000 trucking 

companies a month that are going out of business—is it principally 

because they don’t have the capitalization to pay the higher fuel 

costs as they fuel their trucks in routine operations? 

Mr. WILLIAMS. Yes, sir, it’s—again, there’s a large segment of the 

community that is poorly capitalized and has been mostly cash flow 

operators for many years. And they have a great deal of difficulty 

in these markets. 

And then there are certainly much larger carriers that are public 

companies that are certainly well capitalized, but they also bear an 

awful—probably not as much—— 

Mr. BARTON. My time has expired. 

The companies that are managing to stay in business, they apparently are—I think you said in your opening statement, you are 

being able to pass through some of your increased fuel costs; is that 

correct? It is a better market than it was in that regard? 

Mr. WILLIAMS. Driven by a lack of capacity and competition within that marketplace, yes—not because of the good-naturedness. 

Mr. BARTON. Oh, I know, I understand that. And in the airline 

industry, because of the competitive pressure primarily the low-cost 

carriers like Southwest, you’re not able to pass through the fuel 

costs, because they are unwilling to raise the price; is that correct? 

Mr. STEENLAND. That is clearly a reason. 

Another reason is excess capacity in the market; given that, it’s 

just difficult to pass price, sir. 

Mr. BARTON. Thank you, Mr. Chairman. 

Mr. STUPAK. If I may comment on that, did Southwest increase 

their fares? I mean, they always advertise nothing more than $299; 

and aren’t they now at $549, I think I read in USA Today? 

Mr. STEENLAND. Southwest has not been immune, and yes, they 

have been on occasion taking fare increases. But I think it would 

be fair to say that the level of fare increases and the frequency of 

them has been less than what the network carriers have been looking to try to get. 

Mr. STUPAK. Thank you. 

Mr. Inslee for questions. 

Mr. INSLEE. Mr. Barton noted a different kind of fuel in aircraft. 

I have to point with some pride to the first commercial flight using 

a nonoil-based fuel, using a biofuel, was in a plane built in my district, or next to my district, the Boeing 747 with Virgin Air, using 

a biofuel designed in my State by people at Imperium Energy. And 

we could have some good things happening there, and we will look 

forward to that. 

This is a fairly unusual situation, I think, where three major pillars of our economy that you represent here hard-headed business 

people come and ask the government to do something in a market, 

in a capitalistic market, and I think that’s kind of unusual. 

187 

When I and others urged the Administration to intervene during 

the original Enron debacle, the Vice President sort of told us we 

didn’t understand economics and sort of implicitly said we were a 

bunch of economist hippies who didn’t understand how capital markets work. 

You are suggesting the government has to do something to allow 

the capital markets to really function. At its base level, could you 

just explain to us why, in this particular circumstance, you believe 

that that’s necessary? 

Why should government have to do anything here that the markets just can’t figure out themselves? 

Mr. GUILFORD. Congressman Inslee, our Congressman is John 

Larson from Connecticut. And he is fond of sending me clips from 

the Congressional Record where he gives floor statements where he 

is addressing these issues, where he refers to his ‘‘rock-rib Republican constituents’’ who are talking to him about the problems with 

these markets. And he is talking about us. There are probably no 

greater defenders of the free-enterprise system than we are. 

But where we see what should be free, open, transparent markets that are as free of manipulation as is humanly possible to create significantly, at least in our opinion, out of sync with reality, 

then we have no choice but to ask for Government to step in and 

bring order to what should be a marketplace that works as a point 

of price discovery, as opposed to what it has turned into. 

Mr. STEENLAND. If I could just add, the commodities market is 

a regulated market. There have been changes in it that have gone 

on over time. And when you see today where the financial side of 

the market is 13 times what the physical side is and then you see 

the volatility that exists in that market, I think it creates the necessity to have a discussion like we are having today to revisit 

whether the regulatory structure that is now in place is the appropriate one, and whether changes should be made to get us back 

into a mode that better reflects what supply and demand and more 

realistic prices should be. 

Mr. INSLEE. So I assume you don’t believe this is a fool’s errand. 

I assume by your comments that you don’t think this will simply 

drive these investments offshore and we will have no regulatory 

control of them. 

Why do you believe this will be successful and not believe that 

people will just flee to some foreign market beyond our control? 

Mr. STEENLAND. Well, I think the panelists this morning addressed that issue. And they are far more expert at this subject 

than I am. But when you see all the other folks who are experts 

in this come to the same conclusion, I think it certainly leads the 

airline industry to the view that these are appropriate and necessary steps to take very promptly. 

Mr. INSLEE. Thank you. 

Mr. STUPAK. Mr. Walden for questions. 

Mr. WALDEN. Thank you very much, Mr. Chairman. 

I want to talk about, Mr. Williams, about the issue with trucking, because it is now costing, what, about $1,400 to fill up a truck 

with diesel every time you go somewhere and haul goods? 

Mr. WILLIAMS. And I get to do that every day just about. 

188 

Mr. WALDEN. And the trucks that you have that are surplus that 

you said you are selling overseas, I think you said into Vietnam 

and other countries, is part of that because of the new requirements on fuel and engines here in the United States, that they 

can’t be reused here efficiently? 

Mr. WILLIAMS. No, sir. The market is just so poor here. I mean, 

there is a secondary market after we keep a truck for 42 to 48 

months, for example, and get a half a million miles on it that will 

typically go into a secondary market, where that market doesn’t 

exist because those people are the people that have been pretty 

much run out of business and have not been able to survive. 

So a lot of the equipment we’ll be stockpiling up, and we will 

have acres and acres of trucks parked in this country before it’s 

over. And we are moving a lot of that equipment now overseas, 

which has not been done. But it’s not because of any new mandates 

or anything such as that. 

Mr. WALDEN. Now, this committee, or the full committee, and the 

Energy and Air Quality Subcommittee of this committee are looking at the issue of carbon and carbon sequestration and cap-andtrade. Estimates are that could significantly increase the price of 

fuel, the price of home heating oil especially, the price of fuel oil 

for your jets, the price of diesel for your trucks, the price of gasoline. Some estimates and some have even suggested on this committee of a minimum additional 50-cent-a-gallon increase as a price 

signal in the market. And whatever the price signal in the market 

is, it would have to be above today’s fuel costs. 

I am curious—from each of you, what will those cost increases 

mean to your industry if where you’re at today is debilitating? 

Mr. WILLIAMS. Could I? 

Mr. WALDEN. Yes, sure. 

Mr. WILLIAMS. I think it’s one of the parts of this whole conversation that’s a bit disturbing, in that to whatever degree the 

price of fuel is higher because of speculation, it’s a limiting factor 

on us raising our taxes that we need to raise so that we can invest 

in infrastructure and offer some long-term solutions for our citizens. 

So if, in fact, if $2 is going out, in the price of diesel, is going 

to the benefit of a speculator, I would prefer to see 50 cents of that, 

in this example, going into our Highway Trust Fund, specifically 

being used for investments in highways and bridges to move this 

Nation’s freight. 

Mr. WALDEN. Right, but I don’t think the cap and trade proposal 

puts the money into roads and bridges necessarily. 

Mr. WILLIAMS. I would certainly not—I think from a mobile 

source, I think cap and trade is not a good methodology. I do support carbon taxes, a fuel tax system, as long as that money is specifically used on infrastructure investments. 

Mr. WALDEN. OK. 

Mr. Steenland, how is the airline industry going to be affected 

under these cap-and-trade proposals? 

Mr. STEENLAND. It depends on which one. A properly constructed 

cap-and-trade proposal, if it’s global, if everybody’s in it, might be 

a way to address the overall carbon issue. 

189 

I think we need to take a step back or two, though, because some 

of the policies are based on projections of growth that might’ve 

been what the industry was going to grow when fuel was at $60 

a barrel, but if fuel is going to be at $130, $140 a barrel, there is 

going to be retraction instead of growth. And that is going to make 

a contribution right then and there to carbon emissions. 

So some of the footprint upon which some of these policies are 

being based I think needs to be re-examined based upon some of 

the existing fuel assumptions that are out there. 

Mr. WALDEN. OK. 

Mr. Guilford, when you are heating with oil at home, what does 

another 50 cents a gallon do to the consumer? 

Mr. GUILFORD. You know, the devil is in the details, Mr. Walden, 

because we can document in our industry through research and 

work that has been done at the DOE’s Brookhaven National Laboratory that, in the last 25 years, we’ve managed to have a significant reduction in the per-consumer per-gallon consumption of heating oil because of the introduction of new technologies that our industry has brought online. 

Mr. WALDEN. More fuel-efficient furnaces and all? 

Mr. GUILFORD. Exactly, exactly. For example, if you can take a 

65-percent-efficient furnace and turn it into an 85-percent-efficient 

furnace, you can cut a consumer’s consumption from 1,000 to under 

700 gallons. 

So, depending upon how such a thing were structured, we can 

document that we can already meet some of the cap-and-trade 

ideas that we have seen. 

If it ends up resulting in a significant increase in the price of our 

fuel, if it makes us uncompetitive, obviously that would be something that would be very detrimental to our customers. 

Mr. WALDEN. Because I have heard some estimates out there are 

upwards of a $6 trillion shift in the economy in higher taxes. And 

as I listen to the woes of each of your industries today and the impact I hear at home, whether I am at the grocery store in Hood 

River, Oregon, or out meeting with farmers in Pine Grove or somewhere, I am trying to figure out, when it comes to cap and trade, 

it means you are going to pay for something you’ve never paid for 

before, and that’s carbon, and that’s ultimately coming out of the 

consumer’s pocket, right? 

Mr. GUILFORD. Yes. 

Mr. WILLIAMS. Exactly. 

Mr. WALDEN. Isn’t that going to adversely affect people that 

you’re trying to serve in your own companies? 

Mr. GUILFORD. Enormously. And on the heating side, the only solution that we have is to continue to become more and more and 

more efficient, which clearly we have proven we have been able to 

do over the last 25 years, but we would need another quantum leap 

in that ability. 

Mr. STEENLAND. I think it would be fair to say that the airline 

industry has literally invested tens of billions of dollars in new 

equipment. We, for example, are 25 percent more efficient than 

what we were back in 2000. So that has cost us billions of dollars, 

but in terms of, one, saving in fuel and, two, emitting less carbon, 

190 

we have really taken a very positive step in that direction, as have 

our competitors. 

Mr. WALDEN. Right. No, I don’t doubt that. It’s just a matter of 

what’s this added cost going to do to industries and individuals and 

consumers that already seem to be pretty maxed out? 

So thank you, Mr. Chairman. 

Mr. STUPAK. Thank you. 

Mr. Green for questions. 

Mr. GREEN. Thank you, Mr. Chairman. 

Let me first say, having watched the airline industry and the 

trucking industry because of the district I come from, for a number 

of months what the impact of the high fuel costs on our economy, 

you’re the first to get hit, simply the canary in the mine shaft so 

to speak, because it’s going to reverberate in everything that’s delivered by the trucks and everything else. So the rest of the economy needs to cushion itself, because those costs are going up. 

Mr. Steenland, in your testimony you mentioned that there are 

several factors affecting oil prices, and an energy policy that addresses our Nation’s oil supply and consumption needs to help remedy oil prices. 

In your opinion, is our current energy policy going in the right 

direction in addressing our supply needs? And could increased energy supplies offset some of the unnecessary price increases due to 

the speculation in the markets? 

Mr. STEENLAND. I think as a longer-term solution, figuring out 

ways to, in an environmentally prudent way, to bring more supply 

online would be an appropriate plank in our overall energy policy, 

as well as looking at alternative fuels, looking at proper conservation methods. 

It needs to be a total package, and we need to address it in that 

total way. 

Mr. GREEN. I guess that’s what I’ve heard from people; it’s not 

a silver bullet. Sure, we need to deal with the speculators, we need 

to do alternatives, and hopefully, for example, the biofuel for the 

747—in fact, we just opened a huge biofuel facility in Houston that 

is the largest refinery in the country that is nonedibles. Hopefully, 

those biofuels will be nonedible so we don’t see the price of our food 

go up. 

Mr. STEENLAND. But I think that’s a good example, where 

biofuels is really a multigenerational type of approach, whereas potentially the kind of things we’re talking about today, we could see 

an impact in 30, 60 days. Some of these other events are longerterm. 

Mr. GREEN. Yes. But we need to do it all. We need alternatives 

and control of the current market, but also we need to produce 

more domestically so we can get that into the market. 

Mr. STEENLAND. We do. 

Mr. GREEN. In your opinion, should the ICE regulatory body, the 

Financial Services Authority, be called an equivalent regulatory 

body to the CFTC if they do not require position limits or other 

rules to prohibit excess speculation? Do you think the ICE’s regulatory body, the Financial Services Authority, is anything equivalent to what we have with our CFTC? 

191 

Mr. STEENLAND. I would defer to someone else to answer that 

question. 

Mr. GREEN. I’ll wait until our next panel then. 

Mr. Williams—and, in fact, Mr. Chairman, I’d like to submit for 

the record, I have a Jet Fuel Reality chart, actually presented by 

Continental Airlines, that appropriately is from Houston, that 

shows the crack spread that has increased on a monthly basis for 

jet fuel. As the price of oil goes up—and I was going to ask Mr. 

Williams, I haven’t seen anything based on diesel fuel prices, because we know diesel has gone up. 

Does your association or anyone have any that can compare to, for example, in April of 2001, the price of a barrel of oil was $101. 

The crack spread for getting to jet fuel was $27.10. Whereas on 

June the 9th, a little over a month later, the price of oil per barrel 

was $134.40, but the crack spread went up to $31.20. 

Do you have any information on the diesel, how it’s gone up 

based on any of the refining costs? 

Mr. WILLIAMS. No, sir. We can make that information available 

to you. 

Mr. GREEN. OK. 

I think just for the Committee’s benefit in the long term, Mr. 

Chairman, I would like to submit that for the record. 

Mr. STUPAK. That will be submitted, without objection. 

[The information appears at the conclusion of the hearing.] 

Mr. STUPAK. The gentleman should know that EIA, Energy Information Agency, has provided that information on diesel. The crack 

spread is about 58 cents right now. It was about 47 cents. That is 

the wholesale crack. 

Mr. GREEN. We are seeing that increase. 

Mr. Guilford, I know the cost of home heating oil has increased. 

Have you looked at—is the volatility in the natural gas market as 

much as it is in the oil market? 

Mr. GUILFORD. We haven’t looked at it as closely as we do heating oil, because we certainly live in heating oil every day. But there 

seems to have been, with the closure of a loophole involving natural gas derivatives in 2004, somewhat less volatility. And I think 

that when the next panel meets, that Professor Greenberger can 

address that for you in some detail. 

Mr. GREEN. OK. 

Mr. Chairman, I appreciate that, because I think there has been 

less volatility in another hydrocarbon market that maybe we could 

look at and see how it comes. 

I want to thank you for this panel. 

Mr. STUPAK. I thank the gentleman. 

Also, the EIA—I know you received a copy of the report—they 

looked at the first 3 months of 2008 and compared it with the other 

first 3 months for the last 5 years. And in diesel, in particular, they 

have exported from this country 335,000 barrels of diesel per day 

to keep the margins tight in this country. So there’s plenty of supply, but what they’re doing with it certainly affects the price. 

Mr. Melancon for questions? 

Mr. MELANCON. Thank you, Mr. Chairman. 

Mr. Williams, my son graduated from high school with a young 

man that has been driving trucks with his dad for years. And I saw 

192 

him this weekend, and he said, at the rate they’re going, they’re 

going to sell the trucks and he’s going to look for a job. So I understand. And this is a good, hardworking kid. So I hate to see that 

happen, whether it’s small operations or big operations. 

I don’t really have a lot of questions in this sector, because most 

of the things I’m concerned about are the regulators. But for each 

one of you, Mr. Steenland, from your perspective, how long can 

Northwest or the industry continue before it becomes totally devastating, from a standpoint of being able to continue as a company 

or as an industry? 

Mr. STEENLAND. Sure. Well, for eight airlines, it’s already too 

late. They are liquidated, and they’ll never come back. Two airlines 

are now in Chapter 11. And other airlines, it’s a function of what 

their total liquidity is. 

And basically, the industry is going to have to—it’s a bit of a 

race, where we’re looking to pass through these costs as quickly as 

we can. That gets to the speed with which the price has gone up. 

And as those costs get passed through, as we talked about before, 

demand shrinks. And so we need to take capacity out. 

And we need to reach that equilibrium point where customers 

are paying the level of airfare that clearly compensates us for our 

fuel bill and the industry is right-sized then to meet that demand. 

Mr. MELANCON. Are you seeing reductions immediately in your 

passenger-carrying? 

Mr. STEENLAND. Certainly. 

Mr. MELANCON. Do you know what percent that is by? 

Mr. STEENLAND. It’s a function of—we can always put a passenger on the airplane, depending on the price that we’re prepared 

to charge. So if you look at the usage on the airplane, it’s still fairly 

high, but people are not paying what the true cost is of what it’s 

costing us to provide the service. 

Mr. MELANCON. Got you. 

Mr. Williams, any projections? 

Mr. WILLIAMS. I think well-capitalized carriers will continue to 

survive. But I think it’s important to note that when they are 

wounded, as they are, they’re unable to invest in a lot of the new 

technologies that will allow us to continue to meet our fundamental 

challenge, and that is to move much more freight in a much more 

congested environment while we improve highway safety. And 

that’s the disservice that’s actually going on here, as well. But 

we’re wasting some time, as we need to get on about doing better 

things in a better way. 

But even if we lose a big chunk of the market, the part that we 

have to understand is that this capacity leaves a lot faster than it 

will ever come back. And when this economy returns, which I’m 

very hopeful that it will soon, there is going to be a significant 

problem on how we get goods to market, whether it’s strawberries 

or coil steel. And that’s a very real probability. 

Mr. MELANCON. I see the railroads are advertising, trying to kind 

of do a comparison. Have you seen a decrease in the amount of 

freight that you’re hauling? 

Mr. WILLIAMS. Certainly, the building material industry is tied 

directly to the housing crisis that we’re facing. The steel industry 

is very robust, but that is principally driven by the dollar propoVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00198 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
193 

sition by exporting more steel and importing less steel into this 

country. The glass side of the business is actually quite good, but 

that is principally to industry consolidation within that segment 

and exports to Canada. 

So, collectively, demand is up for us currently, but it’s, again, because of really a lack of capacity within the market. So we have 

some historic pricing power. So, I mean, that makes us feel good. 

But it’s the overall impact of the cost of transportation to the 

economy that I think needs to be our greatest concern. Because it 

is painful for my employees. I’ve closed three terminals; I actually 

announced that this last week. We’re laying some people off in 

those areas. We have people that we’re losing that have had to 

drive too far to come to work. And it’s a real burden on the men 

and women and their families in this country. 

Mr. MELANCON. Thank you. 

Thank you, Mr. Chairman. 

Mr. STUPAK. Thank you. 

Mr. Ross for questions. 

Mr. ROSS. Thank you, Mr. Chairman. 

For Mr. Williams, you refer in your testimony to Congress supporting globally competitive regulatory changes. What types of 

changes are you referring to? 

Mr. WILLIAMS. Specifically, I commented earlier about size and 

weight regulations. We’re the weakest link in the chain. It’s a global supply chain, and the United States has found itself in the precarious position of being the weakest link. We have the most restrictive size and weight regulations in this country. And so there 

is an opportunity there for us to increase our competitiveness by 

bringing ourselves up to international standards. And I think that 

should be a goal of ours in the years ahead. 

I think the part that’s interesting about that, and I alluded to 

this earlier, is that, will we have the appetite for doing that, 

though, when fuel maybe comes back down to maybe a more market-driven price, assuming that speculation is contributing to that 

price of oil? And that comes back to where we’re doing a lot of soulsearching within our own organization, and certainly we have within the industry, about—is this all about the money or is this all 

about doing the right thing for the environment as well? 

So I think that truck size and weight regulations is a good example of how, for example, depending on the type of more productive 

vehicle that’s in use—and most of this equipment is in use all over 

this country, and certainly in every other country—ranges anywhere from 11 to 35 percent more productive. 

And, for example, in my own organization, if I simply slow down, 

idle my equipment less, and were to take advantage of one of these 

particular adjustments that I’m talking about that we have regulatory power to change, I could reduce my fuel consumption by 37 

percent. And that’s without any new technology. And to give you 

an idea what that would mean to me in a marketplace that I lost 

money in last year, that would save me $50 million in fuel. 

So I think sensible, long-term strategies on bringing ourselves 

more into line with what’s going on with the rest of the world 

would have significant effects, both for the environment, for highVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00199 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
194 

way safety, and certainly would reduce our dependence on foreign 

oil. But that’s going to take a constructive change. 

Mr. ROSS. It would seem to me that—and I mentioned earlier I 

think these high fuel prices, gas, diesel, apparently next it’s going 

to be natural gas, we’ll experience that in the winter, have a direct 

relationship to this economic recession we’re in. So I think a lot of 

people are wondering, how long are we looking at prices the way 

we are now? 

And it affects everyone. I represent a lot of farmers. Diesel prices 

have really affected them, because that’s how they irrigate and get 

their produce to market. Just since this meeting started, I talked 

to an electrical contractor who has a diesel pickup, and he requires 

a pickup because of the nature of his work. He said it cost him 

$150 to get to work today. Now, granted he drove quite a ways to 

get to work today, but it’s unconscionable. 

I had a small trucker call me recently; he just has three trucks. 

And he says he bids on a job, and he has to be competitive with 

his bid, and then overnight the price of diesel goes up, and sometimes it goes up from when he starts the job several times before 

he finishes the job, and there goes his profit. And what was going 

to be a small profit ended up, in a situation where he was losing 

money. And that’s a small trucking firm. Obviously, you’re much 

larger than that. 

I guess where I’m going with this is, isn’t it true that, whether 

it be the airline business—and I’d like to get an answer, too, from 

the airline industry—whether it’s the airline business or trucking 

business, you are absorbing some of the increases right now, I 

would guess, hoping the economy turns around and hanging onto 

your market share. But at what point do you have to start passing 

all this along, and what does that do to an already-struggling economy? 

And I’d like to get an answer from both of you on that, if I may. 

Mr. STEENLAND. We are a very high fixed-cost business. So, we 

own or lease our airplanes. We can’t just simply turn them on and 

turn them off. We have 29,000 employees that we want to keep 

gainfully employed. We have long-term rentals at airports. So we’re 

paying all those costs whether we’re flying or not. And so we’re flying the airline, as everyone else is. 

And the challenge is that we haven’t yet been able to simply pass 

through the costs. Because, if we truly just simply posted prices out 

there that fully reflected what the price of jet fuel is, a number of 

people would say, ‘‘I’m not traveling.’’ And an airplane seat is a 

perishable seat. So when it takes off today and the flight leaves 

Minneapolis and it’s going to LA, if there’s not someone paying for 

that seat, it’s gone. It’s not something we can put in inventory and 

sell the next day or the next day after that. 

And so it puts tremendous pricing pressure on the business. And 

it ultimately requires the right equilibrium between those people 

that are prepared to pay the pass-through costs and what the size 

and capacity of the industry is. 

And at today’s prices, the industry is losing money. The U.S. airline industry will lose over $10 billion this year. And so, if this is, 

in fact, what the price of fuel is going forward for the longer term, 

airfares inevitably are going to have to go up. 

195 

Mr. ROSS. How much higher would airfares be today if all of the 

increased cost in fuel was being passed on to your customers? 

And, by the way, thanks for getting me here this morning. 

Mr. STEENLAND. Thank you. 

I’d say 20 percent. 

Mr. ROSS. So, to truly reflect today’s energy prices, you’re saying 

airline tickets would be 20 percent higher. I guess, at some point, 

if prices on energy don’t come down, they will be. Right now, I’m 

sure it’s trying to charge what the market will allow and, also, I’m 

sure, trying to protect or grow your market share factors into it. 

If I could get a response to that from Mr. Williams, as well, because I sense that some of the smaller guys out there with two or 

three trucks are becoming less and less competitive and, as a result, are going to have less competition wherever this thing settles 

out. And what does that do to the economy? 

Mr. WILLIAMS. I think we’re going to see a lot of the changes that 

we saw post-1980, when the industry was deregulated. This is a 

point in time where there’s going to be a significant change in the 

makeup, I believe, because of the burden that most of the carrying 

community can’t continue to bear. 

The gentleman that may be losing his job driving a truck that 

he owned might actually migrate to a company such as mine and 

drive a truck for me. But that doesn’t limit the pain and anguish 

that his loss of equity in that piece of equipment, in the nest egg 

that maybe he or his father had generated over their entire lifetimes. And so there is going to be a lot of pain in the transition, 

I guess would be my point. 

But I think an interesting addition to that would be the comment 

that we’re in the process of pricing our truck order, when we will 

buy about 500 additional trucks next year, or they’ll be replacements, those trucks are extremely more expensive and the most 

dramatic increase in price that I have seen in any year-to-year in 

all the 30 years that I’ve been in business. And I’m talking about 

in excess of 20 percent increase. And that’s driven indirectly by the 

price of oil driving the price of steel, driving the price of tires and 

all the components that are within that truck, not to mention all 

the technology that we voluntarily purchase. 

So, significant increases, and they’re coming back to roost even 

on our own doorstep. 

Mr. ROSS. Mr. Chairman, I see I’m well over my time. And thank 

you for being so generous in indulging me. 

Mr. STUPAK. I thank the gentleman. 

Well, that concludes our questions of this panel. 

Let me just mention, a number of organizations have already endorsed our legislation, H.R. 6330. I know, Mr. Steenland, your organization has, Teamsters have, others. You may want to look at— 

give us your comments, not just 6330, but there are a number of 

pieces of legislation that are pending before Congress, and we’re 

trying to take a look at them. Your testimony today has been most 

helpful, but it also would be helpful to have your input on some of 

this other legislation, whether it is 6330, my bill, the PUMP Act, 

or any other pieces of legislation, it would be helpful to us as we 

try to move something on this legislation. 

But thank you for being here, and thank you for your testimony. 

196 

I now would like to call our third-panel witness to come forward. 

On our third panel we have the Honorable Walter Lukken, who 

is the acting Chairman and Commissioner of the U.S. Commodity 

Futures Trading Commission. 

Mr. Commissioner, as you know, it’s the policy of this subcommittee to take all testimony under oath. Please be advised that 

you have the right, under the rules of the House, to be advised by 

counsel during your testimony. 

Do you wish to be represented by counsel? 

Mr. LUKKEN. No, thanks. 

Mr. STUPAK. OK. Witness indicates he does not. Therefore, I ask 

you to rise and take the oath, please. 

[Witness sworn.] 

Mr. STUPAK. Let the record reflect the witness replied in the affirmative. 

You are now under oath. 

We will ask for your opening statement. You may submit a 

longer statement for the record. But if you would begin, please. 

Thank you. 

STATEMENT OF WALTER LUKKEN, ACTING CHAIRMAN AND 

COMMISSIONER, U.S. COMMODITY FUTURES TRADING COMMISSION 

Mr. LUKKEN. Thank you, Mr. Chairman and other distinguished 

members. And thank you for inviting me to testify before this committee on the role of speculators in the futures markets. 

During the last few years, the futures markets have changed 

dramatically in size and complexity, experiencing 500 percent 

growth in both volume and products listed. Today’s exchanges are 

technology-driven corporations that trade electronically 24 hours a 

day all around the globe. Approximately $5 trillion of notional 

transactions flow through U.S. exchanges and clearinghouses every 

day. 

This description alone would make the oversight of these markets a challenge for regulators, but add to it the subprime crisis, 

record energy and agricultural commodity prices, the influx of financial funds into the futures markets, and historic low staffing 

levels at the CFTC, and it is clear that these are challenging times 

at this agency. 

Recent substantial increases in the price of crude oil have put 

considerable strain on U.S. households. These are matters of intense focus at the Commission due to the key role that the futures 

markets play in the price discovery process. 

The CFTC recognizes that these markets and their participants 

have evolved significantly in the last several years. Concerns have 

been raised recently regarding the role of speculators and index 

traders in the commodity futures markets. As prices have escalated, the CFTC has pursued an active agenda to ensure that commodity futures markets are operating free of distortion. 

These initiatives fall into five broad categories: one, increasing 

information and transparency; two, ensuring proper market controls; three, continuing aggressive enforcement efforts; four, improving oversight coordination; and five, seeking increased funding. 

197 

The proper oversight of markets require transparency. Market 

regulators must receive the necessary information to conduct surveillance of market activity, study long-term financial trends, and 

evaluate policy changes as circumstances evolve. 

The backbone of the CFTC’s market surveillance program is the 

large trader reporting system. All large traders must file daily with 

the CFTC their futures and options positions in the markets. This 

information enables the CFTC’s surveillance economists to oversee 

all traders of size to ensure that no one is attempting to manipulate the futures markets. 

As markets have become electronic and global, the CFTC has 

been working to expand its trade data collection to accommodate 

these trends. On May 29th, the CFTC announced an agreement 

with the U.K. Financial Services Authority to greatly expand on 

the trader data already received from ICE Futures Europe on its 

linked crude oil contract that settles off the NYMEX benchmark, 

including receiving equivalent daily large trader information for all 

months traded. This cross-border information-sharing is unprecedented among global regulators. 

The CFTC has also taken action to improve the transparency of 

index traders and swap dealers in the energy markets. In May, the 

CFTC announced that it would use its special call authorities to 

gather more detailed information from swap dealers on the amount 

of index trading in the markets and to examine whether index 

traders are properly classified for regulatory and reporting purposes. 

These information requests have been sent, and the CFTC expects in the coming weeks to begin receiving more detailed information on index funds and other transactions that are being conducted through swap dealers. After analyzing this data, the CFTC 

will provide a report to Congress by September 15th regarding the 

scope of commodity index trading in the futures markets and recommendations for improved practices and controls, should they be 

required. 

Last fall, the Commission worked with Congress to enact legislation as part of the Farm Bill requiring exempt commercial markets 

that traded linked energy contracts to provide the CFTC with large 

trader reports, and it posed position and accountability limits on 

such products. Congress and this agency believed that these authorities were necessary to protect the energy marketplace. 

As noted earlier, linkages between contracts are not purely a domestic occurrence but also happen across international borders. 

Most energy and agricultural commodities are traded in a global 

marketplace, and the U.S. futures markets have been facing the 

challenges of cross-border trading and regulation for many years. 

For more than a decade, the CFTC has utilized its mutual recognition process for foreign exchanges that allows U.S. institutions 

access to those markets by striking a balance between the need for 

U.S. regulators to ensure proper oversight of our markets and the 

acknowledgment that the increased globalization of international 

markets requires cooperation and coordination between governments. 

With this balance in mind, last week the CFTC announced modifications to its foreign board of trade process. After consultation 

198 

with the British FSA, the CFTC revised the access letter to ICE 

Futures Europe to require the implementation of position and accountability limits on its linked crude oil contract. The CFTC will 

also require other foreign exchanges that seek such access to provide the CFTC with large trader reports and to impose position and 

accountability limits for any products linked to U.S. futures contracts. This combination of enhanced information and additional 

controls will help the CFTC in its surveillance of its regulated domestic exchanges, while preserving the benefits of its mutual recognition program. 

During these turbulent market conditions, the environment is 

right for those wanting to illegally manipulate the markets. In late 

May, the Commission took the extraordinary step of disclosing 

that, since December 2007, its division of enforcement has been 

launching a nationwide crude oil investigation into practices surrounding the purchase, transportation, storage, and trading of 

crude oil and its derivatives contracts. Strong enforcement is imperative during this time. 

Given the CFTC’s size and the enormity of the global marketplace, the CFTC must also engage others in Government as we 

seek to meet our important mission. Two weeks ago, the CFTC announced the formation of an interagency task force to evaluate developments in the commodity markets, which includes the staff 

from the CFTC, the Federal Reserve, the Department of Treasury, 

the SEC, the Department of Energy, and the Department of Agriculture. I have also invited the FTC and FERC to participate as 

well, given their expertise in these energy matters. The task force 

is intended to bring together the best and brightest minds in Government to aid public and regulatory understanding of these markets. 

If it sounds busy, it is, especially given that the agency staffing 

levels are near record-low numbers. Since the CFTC opened its 

doors 33 years ago, volumes on U.S. futures exchanges have increased 8,000 percent. That is compared to a 12 percent decrease 

in staffing levels at the agency. 

As the agency embarks on our new authorities and initiatives in 

order to respond to changing market conditions, it is imperative 

that these be met with adequate resources. The CFTC is in the 

midst of implementing its new Farm Bill authorities, which will require many programmatic changes as well as hard work from an 

already-strained staff. Additionally, the agency staff is racing to 

implement the many recent initiatives I have just outlined in my 

testimony. Recall, as well, that our employees are full-time regulators, charged with overseeing these markets each and every day. 

Without proper funding, the agency will not be able to sustain this 

pace much longer. 

In summary, the Commission shares this committee’s concern for 

the current conditions in energy markets and for the effects of high 

crude oil prices on consumers, workers, and businesses. These are 

difficult economic times, and the Commission recognizes the need 

to respond accordingly to ensure that the futures markets are 

working properly for all Americans. 

Thank you for allowing me to testify, and I welcome any questions you may have. 

199 

[The prepared statement of Mr. Lukken follows:] 

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Mr. STUPAK. Thank you. And thank you for your testimony. 

This is our second hearing, and we are already talking about a 

third hearing. The changes in the Farm Bill—we’re going to make 

sure the oversight role of this committee is done, especially when 

it comes to energy. And, as I think you’ll see this week, there will 

be other pieces of legislation on the floor to try to take away speculation. 

Let me ask you this, if you may, because our last hearing was 

on December 12th, and apparently the CFTC has reversed its position, in that you will now, even though you didn’t do it in December, but now you indicated that you will require the same position 

limits and accountability levels which apply to U.S. markets to 

apply to ICE Futures in the U.K. 

Is that correct? 

Mr. LUKKEN. That is correct. 

Mr. STUPAK. OK. Is the CFTC going to require the positions 

taken on both exchanges be added together when the exchange assesses compliance? For example, can a trader hold a maximum 

limit on both exchanges, or will they be able to double that limit 

by trading on two different places? 

Mr. LUKKEN. Each exchange would set its own limits. 

Mr. STUPAK. So it’s not the aggregate; each exchange could have 

its own limits, right? 

Mr. LUKKEN. That is correct. 

Mr. STUPAK. OK. Are there, what, 18 different exchanges? 

Mr. LUKKEN. Trading crude oil? West Texas—— 

Mr. STUPAK. Right. 

Mr. LUKKEN. There’s two currently. There’s the London market, 

and there is the NYMEX market. 

Mr. STUPAK. OK. What about Dubai? Are they going to be trading on Dubai? 

Mr. LUKKEN. Dubai does not list West Texas—the Dubai Mercantile Exchange, which has an access letter with the CFTC, has 

not listed the West Texas Intermediate contract. There is the 

Dubai Gold and Commodity Exchange, which has no relationship 

to the CFTC. There’s no access letter that we’ve granted them. 

They do have a West Texas contract. It’s about 12,000 contracts 

volume in June. 

Mr. STUPAK. And you expect that to go up, do you not, since 

there has recently been some action on NYMEX being allowed to 

trade on Dubai? 

Mr. LUKKEN. Well, again, if the Dubai Mercantile Exchange 

would have large trader reporting and the imposition of position 

limits, that exchange that has the access letter with us would be 

subject to position limits. 

Mr. STUPAK. OK. So every exchange I have, whatever position 

limit that is, that’s what I can trade up to; that position, correct? 

Mr. LUKKEN. That’s correct. 

Mr. STUPAK. OK. Turn to tab 14 in the book there right there 

in front of you. That’s our exhibit book. This is a chart which shows 

that 64 percent of the trading for the West Texas crude oil contract 

on ICE Futures Exchange originates in the U.S. during 2007. 

So my question is, if a foreign board of trade consistently has a 

majority of its trade originating in the United States, why 

212 

shouldn’t that foreign board of trade be subject to CFTC regulation 

and register as a designated contract market? 

Mr. LUKKEN. Actually, these figures, I’ll have to—ICE can talk 

about these figures as well, but these also include, as U.S. trades, 

trades that are happening both U.S. and overseas. So, actually, if 

you just look at those that originate here in the U.S. and you break 

it down by size, it’s about 45 percent of the market. 

But having said that, even at 45 percent, I think your question 

holds valid, which is, why should we not try to impose U.S. regulatory structure on these markets? I think, for us, we recognize 

that these are global markets, that the ICE exchange has been in 

existence for 25 years, regulated by the FSA, and that we have to 

recognize that there are certain things we can condition, information and controls that are important—— 

Mr. STUPAK. Why can’t you hold these exchanges to the same 

rules and regulations that you do NYMEX? Again, tab 14, you say 

45 percent, I’m looking at volume from all terminals, volumes from 

U.S. terminal, percentage from U.S. terminal, 64.1 percent. Why 

wouldn’t they come under the same regulation? Sixty-four percent 

of the trades are here in the United States. 

Mr. LUKKEN. Again, this is something the Commission looked at 

in 2006 and held public hearings on this, went out in public record, 

trying to get comments about this. And our recognition process allows us to recognize foreign regulators as the home-country regulator but then condition these on important—— 

Mr. STUPAK. I agree. But the question was, why shouldn’t foreign 

board of trades be subject to CFTC regulation and register as a 

designated contract market? 

I know all the reasons why you made these changes. But why 

shouldn’t they be the same, especially when 64 percent of the 

trades are occurring here in the United States? 

Mr. LUKKEN. Well, certainly Congress could make the choice to 

get rid of our program, but that’s not going to stop trades from 

happening overseas. 

Mr. STUPAK. No, it won’t stop trades, but won’t it bring transparency? We’ll know who’s trading, how many contracts they’re 

holding, what the price is. Isn’t that what we’re trying do here? 

Mr. LUKKEN. Well, that’s correct. And our program has allowed 

us to see the transparency on these markets. We see not only U.S. 

participants on ICE, but we also see the two-thirds of those participants, according to open interest, of the foreign participants. So 

we’re seeing not only U.S. participation—— 

Mr. STUPAK. But if you’re seeing all that, why did you have to 

put out the special call then for information? 

Mr. LUKKEN. That’s for swaps. 

Mr. STUPAK. I know that’s for swaps, so you don’t see the swaps. 

In the testimony earlier today, most of them showed that swaps is 

a major problem here. 

Mr. LUKKEN. Right, and that is something that the agency, about 

a month ago, asked for more data about swaps. Typically, swaps 

are aggregators in our markets. They bring multiple positions to 

the markets. They have clients, such as—Morgan Stanley, I think, 

openly talks about having the airline industry as their client. 

Southwest was mentioned, as well. 

213 

These businesses bring all this to the futures markets, where 

they manage their risk. And so that’s typically, we just look to 

what the swap dealers are bringing. We don’t look beyond to who 

their clients are. But that’s the information we’re going to get. 

Come September 15th, we hope to provide Congress with more information about what swap dealers are doing in these markets. 

Mr. STUPAK. You know, I’m looking at a June 18th Bloomberg article quoted that the CFTC’s head of enforcement, Mr. Gregory 

Mocek, is saying that, ‘‘At this time, we have no evidence that speculation in ICE in Western Texas Intermediate crude contracts are 

manipulating the markets.’’ Secretary Bodman basically said the 

same thing. Secretary Paulson has pretty much said the same 

thing too. 

But do you think it’s reasonable for the head of your enforcement 

to be making such claims during an open investigation when you 

put out a special call trying to get the information? It sounds like 

you already predetermined before you got the information that 

there is no speculation or manipulation going on. 

Mr. LUKKEN. Well, manipulation is a different term, and I’d like 

to clarify. Our act defines manipulation as somebody intentionally 

trying to come into the market to their own advantage, collaboratively with a group, to benefit for profit. And we’ve seen this in 

cases, famous cases that this committee is well aware of, including 

Amaranth and those types of cases. 

I think what’s being discussed currently is that there may be so 

much financial money coming into the markets that it may be artificially creating a bubble. That is something different, typically, 

than what we look at. So we can never rule out definitively that 

manipulation is not happening, because that’s what we do, we police the markets, just as policemen police for crime. They can’t prevent it all. But when they do, they go after it aggressively. 

And that’s what I think our enforcement director was saying, is 

we have not seen that ICE is causing a part of this bubble that’s 

going up. But we can’t ever rule out that manipulation is not occurring anywhere. 

Mr. STUPAK. But having been a police officer, you do get a sense 

that something is going on, and you start digging a little bit. 

So let me ask you this. Excessive speculation is prohibited by the 

Commodities Exchange Act. However, a certain amount of speculation in the markets is necessary to provide liquidity. 

What concerns me is the increasing level of speculative money 

purchasing oil futures contracts. So what would you consider excessive speculation? 

Mr. LUKKEN. Well, it’s something—as you mentioned, I think 

your chart had 70 percent. Those are figures, a lot of that growth 

is the swap dealers, trying to figure out what the swap dealers are 

doing. So that’s what we need more information on, greater detailed information. 

We’ve sent out our special calls to get that, to find out how much 

of that business—a lot of it may be commercial. And, in fact, I 

think I’ve passed out a chart to the committee members, swap dealers are currently flat the market or virtually flat the market. They 

have as many short positions, meaning they would benefit from the 

prices going down, as they do long positions. 

214 

So you would think, if all this index money was overtaking these 

markets, that you would see more on the long side. But right 

now—and this has been studied for a long period of time—swap 

dealers have actually had as many short positions as long positions 

in the market. 

Mr. STUPAK. Sure. There is your chart there, the one you passed 

out to the committee today. We just had a chance to take a look 

at it. 

But isn’t this argument really, sort of, flawed? I mean, the law 

of supply and demand is still in effect, and new demand in any 

market forces prices higher to attract new sellers. So there’s a parallel shift up in price every time an index buyer buys or holds. So 

a new entrance and the exit point is higher than if there were no 

large index buyer in the market. So every time you roll one of these 

over and take a new one, the price is higher. 

As you can see, nearby future prices, look at that, they shot right 

up on there. Sure, it stays pretty much the same; you want to say 

it’s flat. But look at what it has done to the price, because it’s a 

new contract. Every time it says short and long, it’s a new contract; 

therefore, the price has to go up, because the flow of money into 

this market, which is unreasonable, that led to excess speculation. 

Wouldn’t you agree? 

Mr. LUKKEN. Well, as you mentioned, there is a short for every 

long. So there is somebody that will lose for every winner. So that’s 

important to remember. And—— 

Mr. STUPAK. As long as those prices continue to go, we continue 

to drive the floor up each time we make one of those. 

Mr. LUKKEN. Right. 

Mr. STUPAK. No matter where it occurs. 

Mr. LUKKEN. Yes, well, I think what this chart—we can’t make 

any hard and fast conclusions with this chart, but it does indicate 

that it’s worth the effort that we’re going through to get the information from these swap dealers, to use this interagency task force 

to look at this. We have DOE and FERC and FTC and others looking at this information with us, so that we can make sound, informed decisions. 

Mr. STUPAK. Well, I agree with you, but I think your chart disproves what you’re trying to say. And as I said earlier, Secretary 

Paulson, after you issued your special call, 3 days later he says, 

and I quote, ‘‘My position, and I’ve looked at this very carefully, is 

I don’t believe financial investors are responsible for any significant 

degree of this price movement. This is supply and demand. Financial investors are on both sides of the market. They are long, they 

are short. They don’t set trends. They follow trends.’’ 

A fair reading seems to me that the Secretary has apparently 

rushed to judgment. And I don’t know if your interagency task 

force you’ve been talking about or your special call is going to 

change the Secretary’s mind. Sounds like he has made up his mind 

before we ever even had any information come forth. 

Mr. LUKKEN. Well, as an independent regulatory agency, we 

have to keep an open mind and evolve with circumstances. And 

that’s why we’re trying to get the better information. I think everybody has agreed that more information is needed on these swap 

dealers, and that’s what we’re going to do. 

215 

Mr. STUPAK. Very good. 

Mr. Whitfield for questions, please. 

Mr. WHITFIELD. Chairman Lukken, thank you very much for 

being with us today. 

And, obviously, we all come to this from different viewpoints. As 

Members of Congress, we’re primarily focused on what can we do 

to get these prices down and help our economy and help people 

who are trying to meet all their financial obligations and so forth. 

And from your perspective, you’re enforcing laws and regulations 

as they relate to trading in the commodity futures market. 

And I know Chairman Stupak had mentioned Secretary 

Bodman’s—he had made a comment that he didn’t feel like speculators were affecting the price. And your chief economist, I guess, 

Jeffrey Harris, in the Senate last month said that there was no evidence that position changes by speculators precede price changes 

for crude oil futures contracts. And without getting into the argument, the first panel all felt like, yes, it’s having a dramatic impact. 

What specific authority do you have today to penalize someone 

or take some action if it’s determined that there is excessive speculation? 

Mr. LUKKEN. Well, excessive speculation is not defined in our act. 

It talks about it’s something that the CFTC should look for and ensure that unwarranted price changes are not occurring, and artificial prices. And it asks us to set speculative limits in order to do 

that. 

We do have a core principle in our act that requires exchanges 

to set position limits, as well as accountability levels, for those contracts. And they do that, and have been doing that since 2000, 

since our act was modernized. 

So excessive speculation is, like I said, an undefined term. But 

we do have controls in place, mainly through the information—— 

Mr. WHITFIELD. Let me just interject for a moment. Even though 

it’s not defined, with the dramatic increase of oil futures market, 

I’m supposing that within the industry there has been some discussion about what is excessive speculation, correct? 

Mr. LUKKEN. Yes, sir. 

Mr. WHITFIELD. And what did you all determine? Did you come 

up with any conclusion of what excessive speculation is as it relates 

specifically to this problem of oil futures? 

Mr. LUKKEN. Again, we have not defined excessive speculation, 

but we certainly have been taking action over the last year to try 

to address some of the concerns around speculators, including closing the Enron loophole as part of the Farm Bill, looking into swap 

dealers as part of our recent special call—— 

Mr. WHITFIELD. You listed a number of initiatives that you had 

taken. And so you can do most of these by regulation, or do some 

of them require legislation? 

Mr. LUKKEN. Well, the Enron loophole required legislation in the 

Farm Bill. So we’re implementing that according to a timetable set 

out by Congress. 

The swap dealer information, we’re trying to see what that information may bear on what the situation is. But we may or may not 

have to require certain legislative changes; I don’t know yet. 

216 

Mr. WHITFIELD. What about margin requirements? 

Mr. LUKKEN. The CFTC does not have specific margin authority 

except for in emergency situations. It’s set by exchanges. 

I would like to address the margin question. Margin in the futures market is different than in the stock markets. It is not a 

downpayment on a good, such as in the securities market. It’s 

meant to cover a 1-day price change. And it’s been successfully 

doing that to prevent systemic risk in the futures markets for 150 

years. 

Mr. WHITFIELD. So you would oppose changing the margin requirements? 

Mr. LUKKEN. I think it would not result in what everybody’s 

looking for, which is lower prices. I think it may drive businesses 

elsewhere, to London and to the over-the-counter markets. That 

should be a concern. 

And I’d also mention, if people are concerned about index traders, those people are normally holding a dollar of asset for the positions they are putting up. So they could meet those margin calls. 

And I’m not sure it would get them out of the market, if that’s 

what the concern of Congress was. 

Mr. WHITFIELD. Now, in the farm bill, what else did it do to assist you, other than addressing the Enron issue? 

Mr. LUKKEN. Well, we also had increased penalty authorities for 

manipulation, which is very helpful. This puts us in line with 

FERC, to ensure that it’s enough of a punishment for people trying 

to manipulate the markets. 

We also received some greater retail fraud authority for foreign 

currency fraud, which was helpful. 

So there are a few provisions in there that helped give us greater 

tools at the agency. 

Mr. WHITFIELD. OK. 

Well, thank you very much. 

Mr. STUPAK. Mr. Melancon for questions. 

Mr. MELANCON. Thank you, Mr. Chairman. 

Mr. Lukken, when was it that the CFTC started looking into the 

swap issue? How long ago was that? 

Mr. LUKKEN. Well, obviously, we always have the ability, and 

have over time during surveillance of our markets, to be able to 

ask for swap dealer information using our 1805 authority. And that 

occurs quite frequently. 

As a structural issue of trying to get information as a class, this 

is something we’ve started thinking about as prices have been escalating, as concerns have been raised in the public about this, that 

we probably need to find out more information about the underlying transactions. 

Mr. MELANCON. So a month ago, 3 months ago, 6 months ago, 

a year ago? 

Mr. LUKKEN. Yes, these are things that, yes, we’ve been debating 

internally, sure. 

Mr. MELANCON. About when? About 6 months ago? A year ago? 

Mr. LUKKEN. Yes, certainly. 

Mr. MELANCON. Now, did the Congress ask you to look into this, 

or did you on your own over at the CFTC take the initiative? 

Mr. LUKKEN. This is something CFTC did on its own. 

217 

Mr. MELANCON. OK. And you’re setting a date for September, yet 

the prices are escalating at a rate that September is going to be 

too late, if I read it correctly. I know government doesn’t work that 

fast, but is there any way to expedite the work you’re doing? 

Mr. LUKKEN. Well, we said by September 15th, so if we can get 

it and make recommendations before then, we certainly will. 

Mr. MELANCON. I have never seen an agency beat a deadline. 

Mr. LUKKEN. Well, we’ll give it our best. 

Mr. MELANCON. Yes. Who exactly is ICE? I mean, I know they’re 

a brokerage firm. I know they’re based out of England. I know they 

have an office in Atlanta. But who are they? Who are the principals? 

Mr. LUKKEN. The principals? 

Mr. MELANCON. Yes, who set ICE up? Is it an American company 

involved in this that didn’t like the way that things were regulated 

by—— 

Mr. LUKKEN. The holding company I think is based in Atlanta, 

but they bought a British company several years back. 

Mr. MELANCON. So who is ‘‘they’’ in Atlanta? 

Mr. LUKKEN. I think by British law it has to be an independent 

board. This is something that I think your next panel could talk 

about. 

Mr. MELANCON. Yes, but who is ‘‘they’’ in Atlanta? Who are the 

‘‘they’’ that set up the ICE? 

Mr. LUKKEN. I don’t know the exact individuals. I think their 

CEO is Jeffrey Sprecher. But they are the ones that bought the 

IPE in London. 

Mr. MELANCON. So they were investors that put this together? Is 

that basically how it got started in Atlanta? And how long ago was 

that? Two years ago? Three? 

Mr. LUKKEN. I think it was in the early 2000s that ICE came 

into formation. 

Mr. MELANCON. So when the CFTC made some changes to the 

way they do business and the way swaps and derivatives are handled, who came and asked the board for that? Who specifically 

came and said, ‘‘We need to make these changes because’’? 

Mr. LUKKEN. Well, the policy regarding swaps has been a policy 

since 1991, so that predates myself. But the swaps exemption has 

been in place since that time. 

Foreign boards of trade, again, this is something that we dealt 

with in a public hearing and, in the Federal Register, put these 

issues out for comment. 

So some of these things pre-date the Commission. 

Mr. MELANCON. So when did the changes take place? 

Mr. LUKKEN. Which changes? 

Mr. MELANCON. The changes in the way we regulate the market, 

the commodity market? I mean, I know over 2 years ago it was 

brought to my attention. And so I’m just wondering when we started this—I guess, when did we start this allowing for the escalation 

by changing the rules of how we ran the market? 

Mr. LUKKEN. Right. Well, ICE Europe, which was the former 

IPE, had been in existence and trading in the United States since 

the CFTC granted it an access letter in 1999. 2006 is when I think 

our surveillance economists became concerned that, because they 

218 

were linking to NYMEX, that they could potentially move the markets. And that’s when we conditioned it on information-sharing between the London exchange and the New York—or the CFTC was 

getting this information about the large traders in those markets. 

Since that period of time, we’ve worked to improve the information we get, and most recently imposing position limits. And so we 

feel that we’ve harmonized those positions and the policies of 

what’s happening here in the United States to make the equivalent 

of what they’re doing in Britain. 

Mr. MELANCON. So ICE only deals with energy, only deals with 

oil? Or do they have other commodities? 

Mr. LUKKEN. I think they are primarily in the energy business, 

yes. 

Mr. MELANCON. OK. But if I were a commodity market, NYMEX, 

CBOT, wouldn’t I want to trade in all commodities? 

Mr. LUKKEN. Well, actually, let me correct myself. They also own 

a fully regulated exchange, the NYBOT, the New York Board of 

Trade, which they have subsequently changed to ICE U.S. But they 

trade coffee, sugar, cocoa, other commodities, fully regulated commodities in the United States. 

Mr. MELANCON. I came from the sugar industry. I haven’t seen 

the price going up on there. What’s the deal with them? They don’t 

want to speculate on that? 

Mr. LUKKEN. I don’t know. 

Mr. MELANCON. We’d like to see some speculation in the sugar 

business. 

I think my time has just about run out. 

But I would encourage you to expedite the report if you would, 

please, sir. As you’re aware, at $4 a gallon, it is getting tougher 

and tougher to explain to constituents exactly what the problems 

are out there. 

Thank you, Mr. Chairman. 

Thank you, Mr. Lukken. 

Mr. STUPAK. Thank you, Mr. Melancon. 

Mr. Barton for questions please. 

Mr. BARTON. Thank you, Mr. Chairman. 

First, I want to commend you for protecting some of the actions 

the CFTC has taken in the last several weeks. They mirror, if not 

exactly at least closely, the bill 6130 that I put in, along with a 

number of other members on the Republican side of this committee. 

So we’re glad to see some actions beginning to be taken. 

My first question goes to the heart of why you’re here. Assuming 

that there is a problem in the markets in terms of speculation in 

the oil futures market, and it would seem to me we have to address 

the underlying supply and demand fundamentals, or no matter 

what we do on speculation, it isn’t going to make much difference 

if we don’t get more supply or less demand or a combination of both 

fundamentally in the world market. 

But having said that, I do think there is something we can do 

on speculation. My biggest concern beyond what to do is how to 

make it congruent with the foreign markets. Our first panel 

seemed pretty satisfied that if we did it in the United States, that 

Europe would follow our lead, and I guess Asia, also. 

219 

Do you share that belief that it’s easy to make whatever we do, 

get the international markets to conform? 

Mr. LUKKEN. Well, I think that’s the worry, is there may be some 

retribution from foreign markets against U.S. exchanges trying to 

get access to foreign markets. So that’s something I think we have 

to be mindful of. I think you still have to ensure that the information you’re going to get is needed and necessary. And I think, as 

we’ve conditioned our access letters, that’s what we’ve tried to get, 

is the large trader reports and impose position limits on these 

types of contracts. And that’s going to be extraordinarily helpful. 

But to require all these exchanges all around the world to come 

to register in the United States, it’s going to be difficult and will 

require all our exchanges to go register all around the world with 

different regulatory authorities. So this ability to recognize each 

other around the world with good conditions, solid conditions, to 

ensure you’re getting the right regulatory authority to police those 

markets, to see the entirety of it, is extremely useful. 

And like I said, if we got rid of our program tomorrow, the London market would not go away. We would just stop seeing it. That’s 

the problem. We want to make sure that we see it. And the leverage we have is through this access letter. 

Mr. BARTON. Well, let’s bring—one of the recommendations of 

Mr. Masters I believe was to raise the margin requirement. Right 

now, we let the commodities markets set their own margin requirements. We don’t have a requirement like we have in the equity 

market that if you buy a stock, you’ve got to put up 50 percent of 

the value of the stock the day you buy it, or I think within 3 days 

or maybe 5 days. 

Let’s assume that, either by statute or by regulation, we raise 

the margin to 25 percent of a commodity of an oil futures contract. 

Would ICE go along with that? I would think they would say, well, 

if they’re at 25, we’re going to be at 10, or we want to get our business—we want to get their business. So, I mean, that’s one example where it’s going to be very difficult I would think. 

Mr. LUKKEN. I think that’s right. I think that’s very right. 

Mr. BARTON. What about the transparency requirements on position limits? If we set more transparency requirements or if we end 

some of these exemptions and require real enforcement on limits, 

what would the ICE market do about that? 

Mr. LUKKEN. I think transparency, this is something we will get 

their data. We are going to put it in our commitment of trader data 

in the future, so the public will be able to see what’s going on in 

ICE and commercial and noncommercial categories. So that’s going 

to be helpful. And ICE has agreed to do that in the future along 

with the position limits and accountability limits. 

Mr. BARTON. So we had one example on a natural gas company. 

When we cracked down in the United States on them, they just 

took their business, didn’t change their position limits or anything, 

they just took it overseas. 

Mr. LUKKEN. I think you have to be mindful of that, that’s a possibility. But still on principle, you want to make sure the markets 

are being properly regulated. And so that’s what we’re trying to do, 

find that balance of get the information you need to properly surveil the markets but also not drive it into darker markets or elseVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00225 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
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where. That would be the worst scenario that we could probably 

hope for. 

Mr. BARTON. Do you agree that, because of the stability of the 

financial market in both the United States and in Great Britain, 

that there’s not much concern about a third market being created 

outside of that framework overseas and that people just aren’t 

going to put their money in Dubai or Hong Kong or someplace like 

that? 

Mr. LUKKEN. I think futures markets, they don’t move very often, 

so London and New York are probably the two markets. But they 

could. There’s a big over-the-counter market that could exist elsewhere outside the U.S.’s surveillance. So that may happen as well. 

But no, I think there are financial centers around the world that 

would try to use this to their advantage: Tokyo and Hong Kong and 

others. 

Mr. BARTON. And my last question, Mr. Chairman. 

Do you agree that it’s possible to have different rules for physical 

participants in the market, i.e., they actually sell the product or 

they actually want to take ownership of it; and different rules for 

nonphysical, they’re in it purely for financial purposes without the 

expectation of receiving or providing the product? 

Mr. LUKKEN. Yes, and we do under current law. I mean, speculators are required to have certain limits on what they can do. So 

the question is, again, how do you ensure that you have enough 

speculators to bring proper liquidity, define prices, discover those 

prices, but not dry them out. So the commercials have difficulty either finding a seller for every buyer or a buyer for every seller. But 

also liquidity drives down prices for commercials as well as the bid 

and spread becomes higher. So that’s useful, too. So we want to 

preserve that but ensure the controls are in place to ensure that 

nobody is artificially driving up prices. 

Mr. BARTON. Thank you, Mr. Chairman. 

Mr. MELANCON [presiding]. Thank you, Mr. Barton. 

Mr. Green for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

And again, welcome Mr. Lukken. 

The CFTC staff has issued no-action letters or foreign-board-oftrade exemptions which allow foreign boards of trade to operate in 

the U.S. without requiring these markets to register at the designated contract markets with the CFTC. How did these no-action 

letters come into existence, and was this process formally approved 

by the commission itself? 

Mr. LUKKEN. This came into existence about 1996. Our act currently prohibits us from regulating foreign boards of trade. So it’s 

difficult for us to put conditions on foreign boards of trade. So this 

access letter, the no-action letter that you have referenced, allowed 

us to have U.S. institutions that were seeking access with foreign 

exchanges to have access to those foreign exchanges under certain 

conditions. The CFTC staff does a thorough review of the regulatory systems of these different countries, as well as the exchanges 

itself before issuing these letters and then allows these institutions 

to trade foreign products. 

Mr. GREEN. Do you agree with Dr. Greenberger’s written testimony when he states that the no-action letter process never conVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00226 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
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templated that an exchange owned by or affiliated with a U.S. entity would escape the CFTC regulation imposed on traditional exchanges? 

Mr. LUKKEN. Well, this is when it was started in ’96 and then 

I think formalized in 1999. Yes, there weren’t any linked products 

at that time. However, in 2006, when this started, when the products did become linked, again, the CFTC held a public hearing, put 

out for public comment the changes that they were seeking, and we 

started asking for additional information from these markets. 

Mr. GREEN. Do you know how many foreign exchanges have 

placed terminals within the U.S. pursuant to that no-action letter? 

Mr. LUKKEN. I think it’s around 20. 

Mr. GREEN. Did the commission disclose its 2007 investigation 

and the practice surrounding the purchase and transportation of 

storage and trading of crude oil contracts? 

Mr. LUKKEN. Yes, it did. 

Mr. GREEN. What effect, if any, would this public announcement 

have made on this investigation of the contract market? 

Mr. LUKKEN. Well, we felt, obviously, we never want to hinder 

an investigation either claiming charges against innocent parties 

until proven guilty, but because of and recognizing that there were 

concerns about manipulation in these markets, we took the extraordinary step of disclosing that we’ve been investigating this 

since 2007. 

Mr. GREEN. Do you agree that oil has been transformed from a 

commodity into a financial asset where its prices are influenced by 

those investing in oil futures who are seeking a hedge against the 

weak dollar? 

Mr. LUKKEN. Certainly our economists that look at this see the 

correlations between the dollar and commodity prices. 

Mr. GREEN. Do you feel, as a matter of our economic policy, our 

government should allow commodities essential to the economy, 

such as oil, to be treated as a speculative asset for investors with 

hundreds of billions to allocate or should it be regulated in a way 

to ensure that its price is dictated exclusively by supply and demand? 

Mr. LUKKEN. Our mission is to ensure that it’s influenced by supply and demand, and that speculative interests are not artificially 

driving prices. 

Mr. GREEN. On June 10th, CFTC announced that, in light of the 

rising crude oil price, it would convene an interagency task force, 

including the Treasury and Energy Department. This task force 

will look at the impact of the index traders and speculators. I know 

it’s only a few weeks later, but has the task force met yet? 

Mr. LUKKEN. We have met. We’ve tried to assign some of the 

things to different agencies. We will continue to meet. And hopefully, some of its findings can be a part of this report on September 

15th. 

Mr. GREEN. And you’re still continuing to receive data on commodity index investments from the investment banks and funds 

pursuant to the special call for data issued on May 29? 

Mr. LUKKEN. Are we receiving the data? 

Mr. GREEN. Yes. 

222 

Mr. LUKKEN. I think we’ll start receiving the data some time towards mid-July. We’ve sent out the request but have not gotten 

back the data yet. 

Mr. GREEN. I appreciate your time. Thank you for appearing 

today. 

Thank you, Mr. Chairman. 

Mr. MELANCON. Thank you, Mr. Green. 

Mr. Walden. 

Mr. WALDEN. Thank you, Mr. Chairman. 

Mr. Lukken, thank you for being here today. 

Does the CFTC have the authority, do you have all the authority 

you need to go after somebody if they’re on ICE or one of the other 

exchanges and adversely affecting our market? 

Mr. LUKKEN. Well, if they’re trading on ICE, and I would assume 

they’re U.S. participants, we would certainly—that’s an illegal act, 

and we can go after those U.S. participants for that, certainly. 

Mr. WALDEN. So do you need any additional authority from us, 

from the Congress? 

Mr. LUKKEN. For policing those, I think what’s being considered 

is trying to codify some of the things that we’ve talked about. I 

think that would be helpful. And we’re trying to think through 

whether we have the legal ability to go after all this. We certainly 

will advise this committee if we feel we’re missing something. 

Mr. WALDEN. And when would that advice come to this committee? 

Mr. LUKKEN. As quickly as possible if we feel we need something. 

But right now, part of this is we have the ultimate authority, 

which is to pull the no-action letter. So we can ensure—work with 

exchanges, work with the FSA, to get people out of positions. We 

can sue participants that are trying to manipulate the markets. So 

we have quite a few tools in this area. 

Mr. WALDEN. There are a lot of folks, some of them who testified 

today, believe that market manipulation, not just speculation, is 

going on and could account for some say as much as $25, $35, $60 

a barrel. What’s your estimate? 

Mr. LUKKEN. Well, I think certainly manipulation, illegal manipulation, somebody who is trying to control the market by holding 

a position, that, in our experience, has been a short-term effect. I 

mean, it’s somebody able to hold a position at the expiration of a 

contract. And we’ve seen this very famously in Hunt Silver Crisis 

and with Amaranth, working off of two marketplaces to do that. 

But typically they can’t hold those positions very long. 

I think what people are concerned about is more of a structural 

effect, too much financial money. And that’s something we’re trying 

to get our arms around with this swap dealer special call authority. 

But as far as trying to estimate, it’s difficult for me to know. 

Mr. WALDEN. OK, and then you’ve heard the talk today about 

putting in different margin requirements. What’s your recommendation to us with regard to margin requirements, especially 

in some of these trades? 

Mr. LUKKEN. Well, I think margin is a pretty imprecise tool to 

try to go after the activity you’re trying to go after. There are other 

ways to get it through transparency, in the controls I’ve talked 

about. But margin would raise the cost on some of these businesses 

223 

significantly, could potentially move them to other markets like 

London or underground. Without—and I think the other concern 

for us is that these are meant, margin is meant to protect the 

clearinghouse. We want to make sure that that is a targeted protection. And if we start toying around with margin when prices are 

too high or too low, I’m not sure what sort of precedent that would 

set. But I think there are other ways to get at the type of controls 

that you’re after. 

Mr. WALDEN. And tell us about the OTC, the over-the-counter 

market and your regulatory authority toward that, those sorts of 

trades. Do you have much authority there? 

Mr. LUKKEN. Well, right now, if there’s a participant in our markets and we see an anomaly in their trading, we’re able to reach 

through into over-the-counter market to get that data on a case-bycase basis and determine whether they’re trying to use the overthe-counter market in conjunction with the futures markets to manipulate the price of a given commodity. So the over-the-counter 

market is a very large market. It’s not necessarily a price discovery 

market like the futures markets have been and some even exempt 

commercial markets like ICE have become. So we try to only go 

into the over-the-counter market on a need-to-know basis and see 

what’s going on, and it’s been effective. 

Mr. WALDEN. OK. 

When it comes to these giant investment firms coming into the 

market, we read about the CalPERS, the California, I assume it’s 

Public Employer Retirement System, coming in and weighing in 

with what, 4.5 percent or something of their wealth. What impact 

are you seeing as a result of that in the market, and where do 

these funds go in today’s economy, but into the commodities? 

Mr. LUKKEN. Well, I think everybody can agree that there’s been 

an influx of financial money from pensions and endowments. They 

typically go through swap dealers, which we’ve talked about. Swap 

dealers are bringing a lot of business into the futures markets, including a lot of commercial businesses. So I’m not sure. I think, 

under the sort of portfolio diversification theory, commodities help 

improve the returns for these commodity pension, these pension organizations. I’m not sure there—I’m sure there are other assets 

they could go back to if Congress felt that they were somehow artificially driving up prices. 

Mr. WALDEN. Now, some of the most vocal opponents of your organization and this administration have called for closing the socalled Enron loophole. That was done to a large extent in the Farm 

Bill, and some of those local advocates didn’t bother to vote for the 

Farm Bill, which closed that loophole. Tell me, though, from your 

standpoint, the closing of that loophole, did that get done properly? 

Is there more work to get done there? Are there additional authorities that you need? 

Mr. LUKKEN. I think it is going to be a very effective tool for us 

because our concern, as you know, our act requires us to protect 

the price discovery process wherever that may occur. So it may 

occur in a futures market, but it may occur in the over-the-counter 

market on these electronic exchanges. And so that’s where we drew 

the line and said, that’s when the public interest arises and we 

need additional authorities, is when price discovery begins to occur. 

224 

And so I think that has been a very effective way to think about 

this, is that we’re going to protect the fully regulated marketplace, 

and these swap electronic marketplaces have become price discovery vehicles, and we’re hopeful to get those authorities in place 

as quickly as possible. 

Mr. WALDEN. All right. 

Thank you, Mr. Chairman. Thank you. 

Mr. STUPAK [presiding]. Mr. Burgess for questions. 

Mr. BURGESS. Thank you Mr. Chairman. 

Mr. Lukken, I assume you were here when the first panel testified this morning. 

Mr. LUKKEN. I was. 

Mr. BURGESS. Mr. Masters talked about his four-step plan to immediately bring the price of crude down to its marginal cost of $60 

to $70; it could happen within a period of hours, minutes, days. 

Well, step one was, establish limits that apply to every market participant. And you heard testimony from other individuals on that 

first panel that this was probably where the most bang for the 

buck occurred in these four proposals, and this was the step of establishing position limits. Do you have currently the authority to 

do what is outlined by Mr. Masters in step one in his testimony? 

Mr. LUKKEN. Putting position limits on speculators? 

Mr. BURGESS. Yes. 

Mr. LUKKEN. Currently, I think our act requires exchanges to 

put position limits on it. But I think through emergency authority, 

we could put position limits on any type of participant. 

Mr. BURGESS. Well, again, the testimony we heard this morning 

was pretty powerful; that using this type of authority within a very 

brief period of time, we could bring the cost of crude oil to well 

under $100 a barrel. We see how the economy is suffering. We see 

how other commodity prices are affected. We heard the testimony 

from the truckers, the airline industry and on. Wouldn’t that kind 

of classify as an emergency to take this step? 

Mr. LUKKEN. Well, I think the big—we currently have controls 

and position limits on speculators, accountability levels outside the 

spot month for speculators. I think what was in that chart, the 70 

percent chart that was shown, are the swap dealers, those people 

who are aggregating lots of clients and putting them into the futures markets, the net risk of those positions. 

We’re going to try to get better information from them, but we 

can’t put limits on or think about limits until we get better data 

and information from those types of participants. 

Again, we want to also make sure that if they’re purposeful evading limits, that’s something I think we should go after. But it could 

be that a lot of these are below limits or commercial participants 

coming to the markets. So we just need better data before making 

any hard and fast decisions about that. 

Mr. BURGESS. OK. 

Well, we had a hearing—and it probably wasn’t as involved as 

this morning’s has been—last December. How much more time? 

How much more data? What could we reasonably expect as a time 

line from the CFTC before you feel that you have the data you 

need to invoke those emergency provisions to bring the price of 

crude oil down by 50 percent? 

225 

Mr. LUKKEN. Well, certainly these are complex books that we’re 

going through from swap dealers to try to unravel. These are not 

futures contracts. They are tailored contracts between customers 

and the swap dealers. So we’re trying to put them in equivalent 

terms to the futures market, these billion dollar books of these organizations. So, again, we’re a small staff trying to do this while 

we, at the same time, regulate the markets. So we’re doing it as 

fast as we can to get to Congress the information they need to 

make decisions. 

Mr. BURGESS. And I appreciate the conditions under which you 

work. It’s just we hear people talk about opening the Strategic Petroleum Reserve, the President has executive authority to do that 

in times of emergency and that maybe this is one of those times. 

And I would just submit, if you have that authority under emergency provisions, that the step taken of limiting the spot market 

might be, or the speculators on the spot market may be a less drastic step than drawing down the Strategic Petroleum Reserve. We 

probably have a great reserve of speculators, but if we got into 

trouble after drawing down the Strategic Petroleum Reserve, we 

have nowhere else to go but ANWR, and we’ve heard it takes 10 

years to get that oil. 

Now, on the issue of just your ability to do your job, how do we 

stand currently with—you said you needed, what was the figure, 

you needed an additional $150 million this year? Did I see that in 

your testimony? 

Mr. LUKKEN. No, actually an extra $30 million. 

Mr. BURGESS. $30 million, OK. We’ll give you $150. 

But realistically what is the practical effect of the fact that we’re 

just now starting our appropriations work in Congress, and no one 

will tell you with a straight face that we’re going to finish any appropriations bill by September 30th, and anything that happens 

will be done after the next President is sworn in? 

We’re asking you to move with all due dispatch on this, and yet, 

at the same time, we’re probably not going to fund you any additional money for at least 6 or 7 months and maybe even longer 

than that. Is that going to be a problem? 

Mr. LUKKEN. A huge problem, sure. This is something that we’ve 

been straining under the pressure to oversee the markets, all the 

initiatives that we’re going through, the Farm Bill with its authorities to go through, just the growth in the market itself requires us 

to get more staffing. So, yes, this is something I know we’re not 

going to be able to bring up to speed with staffing immediately, but 

we have to be thinking, and as a steward of this agency, its longterm health to ensure that it has the proper staffing to do its job 

so that it can report to Congress with certainty that it’s overseeing 

these markets. 

Mr. BURGESS. I appreciate your attention to the long-term details. 

Can you, and I don’t have much time left or any time left, but 

can you in very simple terms, simple declaratory sentences, give us 

the difference between the Enron loophole, the London loophole, 

and the swaps dealers loophole? 

Mr. LUKKEN. Well, the Enron loophole, as it’s called, was meant 

to, over time, exempt commercial markets developed, which are 

226 

ways of putting swap positions onto an electronic format. These positions became more and more price discovery vehicles, and we 

needed authorities to go along with that. 

What’s occurring in London and what we’ve announced with the 

FSA in London, these are fully regulated markets. And so we were 

trying to work with the British authorities to get the proper information from them and to harmonize the information and the position accountability and position limits on those markets. So that’s 

what we’ve already taken steps to address, and I think those will 

be helpful in the future. 

As far as the swap, the swaps exemption, that is something 

that’s been in place, again, since 1991 as a policy. It’s something, 

when the CFTC was reauthorized in 1986, the legislative history 

from Congress urged us strongly to consider exempting these types 

of transactions out of using hedge exemptions. So this is something, 

I wasn’t around at the time, but I’m sure the commission took 

Congress’s words to bear and decided to do this. So this is something we’re readdressing. We’re trying to get better information to 

understand whether this still makes sense, and if it doesn’t, we’ll 

make proper recommendations. 

Mr. BURGESS. Let me ask you a question just on technical 

grounds as to what the language that’s called the Enron loophole, 

that was actually passed in the Commodity Futures Modernization 

Act by the House of Representatives in October of 2002 and then 

picked up and put into a large appropriations bill. Did the language change between the time the House voted on its bill in October of 2002 and the time that the omnibus bill was passed later 

in December? 

Mr. LUKKEN. Section 8 did not—or Section 2(h) did not change 

at all. 

Mr. BURGESS. Did it change from May of 2002 when this committee marked up that legislation to the time it was voted on on 

the House Floor? Was the language the same from what this committee submitted for Mr. Ewing’s bill to the House floor to be voted 

on in October? 

Mr. LUKKEN. I believe it was the same. 

Mr. BURGESS. So this was not language that was just thought up 

at the last moment? 

Mr. LUKKEN. No. This was I believe put into the bill, and I think 

it went through both this committee, the Ag Committee and the 

Banking Committee at the time, and then came to the House floor 

with a statement of administrative policy in support of it. 

Mr. BURGESS. So this would have been language that was voted 

on by Mr. Stupak and Mr. Dingell and Mr. Inslee, who all voted 

aye, but Mr. Green was not present at the time? 

Mr. LUKKEN. In October of 2000. 

Mr. BURGESS. Yes, in October of 2000. 

I yield back my time, Mr. Chairman. 

Mr. STUPAK. You don’t have anything to yield. You’re way over. 

Mr. Inslee for questions. 

Mr. INSLEE. Thank you. 

There are five things that our previous witnesses have talked 

about: closing the three loopholes, the three Horsemen of the 

Apocalypse, I guess, the ICE, the swap, the Enron; measures to inVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00232 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
227 

crease margin requirements is a fourth action; and a fifth, measures to restrict the positions that traders will have in a particular 

market. So there are five actions to be considered. I would like you 

to address each one of those actions. Tell me which ones would require some international action to have some significant effect, or 

which could be done just by the United States and still have at 

least considerable effect? And which ones would require congressional actions as opposed to you being able to take regulatory action with or without, forgetting that wisdom, but whether or not 

you have the authority to do it? Could you address each of those 

five? 

Mr. LUKKEN. I think the first one, the exempt commercial market issue, was passed as part of the Farm Bill. And so we’re addressing trying to within, I think we have 180 days to try to get 

out a rule on that and try to address the issue regarding what is 

called the Enron loophole. 

The second issue dealing with foreign boards of trade, as stated, 

we are now getting the equivalent of large trader reports from the 

foreign board of trade that have links to the United States, both 

in London. So that will be helpful, as well as putting position limits 

on them, so we can do that administratively. But certainly I know 

that’s been floating around; a codification of this would be helpful 

in my view. 

Third, dealing with swaps, this is an issue that we’ve asked for 

additional information about a month ago to get better information 

from swaps to understand what type of transactions are coming 

onto our markets as a result of swap dealers. We hope to get that 

information. And by the way, that also includes sovereign wealth 

funds coming through swap dealers and to find out the type of information coming through those swap dealers. And hope to make 

recommendations to Congress by September 15th. 

Margin, we do have authority, emergency authority to raise margins on exchanges. And I do believe we also have similar authority 

to raise or to implement position limits on exchanges as well. 

Mr. INSLEE. So all five of those actions, it sounds like you could 

take, you mentioned one of them, that it would be helpful to have 

statutory authority in the ICE situation, but all five of them, you 

think you would have authority to take action now, then, even 

without specific statutory authority? 

Mr. LUKKEN. And we have on the first three. We are taking administrative action on the first three. 

Mr. INSLEE. And do you have intentions on margins or positions? 

Mr. LUKKEN. Well, again, as far as the margin, in the futures 

market, it’s meant to protect the clearinghouse to cover a 1-day 

price move in the futures markets. I think there are concerns that 

raising margins could drive this business elsewhere, and it would 

be difficult to get it back. There’s no reason that the benchmark 

has to be in New York. It could be elsewhere in the world. And I 

think it would be terrible if we lost the oversight of those markets 

to other places. 

Right now it’s in New York, and we get all the information, and 

we get the information from London as well. So we’re seeing the 

entirety of the crude oil regulated marketplace. 

228 

Mr. INSLEE. Isn’t that, on margin, isn’t that argument that it will 

drive people offshore really the same in equities and stocks? I 

mean, we have margin requirements here, and we have a pretty vibrant capital market here. Isn’t it pretty much the same? We have 

attractions to be in this market for a variety of reasons, because 

of the stability of our economy, the relative stability of our political 

system. Margin requirements haven’t destroyed our capital markets here, have they? 

Mr. LUKKEN. No, but certainly regulation has been a concern in 

our capital markets, that excessive regulation is driving business 

elsewhere. And that’s the Bloomberg-Schumer report that business 

was going to London and we need to reexamine our capital markets 

regulation—— 

Mr. INSLEE. Well, you’re not suggesting reducing margin requirements in the equities markets because we’re losing all this business? 

Mr. LUKKEN. Absolutely not. I’m just saying that we have to be 

mindful that regulation does have an effect on the competitiveness. 

Mr. INSLEE. Well, if we’re mindful that we may be able to reduce 

oil prices by 30 to 50 percent just by increasing margin requirements, wouldn’t that be a pretty good trade-off? 

Mr. LUKKEN. Well, I’m not certain that that would be the effect 

of raising margins. 

Mr. INSLEE. Well, even if it’s half a percent it would probably 

outgun the loss of any potential loss of a capital market overseas; 

wouldn’t it? 

Mr. LUKKEN. Well, I think there are other measures, through 

transparency and other controls, that would be more effective than 

raising margin. 

Mr. INSLEE. And what would those be? 

Mr. LUKKEN. Well, certainly, trying to get better data to the public about what’s happening overseas and what’s happening in the 

swap markets, trying to bring greater transparency to those marketplaces, and ensuring that none of these markets people are 

evading position limits in order to speculate had they come directly 

to the marketplace. 

Mr. INSLEE. Well, just as one Congressman, I hope you look at 

the Titanic effect of even small changes in the price of oil relative 

to the relative small effect on losing a trading position here or 

there to overseas swapping markets. The big savings is in oil 

prices. 

Thank you. 

Mr. STUPAK. Thank you, Mr. Inslee. 

Mr. Dingell for questions please. 

Mr. DINGELL. I am curious, what is a hedger? 

Mr. LUKKEN. A hedger? 

Mr. DINGELL. Yes. 

Mr. LUKKEN. In our terms, it’s somebody who has price risk to 

the underlying commodity. 

Mr. DINGELL. OK. Now, what other categories or persons are 

there in the futures markets? 

Mr. LUKKEN. What other categories do we break down? 

229 

Mr. DINGELL. Yes. You got hedgers are in there, and then you 

got other folks who are investors, or what are they, or are they 

speculators? 

Mr. LUKKEN. Well, we currently break down in our commitment 

of trader reports commercials and noncommercials. So in the commercial category, we have both what you would say a physical 

hedger, somebody who is physically in the market, such as airline 

companies or refineries. 

Mr. DINGELL. The airline company is a hedger; right? 

Mr. LUKKEN. Pardon? 

Mr. DINGELL. The airline company is a hedger; right? 

Mr. LUKKEN. Yes. 

Mr. DINGELL. And that’s because they’ve got a legitimate interest 

in the commodity that they’re interested in; right? 

Mr. LUKKEN. Yes, sir. 

Mr. DINGELL. Now, does a speculator have that? 

Mr. LUKKEN. Speculators do not. 

Mr. DINGELL. OK. Now, what is a commercial and what is a noncommercial. What are the differences between them? 

Mr. LUKKEN. Well, commercials, typically people who have, 

again, an interest in the price, the underlying price risk. 

Mr. DINGELL. An interest in the price, but do they ever receive 

the commodity? 

Mr. LUKKEN. Well, certain commercials certainly do. 

Mr. DINGELL. Some do and some don’t? 

Mr. LUKKEN. Yes. 

Mr. DINGELL. Now, what is the guy who never receives the commodity? What is he? Is he a speculator? 

Mr. LUKKEN. Typically speculators never receive the commodity. 

That’s correct. 

Mr. DINGELL. OK. Now, is there anybody else who doesn’t receive 

the commodity? 

Mr. LUKKEN. A lot of the swap dealers that we’ve been talking 

about also do not receive the commodity? 

Mr. DINGELL. So a swap dealer doesn’t receive. Now, what’s the 

difference between a swap dealer and a speculator? 

Mr. LUKKEN. Well—— 

Mr. DINGELL. Neither one of them receives a commodity, do they? 

Mr. LUKKEN. No, but a swap dealer does bring a variety of different positions to the market. 

Mr. DINGELL. He doesn’t ever receive the commodity, does he? 

Mr. LUKKEN. But many of his clients do. 

Mr. DINGELL. Pardon? 

Mr. LUKKEN. Many of his clients do. 

Mr. DINGELL. His clients do? 

Mr. LUKKEN. Correct. 

Mr. DINGELL. What clients do? 

Mr. LUKKEN. Well—— 

Mr. DINGELL. What is the swap dealer that you’re talking about? 

Would it be Goldman Sachs? 

Mr. LUKKEN. Goldman Sachs, Morgan Stanley, JP Morgan. But 

they represent clients; like United Airlines is a client of Morgan 

Stanley, and they manage all of their risk management for fuel oil 

delivery. 

230 

Mr. DINGELL. OK. Now, they represent also CalPERS? 

Mr. LUKKEN. They certainly do. 

Mr. DINGELL. And they represent the big asset funds? 

Mr. LUKKEN. They do. 

Mr. DINGELL. But they never receive any oil, do they, in these 

commodities exchange? 

Mr. LUKKEN. Not the pension funds or endowments. 

Mr. DINGELL. No. So what is the effect of all these folks being 

in there and not ever receiving oil? Are they raising costs or lowering costs or making the market liquid? What are they doing? 

Mr. LUKKEN. Well, that’s something that we’re trying to find out 

with our special call that we—— 

Mr. DINGELL. Do you know, it used to be that you had a form 

that you circulated every month. It went to everybody in the futures business, right? Do you remember it? 

Mr. LUKKEN. Commitment of Trader Report. 

Mr. DINGELL. Yes. And as they received these forms, they wrote 

in the corner that they were a hedger or that they were a speculator, right? They checked a little box, right? 

Mr. LUKKEN. Correct. 

Mr. DINGELL. You don’t have them check that anymore, do you? 

Mr. LUKKEN. I think they still do, but we have classified swap 

dealers. 

Mr. DINGELL. Can you tell me that they are and they do? 

Mr. LUKKEN. They currently still check a box whether they’re 

commercially hedging. 

Mr. DINGELL. They do? 

Mr. LUKKEN. Correct. 

Mr. DINGELL. So does one of these commercial swaps guys, which 

box does he check, speculator or hedger? 

Mr. LUKKEN. Well, our policy since 1991 has been that swap 

dealers are commercial businesses trying to hedge their underlying 

asset exposure that they’re dealing with commercial business. 

Mr. DINGELL. Now, how does CalPERS hedge their underlying 

exposure? They’re a speculator aren’t they? 

Mr. LUKKEN. Well, they come to swap dealers and—— 

Mr. DINGELL. No, no, no. They’re a speculator, aren’t they? Isn’t 

CalPERS a hedger? 

Mr. LUKKEN. CalPERS? 

Mr. DINGELL. They receive the oil. You told me that somebody 

who doesn’t receive the oil is a hedger, right—or rather is a speculator? 

Mr. LUKKEN. You could probably term them a speculator, sure. 

Mr. DINGELL. So they’re speculators. Now, it’s interesting to note 

that Goldman Sachs doesn’t receive a nickle’s worth of oil, do they? 

Mr. LUKKEN. No, they don’t. 

Mr. DINGELL. No, they don’t. They just—so what I’m trying to 

understand is, how many speculators are in the market, and how 

many hedgers are in the market? 

Mr. LUKKEN. Actually, to clarify, I understand that Goldman 

Sachs does have the ability to receive and make delivery on foreign 

oil. 

231 

Mr. DINGELL. We’ve gone beyond that. How many speculators are 

in the market, and how many hedgers are in the market, and how 

do you know the difference? 

Mr. LUKKEN. I think, under current, about 36 percent of the oil 

market is traditional speculators. We have about 32 percent swap 

dealers in the market, and the rest is commercial participants. 

Mr. DINGELL. Now, how much is this speculating affecting the 

market? 

Mr. LUKKEN. Well, that’s—— 

Mr. DINGELL. There are a lot of speculators in there. How much 

are the speculators affecting the market? 

Mr. LUKKEN. Well, certainly we are looking at supply and demand, and there are strong fundamentals in place here. 

Mr. DINGELL. I’m just a poor Polish lawyer up here, and I’m just 

sitting here asking a very smart fellow to tell me what’s going on 

there. How do these speculators affect the market? 

Mr. LUKKEN. Well, they bring information to the market and oftentimes very valuable information. 

Mr. DINGELL. But are they raising the market price? Are they 

lowering the market price? What are they doing? 

Mr. LUKKEN. Well, about half the time, they’re on the short side 

of the market, benefitting when it goes down, and the other half 

are on the—— 

Mr. DINGELL. Are you telling me this is cancelling out? 

Mr. LUKKEN. Well, a lot of their positions are. 

Mr. DINGELL. Do you know that? 

Mr. LUKKEN. Yes, we do. 

Mr. DINGELL. Now, how much in the way of these futures contracts are there for oil, and how much oil is there moving through 

the market? Do they cancel each other out? In other words, do you 

have the same number of barrels of oil moving through the market 

that you have contracts for the movement of the oil? 

Mr. LUKKEN. No, the futures markets are larger than the physical markets. 

Mr. DINGELL. That’s right. They’re enormously larger. So are 

these enormously larger volumes of swaps and other things that 

you got going on there and speculations and so forth, are they affecting the market? Because here you’ve got, what is it, it’s about 

13 times as much as you’ve got in the way of oil, or rather in the 

way of contracts that you’ve got in the way of oil; is that right, 13 

times? How many billion barrels is moving through the swap mechanism—or rather through the contracts mechanism, and how much 

is moving through the pipeline? What’s the difference? It’s about 13 

times, isn’t it? 

Mr. LUKKEN. Well, these are risk management markets. A futures contract is not affecting the underlying supply. 

Mr. DINGELL. We’re not talking about risk management. I’ll get 

to that when I’m ready. We’re talking now about speculating. Speculation is not a risk management tool. It is a tool whereby you 

make money or lose your shirt, is that right? 

Mr. LUKKEN. That’s correct. 

Mr. DINGELL. OK. So what is the relationship? You’ve got how 

many million barrels of oil are moving through the pipeline, and 

how many million barrels are moving through the contracts? Just 

232 

tell me. You’re in charge of this important agency that is here to 

tell us about these things. I’m waiting to hear the answer. 

Mr. LUKKEN. I think it’s about 13 times the physical. 

Mr. DINGELL. Thirteen times. So we got here a situation where 

you got an elephant, which is the speculation, and you got the oil 

which is moving, which is a flea on the back of that elephant. The 

flea wants to go somewhere, but he can only go on the elephant. 

And the elephant can go anywhere he wants, but the flea has got 

to go along. Now, tell me how it is that this market situation works 

for the benefit of the consuming public, and how does it work for 

the benefit of those goodhearted folk up there in New York who are 

running this wonderful speculative enterprise? Who comes out 

ahead and who gets skinned? And how does the consumer come out 

of this when all these wonderful folks with billions of dollars in 

backing and exemption from you goodhearted folks at CFTC, how 

is the ordinary citizen, and how is oil price, and how is the wellbeing of this country going to prosper? If you look, when you gave 

that Goldman Sachs exemption, you had one number, a very small 

number, of contracts moving on the speculative part and you had 

a lot that were moving on the part of the market which related to 

the question of actually managing supply and managing price 

versus supply. How have those numbers changed? 

Mr. LUKKEN. They’ve increased. 

Mr. DINGELL. They’ve increased. How have they increased? 

Mr. LUKKEN. Well, I think over the last 3 years, in particular, 

we’ve seen an increase in speculative trading from about 34 percent 

to 36 percent—— 

Mr. DINGELL. Well, the very—— 

Mr. LUKKEN [continuing]. On the swap dealer side. 

Mr. DINGELL [continuing]. Capable staff has helped us both. Tell 

me if you agree. And I’ll refer to Exhibit Number 2 that was prepared for us. In January of 2000, speculators, 37 percent; physical 

hedgers, 63 percent. Today, speculators, 71 percent; physical hedgers, 29 percent. That’s 2008 versus January 2000. What can you 

tell me? How does this impact upon market prices? Do you have 

any idea? In 25 words or less, tell me what you know that this is 

doing to the marketplace? 

Mr. LUKKEN. Well, the CFTC obviously—— 

Mr. DINGELL. Pardon? 

Mr. LUKKEN [continuing]. Wants to keep in front of these trends, 

and we have asked for additional information from swap dealers. 

Mr. DINGELL. Beloved friend, you are down there regulating a 

market. You are from the CFTC I am told. And the CFTC is supposed to regulate this market. By curious circumstance, I was in 

the House when a Member of Congress from Iowa forced through 

something it created, your entity. And he was going to see to it that 

the farmers, who then were the people who were being screwed, 

and the consumers, who were then the people being screwed, were 

going to be protected against these folks in the futures market. 

Now we find that these goodhearted folk in the futures market 

have figured out how not just to screw the farmers and the consumers in the city, but they figured out how to screw both the 

farmers and the consumers in the city on a whole new product, and 

that’s oil. Now, what have you done to look at this to see what the 

233 

cost is? Don’t tell me you’ve got a study. These price increases have 

been going on. You’ve had better than a year in which you folks 

have been sitting idly by twiddling your thumbs watching to see 

what was going on, or at least you so tell me. But what have you 

found during that? What can you tell me about how these numbers 

that we are now discussing are affecting prices and why prices are 

moving? I’m listening. 

Mr. BARTON. Mr. Chairman, I hate to interrupt, but our distinguished chairman has already doubled his time, and we have one 

more panel. I would hope this would be his last question. 

Mr. DINGELL. I’m over my time, but it is a wonderful question. 

Mr. BARTON. It is a wonderful question, but we have three more 

witnesses on a fourth panel. 

Mr. DINGELL. I will write you a letter. 

I ask you, Mr. Chairman, that I have permission to have that letter inserted in the record. I’m sure that the CFTC will be delighted 

to give us a response, perhaps even a factual one. 

Mr. LUKKEN. I look forward to it. 

Mr. STUPAK. Mr. Barton, did you want to go another round of 

questions? 

Mr. BARTON. No, no. I appreciate the opportunity, but I would 

like to hear from the fourth panel. 

Mr. STUPAK. All right. 

Well, I have many more questions, but I guess we’re going to 

have to go with the next panel. 

Just one question if I may. We’ve had testimony that there’s 

about 12.5 percent of the sovereign funds may hold as much as 12 

percent. But yet, in talking with CFTC, it may be only, in your letter you sent to us, it was only one that you knew of. How can you 

get such a big discrepancy when there is as much as 12.5 percent 

of these sovereign wealth fund clients but you can only find one? 

Mr. LUKKEN. What we reported was directly those sovereign 

wealth funds on our markets directly using the futures markets. I 

think what we will try to find out in getting more data from swap 

dealers is whether some of the sovereign wealth funds are coming 

through swap dealers indirectly out of the futures markets. 

Mr. STUPAK. Very good, very good. 

I said I would only take one more. I’ve got many more. We’ll put 

them in writing, and we’ll send it up to you. 

I think we’re going to move on to our next panel. 

Thank you for your time here today, Mr. Lukken. 

Let me call up our fourth and final panel to come forward today. 

We appreciate them being here and their patience today as we 

move forward on this very interesting issue. 

The first is Mr. James Newsome, Ph.D., who is chief executive 

officer and president of the New York Mercantile Exchange; Mr. 

Robert Reid, who is chairman of the ICE Futures Europe for the 

International Exchange, Incorporated; and Mr. Michael 

Greenberger, J.D., who is professor of law and Director of the Center for Health and Homeland Security at the University of Maryland. 

It’s a policy of this subcommittee to take all testimony under 

oath. Please be advised that witnesses have the right under Rules 

of the House to be advised by counsel during their testimony. 

234 

Do any of you wish to be advised by counsel during your testimony? 

Everyone is shaking their heads no. I take it as no then. 

I’m going to ask you to please rise and raise your right hand to 

take the oath. 

[Witnesses sworn.] 

Mr. STUPAK. Let the record reflect the witnesses replied in the 

affirmative. They are now under oath. We will now begin with 

opening statements. 

I’ll start with you Dr. Newsome. If you would begin please, 5 

minutes. If you have a longer statement, it will be included as part 

of the record. 

You may begin, sir. 

STATEMENT OF JAMES NEWSOME, PH.D., CHIEF EXECUTIVE 

OFFICER AND PRESIDENT, NEW YORK MERCANTILE EXCHANGE, NEW YORK, NEW YORK 

Dr. NEWSOME. Thank you, Mr. Chairman. 

NYMEX is fully regulated as a derivative clearing organization 

and as a designated contract market, which is the highest and 

most comprehensive level of regulatory oversight for a trading facility. I want to express our appreciation to you and the Committee 

for holding this hearing. 

The ever-increasing cost of energy touches all aspects of our daily 

lives. Today it is quite possibly the most important issue facing 

global and domestic economies as well as U.S. consumers. The 

Commodity Futures Modernization Act of 2000 ushered in a period 

of phenomenal growth in derivatives markets. The CFMA has proven to be the gold standard of U.S. financial policy. 

For the most part, the value and success of the CFMA holds true 

today. However, neither the Congress nor the CFTC had a crystal 

ball, and it was impossible to determine how some markets would 

develop. In at least two instances, markets have developed differently than anyone could have anticipated at the time. 

First, that an OTC natural gas contract trading on an unregulated exempt commercial market could mirror an exchange regulated contract and that the two could become closely linked. Ultimately the OTC contract began to serve a price discovery function. 

Market participants could and did easily move positions from the 

regulated exchange to the ECM to avoid regulatory requirements, 

such as position limits. 

This situation was investigated by the Senate Permanent Subcommittee on Investigations chaired by Senator Carl Levin with 

full cooperation from NYMEX and was addressed effectively in an 

amendment to the recently adopted Farm Bill. 

Second, foreign boards of trade began offering futures contracts 

with U.S. delivery points to U.S. customers pursuant to CFTC noactionletters. Historically, foreign exchanges were permitted to 

offer direct access to their markets to U.S. customers based upon 

a determination by CFTC staff that the foreign regulatory regime 

governing the foreign board of trade was deemed comparable to 

that of the CFTC. 

This approach worked effectively until a foreign board of trade 

listed the look-alike of the NYMEX West Texas Intermediate Crude 

235 

Oil Futures contract without the level of transparency and market 

surveillance controls, such as position limits, that are required on 

U.S. markets. It was never anticipated that the no-action process 

would be utilized in this manner. 

For 2 years now, NYMEX has argued that foreign board of trades 

offering linked products should be required by the CFTC to provide 

the same level and quality of data and at the same frequency that 

U.S. exchanges provide to the CFTC. 

In addition, we believe that no-action letters for foreign boards 

of trade offering contracts with U.S. delivery points should be conditioned to impose position limits and/or accountability levels. 

And we appreciate the announcement made last week by the 

CFTC to do just that. 

Much has been said recently regarding the role of speculators 

and energy markets. Speculative activity on U.S. regulated futures 

exchanges is managed by position limits. For the NYMEX WTI 

Crude Oil Contract, the position limit during the last 2 days of the 

expiring delivery month is 3,000 contracts. Breaching that position 

can result in disciplinary action being taken by the exchange. 

Many believe the speculators, particularly index funds and other 

large institutional investors in our markets, are responsible for the 

high price of crude oil. Data from NYMEX confirms that noncommercials are relatively balanced between long and short open 

positions for NYMEX crude oil futures. Thus, noncommercials are 

simply not and cannot be providing disproportionate pressure on 

the buy or long side of the crude oil market. 

In fact, since October 2007, swaps dealers in our crude oil markets have been holding overall net short positions. Thus any price 

impact attributable to swaps dealers would be to lower prices, not 

to rise them. 

Questions are being raised as to whether hedge exemptions for 

swaps dealers are being used by index funds and other institutional investors as a means of circumventing speculative position 

limits. The full extent of participation by swaps dealers, as well as 

what, if any, influence they are having on current market prices 

and volatility, cannot be determined without accurate data. 

NYMEX believes that more precise data are needed to better assess the amount and impact of this type of trading. And NYMEX 

supports the further delineation of data in the CFTC large trader 

report. 

In addition, we continue to believe that market fundamentals are 

the most important factor in the current market. Uncertainty in a 

jittery, very tight global crude market regarding geopolitical uncertainty, refinery sabotage, and shutdowns, decreasing production by 

non-OPEC producers and increasing global demand, as well as devaluation of the U.S. dollar, are clearly having an impact on the 

assessment of crude oil market fundamentals. One may view such 

factors as contributing to uncertainty or risk premium to the usual 

analysis or typical analysis of supply and demand data. 

Mr. Chairman, while we may not be in total agreement on some 

of the issues discussed here today, we are in complete agreement 

that transparency is fundamental to a competitive marketplace. 

For 2 years, we have supported full transparency for U.S.-based energy contracts traded on foreign boards of trade and by controlling 

236 

speculators by instituting speculative limits on those foreign boards 

of trade. And finally, we remain fully supportive of further delineation of information from swaps dealers and funds in the CFTC 

large trader reports. 

Thank you, sir. 

[The prepared statement of Dr. Newsome follows:] 

STATEMENT OF JAMES NEWSOME, PH.D. 

•The Commodity Futures Modernization Act of 2000 significantly enhanced the 

competitiveness of U.S. markets by allowing them to adapt readily to changing market demand, and, for the most part, the value and success of the CFMA holds true 

today. 

• However, it was impossible to know then what we know now about how some 

markets would develop. 

• Complete transparency is fundamental for competitive markets. 

•The same level of transparency and position size controls present on regulated 

U.S. futures markets should be the standard for foreign markets offering products 

with U.S. delivery points and for OTC contracts that serve a price discovery function. 

• Additionally, a case has been made for disaggregation and delineation of positions held by swap dealers. This will provide important information to determine 

whether speculative position limits are being avoided by index funds and other institution investors and whether their activity is influencing market prices. 

• Many factors are contributing to high energy prices. NYMEX continues to believe that market fundamentals are a significant factor that must not be discounted 

in this debate. 

• Increasing margins to dampen speculative activity will not change the fundamentals and will inevitably drive business away from the highly regulated, transparent market. This will do more harm than good. 

TESTIMONY

Mr. Chairman and Members of the Committee, my name is Jim Newsome and I 

am the President and Chief Executive Officer of the New York Mercantile Exchange, Inc. (NYMEX or Exchange). NYMEX is the world’s largest forum for trading 

and clearing physical-commodity based futures contracts, including energy and metals products, and has been in the business for more than 135 years. NYMEX is a 

federally chartered marketplace, fully regulated by the Commodity Futures Trading 

Commission (CFTC or Commission) both as a ‘‘derivatives clearing organization’’ 

(DCO) and as a ‘‘designated contract market’’ (DCM), which is the highest and most 

comprehensive level of regulatory oversight to which a derivatives trading facility 

may be subject under current law and regulation. 

On behalf of the Exchange, its Board of Directors and shareholders, I want to express our appreciation to the Committee for holding this hearing and addressing the 

issue of ‘‘Energy Speculation: Is Greater Regulation Necessary to Stop Price Manipulation?’’ The ever increasing cost of energy touches all aspects of our daily lives 

and today is quite possibly the most important issue facing global and domestic 

economies as well as U.S. consumers. Highlighting the urgency of the matter, no 

fewer than seven bills have been introduced in the House and Senate over the last 

few weeks on this very topic. We applaud the Committee’s decision to thoroughly 

evaluate the many facets of this topic by inviting a diverse group of panelists who 

can provide a broad array of opinions to the discussion. 

BACKGROUND 

The Commodity Futures Modernization Act of 2000 (CFMA) was the premier legislative vehicle that transformed the regulation of derivatives markets in two important ways. The CFMA: 1) established flexible core principles to allow regulated exchanges to compete effectively with the growing over-the-counter (OTC) markets 

and foreign markets and; 2) provided legal certainty to financial and energy swaps. 

The CFMA, as anticipated, ushered in a period of phenomenal growth in the derivatives markets and has proven to be the gold standard of U.S. financial policy. As 

Acting Chairman and then Chairman of the CFTC from 2001–2004, I was involved 

in the implementation phase of this landmark piece of legislation. 

237 

The CFMA significantly enhanced the competitiveness of U.S. markets by allowing them to adapt readily to changing market demand, and, for the most part, the 

value and success of the CFMA holds true today. However, no one had a crystal ball 

back then and it was impossible to know then what we know now about how some 

markets would develop. In at least two instances, markets have developed differently than anyone could have anticipated at the time. 

First, an OTC natural gas contract began trading on an unregulated exempt commercial market (ECM) that mirrored the regulated exchange-traded natural gas futures contract and the two contracts became intricately linked. Over time, the volume on the ECM contract grew substantially, and an arbitrage market developed 

between the two markets. Ultimately, the OTC contract began to serve a price discovery function. Thus, ECMs began to function more like a traditional exchange and 

market participants easily moved positions from the regulated exchange to the ECM 

to avoid regulatory requirements such as position limits, a strategy that contributed 

to the collapse of Amaranth. This scenario was investigated by the Senate Permanent Committee on Investigations chaired by Senator Carl Levin. (NYMEX cooperated in this investigation.) Ultimately, this situation was addressed effectively in an 

amendment to the recently adopted Farm Bill. 

Second, non-U.S. exchanges (also referred to as foreign boards of trade (FBOT)), 

which were permitted by CFTC staff to offer their products to U.S. customers pursuant to CFTC no-action letters, began listing futures contracts with U.S. delivery 

points among their product slates. Historically, under the FBOT CFTC staff no-action process, such exchanges were permitted to offer direct electronic access to their 

markets to U.S. customers based on a determination by CFTC staff that the foreign 

regulatory regime governing the the FBOT was ‘‘comparable’’ to that of the CFTC. 

Essentially, there is a system of mutual recognition among regulators around the 

world as a means to facilitate access to global markets. This approach worked effectively up until a FBOT listed the look-alike of the NYMEX West Texas Intermediate 

(WTI) Crude Oil Futures contract without the level of transparency and market surveillance controls such as positions limits that are provided by U.S. markets under 

direct CFTC regulation. It was not anticipated that the no-action process would be 

used in this manner, which has effectively diminished the transparency to the CFTC 

of approximately one-third of the WTI crude oil market, and permitted an easy avenue to circumvent position limits designed to prevent excessive speculation. 

FOREIGN BOARDS OF TRADE AND TRANSPARENCY 

NYMEX has advocated for greater transparency of futures activity linked to U.S. 

exchanges occurring on markets regulated by foreign regulators for two years. Complete transparency to the CFTC should be a fundamental requirement for markets 

that are linked. In this connection, we have argued that FBOTs offering these 

linked products should be required by the CFTC to provide the same level and quality of data and at the same frequency that U.S. exchanges provide to the CFTC on 

a daily basis. 

In addition, we believe that no action letters for FBOTs offering contracts with 

U.S. delivery points should be conditioned to impose position limits and/or accountability levels. This would be a positive step and would provide an effective mechanism to restrict speculative activity in those markets. This is particularly important 

when the contract trading on the FBOT is the WTI crude oil contract, which is a 

benchmark for crude oil pricing, and which can have a substantial impact on U.S. 

consumers and the U.S, economy. Indeed, we would support the imposition of position limits even for listed contracts that are financially settled. We applaud the 

CFTC’s recently issued press release that advised that the CFTC is now imposing 

position limits on ICE Futures Europe as a condition of the no-action relief. 

In this regard, approximately one year ago, a new futures exchange, the Dubai 

Mercantile Exchange (DME), commenced operations in Dubai. NYMEX is a founder 

and has an ownership share in this venture and provides clearing services for the 

new exchange. The core or flagship crude oil futures contract is an Oman Sour 

Crude Oil futures contract. The DME initiative provides competition and greater 

transparency to crude oil trading in a critically important energy region. Although 

the DME does not yet list a WTI financial futures contract, the DME has received 

a no action letter from the CFTC staff for this contract and NYMEX received an 

amendment to its Clearing Order allowing our exchange to clear positions. The 

DME is currently finalizing a launch date for that contract. It is our understanding 

that, when a launch date is finalized on the DME WTI contract, DME will implement hard position limits that are comparable to NYMEX’s own limits on our WTI 

crude oil futures contract. Also, as part of the NYMEX Clearing Order, large trader 

reporting to both the CFTC and NYMEX is required. 

238 

In a more recent initiative, NYMEX has entered into an alliance with a Londonbased clearinghouse, LCH.Clearnet Limited (LCH), under which LCH will provide 

clearing services for two new product slates to be launched later this summer either 

by NYMEX or by a NYMEX affiliate. These new product slates are intended to provide greater competition to other energy trading facilities that are active in this energy space. One product slate, focusing upon natural gas and electricity contracts, 

will be listed by a division of NYMEX in the exempt commercial market tier. Applicable products in this category will comply fully with the requirements for significant price discovery contracts contained in the recently implemented CEA Reauthorization Farm Bill. The other product slate, focusing upon crude and crude products, 

will be listed for trading by a NYMEX affiliate based in London that will be regulated by the U.K. Financial Services Authority. While that affiliate will follow the 

path of other exchanges regulated by other regulators and will be applying for 

CFTC no-action relief, this affiliate will provide large trader reporting to the CFTC 

and also will impose hard position limits on any listed contracts with U.S. delivery 

points. 

SPECULATION 

Speculative activity on futures exchanges is managed by position limits. As stated 

in the CFTC’s rules, position limits and accountability levels are required ‘‘to diminish potential problems arising from excessively large speculative positions.’’ These 

limits effectively restrict the size of a position that market participants can carry 

at one time and are set at a level that greatly restricts the opportunity to engage 

in possible manipulative activity on NYMEX. For the NYMEX WTI crude oil contract, the position limit during the last three days of the expiring delivery month 

is 3000 contracts. Breaching the position limit can result in disciplinary action being 

taken by the Exchange. 

Many believe that speculators, particularly index funds and other large institutional investors in our markets are responsible for the high price of crude oil. However, data analysis conducted by our Research Department confirms that the percentage of open interest in NYMEX Crude Oil futures held by non-commercial participants relative to commercial participants actually decreased over the last year 

even at the same time that prices were increasing. In addition, non-commercials are 

relatively balanced between long (buy) and short (sell) open positions for NYMEX 

crude oil futures. Thus, non-commercial participants are not providing disproportionate pressure on the long ( buy) side of the crude oil futures market. We also 

reviewed the percentage of open interest in the NYMEX Crude Oil futures contract 

held by non-commercial longs and shorts relative to that held by commercial longs 

and shorts from 2006 to the present. Commercial longs and shorts consistently have 

comprised between 60 and 70% of all open interest. 

We have seen various representations made relative to participation by speculators in our markets that directly contradict our data. One such representation 

claims that 70% of our crude oil market is made up of speculators. That analysis 

incorrectly assumes that all swap dealers are non-commercials and that all of their 

customers who would be on the opposite side of any energy swaps that they might 

execute would also all be non-commercials. We know that this is simply not the 

case. However, this confusion clearly highlights the need for the CFTC large trader 

data to delineate for energy futures the degree of participation by non-commercials 

in the same manner that such data are now being delineated for agricultural contracts. 

NYMEX also maintains a program that allows for certain market participants to 

apply for targeted exemptions from the position limits in place on expiring contracts. 

However, such hedge exemptions are granted on a case-by-case basis following adequate demonstration of bona fide hedging activity involving the underlying physical 

cash commodity or involving related swap agreements. A company is not given an 

open-ended exemption, and the exemption does not allow unlimited positions. Instead, the extent of the hedge exemption is no more than what can be clearly documented in the company’s active exposure (as defined by the CFTC) to the risk of 

price changes in the applicable product. In a number of instances, hedge applications are either reduced in number or are denied because of staff’s overriding focus 

on maintaining the overall integrity of our markets. 

A vast amount of attention is focused on speculative activity and what, if any, influence speculators are having on current market prices and volatility. In order to 

determine accurately whether speculative activity is influencing the market, the 

data must be complete and accurate. Recently, a potential gap was identified in the 

large trader data compiled by the CFTC in its Commitment of Trader’s Report. SpeVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00244 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
239 

cifically, questions are being raised as to whether hedge exemptions for swap dealers are being used as a means of circumventing speculative position limits. 

At this time, due to the manner in which the data are reported, it is not clear 

whether this is true or not. In response to these queries, the CFTC announced its 

intent to develop a proposal that would routinely require more detailed information 

from index traders and swaps dealers in the futures markets, and to review whether 

classification of these types of traders can be improved for regulatory and reporting 

purposes. NYMEX believes that it will be useful to the development of thoughtful 

public policy for the CFTC to obtain more precise data so as to better assess the 

amount and impact of this type of trading in the markets. 

MARKET FUNDAMENTALS 

NYMEX strongly believes that greater transparency is needed and that data on 

participation of swap dealers and index funds must be improved in order to effectively monitor these markets and accurately assess what is or is not influencing the 

price. In addition, we continue to believe that market fundamentals are the most 

important factor in the current market. Currently, uncertainty in the global crude 

market regarding geopolitical issues, refinery shutdowns and increasing global demand, as well as devaluation of the U.S. dollar, are clearly having an impact on 

the assessment of market fundamentals. One may view such factors as contributing 

an uncertainty or risk premium to the usual analysis of supply and demand data. 

Indeed, such factors now may fairly be viewed as part of the new fundamentals of 

these commodities. 

Other demand and supply fundamentals in the oil markets are factors in high oil 

prices. For example, global demand is exceeding supply by one million barrels per 

day. As a result, a market with highly inelastic demand will need to equilibrate 

through a substantive rise in price. The upward pressure has been there and, according to these projections, will continue to be there. If the major oil companies 

truly believed that current levels are artificially high and do not properly reflect 

market fundamentals, one would expect them to sell in order to lock in the current 

high prices. Such selling of course then would have the effect of providing downward 

pressure on prices. However, such a response by the big oil companies has not been 

observed to date. 

MARGINS 

In futures markets, margins function as financial performance bonds and are employed to manage financial risk and to ensure financial integrity. A futures margin 

deposit has the economic function of ensuring the smooth and efficient functioning 

of futures markets and the financial integrity of transactions cleared by a futures 

clearinghouse. Margin levels are routinely adjusted in response to market volatility. 

Some have suggested that the answer to higher crude oil prices is to impose substantially greater margins on energy futures markets regulated by the CFTC. The 

theory is that higher margin levels will dampen speculative activity, and that less 

speculative liquidity will lower prices. 

We believe that this approach is misguided. As noted above, the appropriate tool 

for controlling speculation is position limits. In addition, adjusting margin levels significantly upward will not change the underlying market fundamentals. Furthermore, given the reality of global competition in energy derivatives, increasing crude 

oil margins on futures markets regulated by the CFTC inevitably will force trading 

volume away from regulated and transparent U.S. exchanges into the unlit corners 

of unregulated OTC venues and also onto less regulated and more opaque overseas 

markets. 

CONCLUSION 

Complete transparency is fundamental for competitive markets. The same level 

of transparency and position size controls present on regulated U.S. futures markets 

should be the standard for foreign markets offering products with U.S. delivery 

points and for OTC contracts that serve a price discovery function. Additionally, a 

case has been made for disaggregation and delineation of positions held by swap 

dealers. This will provide important information to determine whether speculative 

position limits are being avoided by index funds and other institution investors and 

whether their activity is influencing market prices. 

Many factors are contributing to high energy prices. NYMEX continues to believe 

that market fundamentals are a significant factor that must not be discounted in 

this debate. Increasing margins to dampen speculative activity will not change the 

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fundamentals and will inevitably drive business away from the highly regulated, 

transparent market. This will do more harm than good. 

I thank you for the opportunity to share the viewpoint of the New York Mercantile Exchange with you today. I will be happy to answer any questions that any 

Members of the Committee may have. 

Mr. STUPAK. Thank you, Dr. Newsome. 

Mr. Reid, would you care to make an opening statement please? 

STATEMENT OF SIR ROBERT REID, CHAIRMAN, ICE FUTURES 

EUROPE, INTERCONTINENTAL EXCHANGE, INC., ATLANTA, 

GEORGIA 

Mr. REID. Chairman, I am Sir Bob Reid, Chairman of ICE Futures Europe and the Intercontinental Exchange. I very much appreciate the opportunity to appear before your hearing today to 

provide our views on the issue of whether greater regulation is necessary to stop price manipulation. 

Our primary objective in ICE Futures Europe is to conduct an orderly market, which is clear rules and procedures, which is financially secure, which is transparent, presenting prices and transactions in a comprehensible way, and which is free from abuse. The 

achievement of this objective is by effective and intelligent supervision. Intimate knowledge of the participants and the business 

they are transacting is key. This positive approach that supervision 

has built the reputation of the Exchange and is an attraction for 

its participants. 

Let me stress there can be no substitute for active management. 

While we respect the limits set by the regulators, we do not see 

their observance as a substitute for continuous surveillance. There 

have been allegations recently that the regulatory system in London is lax. There has been a massive flow of market data from the 

Exchange to regulators in London and Washington since the 

launch of our WTI contract in early 2006. And the continuous 

interaction between our Exchange and regulators on both sides of 

the Atlantic reflect regulatory regimes which are active and alert 

and have a detailed conversance with our business. 

It’s important to note that as recently as last week the Director 

of Enforcement of the CFTC publicly stated that the commissioners 

see no evidence of manipulation in our markets. With that said, let 

me make it quite clear that we have and always will be receptive 

to the concerns of the regulators. This sets the background against 

which I shall address your question whether greater regulation is 

necessary to stop price manipulation. 

Let me first of all describe the participants in our market. The 

participants are similar to those in the United States market. 

Membership in the London Exchange involves full diligence, appropriate money laundering checks, and possession of all the necessary licenses. The commercial participants in our markets seek 

risk management and stabilizing of their future costs. The financial 

participants provide the liquidity necessary to make the market efficient. Together, these two sets of market participants bring their 

views about what the present and future, and let me stress the 

word ‘‘future,’’ what the future price of a commodity might be. 

There has been much negative comment about the role of the financial participants, characterizing them as speculators. This negVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00246 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
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ative comment is misplaced. Financial participants are a valuable 

source of liquidity to the market. This liquidity allows the commercial participants to hedge their energy costs more efficiently and 

stabilize their prices to the end consumer. Furthermore, studies 

have shown that financial participants are on both sides of the 

market and in many instances dampen price volatility, which can 

be helpful in times of rising prices. Without the ability to hedge, 

the commercial participants would have to factor the risk into their 

pricing to the end consumer, to the end consumer’s financial disadvantage. 

Returning to the question, the account information flows between 

regulators are robust, and we’ve agreed to improve them as market 

dynamics have changed and the domestic regulator has requested 

additional information on the imposition of a position accountability regime. However, it’s important to note that the outcome of 

these steps and many of the other suggested legislative steps under 

consideration are unlikely to change the market dynamics that are 

driving the price of oil. 

As the Chairman of the Exchange, my role is, however, confined 

to the operation of the mechanism which provides price discovery. 

Our discharging of this duty is as important to the consumer as it 

is to the oil producer. 

I thank you. 

[The prepared statement of Mr. Reid follows:] 

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Mr. STUPAK. Thank you, Mr. Reid. 

Professor Greenberger, your opening statement, please, sir. 

STATEMENT OF MICHAEL GREENBERGER, J.D., PROFESSOR 

OF LAW, DIRECTOR, CENTER FOR HEALTH AND HOMELAND 

SECURITY, UNIVERSITY OF MARYLAND, BALTIMORE, MARYLAND 

Mr. GREENBERGER. Good afternoon. I want to start by saying 

that section 8(a)(9) of the Commodity Exchange Act gives the Commission what has been called its most potent tool. It provides that 

whenever the Commission has reason to believe that an emergency 

exists, it may take such actions, including but not limited to, the 

setting of temporary emergency margin levels on any futures contract and the fixing of limits, speculation limits, that may apply to 

a market position. 

What is an emergency under the Commodity Exchange Act? It 

means in addition to threatened or actual market manipulations or 

corners, any act the United States or a foreign government takes 

affecting a commodity or any other major market disturbance 

which prevents the market, which prevents the market from accurately reflecting the forces of supply-demand. I think everything 

you heard this morning talks about a situation that is an emergency that the market does not accurately reflect the forces of supply-demand. 

Now you might well ask yourselves why, after a day like June 6th, when oil skyrocketed $11 in one day, there wasn’t an emergency with temporary margins and position limits set by the Commission. And the answer to that I think is quite simple. They have 

the information from Mr. Newsome. They don’t have the information from ICE, so they don’t know what is happening on ICE. 

Now, the Senate Permanent Investigating Subcommittee has 

shown in two different reports specific examples of ICE being used 

especially in the Amaranth case, to manipulate up the price in that 

case of natural gas. Now Mr. Barton has earlier this morning said, 

gee, we’re worried we’re going to have to have Mr. Reid, Sir Robert, 

who I believe lives in England, how can we get control over ICE? 

Do we have to have a regulation in London and a regulation in the 

United States? 

Let’s remember who ICE is. It is very nice that Sir Robert is here 

today. Usually Mr. Jeffrey Sprecher or Mr. Vice from Atlanta, 

Georgia comes to testify before this and other committees. I’m sure 

it’s nice to have Sir Robert here today waving the British flag. ICE 

is headquartered in Atlanta. Its trading engines are in Chicago. It’s 

trading 30 percent of the West Texas Intermediate benchmark 

crude oil contract on United States terminals located in the United 

States and denominated in United States dollars. 

Now it is true that the International Petroleum Exchange, when 

I was at the CFTC, came to us as a London corporation with London crude oil contracts, trading on a London floor, and asked for 

permission not to register as a full designated contract market because they were truly a foreign entity. And I wrote the template 

of the letter that approved that. I’m sorry that I did. But our thesis 

was that it was truly a British corporation. We never envisioned 

that the International Petroleum Exchange would be bought by the 

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Atlanta Intercontinental Exchange, which, by the way, people said 

who are the founders? The founders are Goldman Sachs, Morgan 

Stanley, British Petroleum and the Flour Corporation. They founded this exchange to be competitive to Mr. Newsome, Dr. Newsome, 

as a fully regulated exchange operating outside of United States’ 

regulation. 

Now the question for this Congress is, can an Atlanta corporation, a headquartered Atlanta corporation, I believe Sir Robert’s 

bosses, trading engines in Chicago, trading 30 percent of our contract, in U.S. denominated dollars, do we have the authority, 

should we be calling them a foreign corporation? They’re not a foreign corporation. It’s a United States’ corporation by any measure. 

And so when we ask the question, gee, will this go off to England, 

this trading? That means will it go off to the Chicago trading engine, not to England. 

You have been told there are two major markets. One is Sir Robert’s, whose headquarters is in Atlanta and trading engine is in 

Chicago trading our contract, and the other is Mr. Newsome. This 

is a United States’ market. It makes sense that it’s a United States 

market. We’re dealing with West Texas Intermediate petroleum delivered in Cushing, Oklahoma. 

Now Mr. Lukken has proudly announced that after negotiations 

with the Financial Services Authority, by the way, who has two supervisors for these markets, and if you look at it worldwide, it’s 50 

percent of the futures contracts in the world, two supervisors, they 

have never brought an enforcement action in the energy futures 

markets since they came into existence in 1997. 

Mr. Lukken has negotiated with the British to regulate what is 

happening here in the United States, and he has gotten limited 

conditions. He is going to get some speculation limits. He is going 

to get some identification. But he isn’t going to have the power 

under section 8, 9 to go to the floor or the headquarters of the 

Intercontinental Exchange when that market does no longer accurately reflect the forces of supply-demand. 

Now if the first panel and the second panel proved anything I believe it is that these markets no longer represent supply-demand 

and I want to emphasize, I agree, supply-demand is a problem. I 

don’t want to be misunderstood. Supply-demand is a problem. But 

what we’ve heard today is there is a speculative premium. 

Mr. Stupak has introduced this legislation. This legislation effectively takes us back to December 19, 2000, before the Commodity 

Futures Modernization Act was passed. There is not a provision in 

that bill that wasn’t the law in 1999. We weren’t hearing about 

skyrocketing oil prices in 1999. In fact, before Mr. Newsome went 

to NYMEX, I visited NYMEX, and the traders were sitting reading 

newspapers on the floor. Why? Oil was $15 a barrel. Straight on. 

No volatility. Each of the things that was talked about today could 

be taken care of by Mr. Lukken this week. He doesn’t need legislation and I can tell you why. If he needs legislation, there are two 

parallel bills circulating around. One is the appearance of regulation without really providing it, and there are bills in accordance 

with Chairman Stupak’s thing that provide real regulation. You 

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hole. Please don’t take legislation that doesn’t fix this problem. I 

will be happy to answer questions. 

[The prepared statement of Mr. Greenberger follows:] 

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Mr. STUPAK. Thank you and thank you to each of you for your 

testimony. 

Mr. Newsome, in your testimony you said that there is no evidence that increased speculation is impacting oil prices. You cite 

NYMEX research department analysis that, quote, ‘‘noncommercial 

speculative positions in oil futures are declining relative to commercial future holdings.’’ From that you conclude that speculative 

interest is not causing prices to increase. But isn’t it the case that 

your analysis excludes trading of the West Texas intermediate 

crude oil, futures oil on ICE futures in Europe, which adds additional 30 percent trading volume on top of NYMEX? 

Dr. NEWSOME. That’s true, Mr. Chairman, and my comments in 

the testimony reflect only the information that we see and that we 

collect on the New York Mercantile Exchange. Obviously the information at ICE and the over-the-counter markets is not a component of that. 

Mr. STUPAK. So it’s also the case that comparing commercial 

versus noncommercial open interest is largely a worthless exercise, 

isn’t it? 

Dr. NEWSOME. No, I wouldn’t say it’s worthless. Certainly we are 

in agreement that it can be made better. I think the index funds, 

the activity, the swaps dealers is a relatively new scenario. Certainly as soon as we became familiar with that we immediately 

supported the CFTC, further delineating that information so that 

we could see exactly what the customers were doing behind the 

swaps dealers. 

Mr. STUPAK. So speculative interest is, when you look at swaps 

and when you look at the speculative positions in the commodity 

index, investments certainly are causing increase in oil prices, are 

they not? 

Dr. NEWSOME. No, sir, I would not agree with that. Certainly 

there are more speculators in the market. But if you look at how 

the market operates, and there are two things I would bring up, 

one is that because of the very nature that they are speculators, 

they cannot make or take delivery of the contract and they will always trade out of that contract prior to expiration. So they’re not 

even in the market at expiration when the key pricing figure is developed. 

Mr. STUPAK. And because they never take delivery and they roll 

that contract over, every time they roll it over don’t they set a new 

floor price? 

Dr. NEWSOME. But by the nature of a roll, a roll by definition is 

selling the front month and then turn around and buying a back 

month. So my point is because they are speculators, if you believe 

that they have the ability to drive the price higher when they’re 

buying, why does it not drive it lower when they’re selling, which 

they have to sell every month? 

Mr. STUPAK. Because every time you roll, and every time you buy 

every month or when they sell, they come in at a higher price than 

what they sold at, do they not? Especially with all the extra 

money? If you go back to the chart that Mr. Lukken had up, where 

he said it was basically flat, you saw the price continue to increase. 

So every time you roll one of those over, there is a new floor that 

is being created. You add that large investment of money called the 

284 

pension funds and others who are bringing money in which is driving up the price. 

Dr. NEWSOME. Again, you know by the very nature of the roll 

they have to sell. And there is no question and no one is arguing 

that prices are not going higher. It’s just the fundamental reason 

why prices are going higher, and the fact that the speculators have 

to sell each month before expiration in no way is driving the market lower. And therefore it’s hard for me to believe that on the flip 

that they are driving the market higher. 

Mr. STUPAK. Let me ask you this. How do you define excessive 

speculation? 

Dr. NEWSOME. Well, I think we take steps to make sure that we 

do not have excessive speculation at NYMEX. One of the comments 

that has been thrown around today is that there are no position 

limits. We’ve absolutely hard position limits on all of our contracts 

with the New York Mercantile Exchange. Those are hard limits. 

Mr. STUPAK. What are those hard limits? 

Dr. NEWSOME. 3,000 contracts for the last 3 trading days. 

Mr. STUPAK. So what is the limit on ICE? 

Dr. NEWSOME. There are no limits. 

Mr. STUPAK. There are none? 

Dr. NEWSOME. Yes, sir. 

Mr. STUPAK. All right. So, and Mr. Lukken said you can have a 

limit with you and you can go and have a limit with London futures so you don’t take the aggregate, you just take individuals, 

right? 

Dr. NEWSOME. And we have experienced that in our markets, 

speculators who bumped up against position limits who we required to stop trading. 

Mr. STUPAK. Then they go to ICE like Amaranth did? 

Dr. NEWSOME. Yes, exactly. 

Mr. STUPAK. Should swap dealers trading standardized contracts 

in order to counter markets for energy which can affect prices in 

the futures market directly or indirectly be subject to disclosure requirements and oversight by the CFTC? 

Dr. NEWSOME. Certainly the price discovery mechanism is one 

that I think is near and dear to the marketplace and to the extent 

that an OTC contract becomes large enough and linked to a contract and therefore has an influence on price discovery, without 

question it should be regulated. 

Mr. STUPAK. Would NYMEX support a requirement that such 

trades be cleared through an exchange as a way to provide transparency and ensure accountability? 

Dr. NEWSOME. I mean we do have a very big component of our 

business that is clearing over-the-counter trades. The way we currently do that, we make that fully transparent to the CFTC and 

those trades become aggregated as part of our position limits as 

well. 

Mr. STUPAK. OK, you’re regulated by CFTC? 

Dr. NEWSOME. Yes, sir. 

Mr. STUPAK. We’ve been here now for about 6 hours, we’re probably going to be here for another hour. Why wouldn’t we just apply 

all the trades that are going to ICE the same regulatory scheme 

285 

that NYMEX has? Would not this problem go away with excessive 

speculation that we’re alleging? Wouldn’t that be a way to do it? 

Dr. NEWSOME. And we have been advocating that for the last 2 

years. 

Mr. STUPAK. Sir Robert Reid, would you like to comment on that? 

Why wouldn’t you just, since you’re a foreign exchange by name 

only—you have your offices in Atlanta, Chicago, the trades are 

here, it’s on West Texas Intermediate crude. Other than name, 

you’re a U.S. company. So why wouldn’t you just be subject to the 

same regulations as NYMEX? 

Mr. REID. We need to correct a few things first. First of all, we 

were founded in 1981 and we operate under the regulation of the 

Financial Services Authority. 

Mr. STUPAK. In London. 

Mr. REID. And many comments have been made about the laxity 

of that. All I can say is if that is lax regulation, I never want to 

see hard regulation. 

The second thing is we have been to the CFTC. I have personally 

been in Washington across, around a panel like this, being asked 

questions. All our information is available to the CFTC if they 

want it. 

Now as far as limits are concerned, as I said in my introductory 

remarks, this is all about supervision and knowing your market. 

We know the positions of each of the people on our markets. And 

if they look unusual or if they look as if they’re growing and we 

don’t understand it, then we call them in and we ask the questions. 

We can ask them to reduce or we can ask them to close them down. 

This is what I would call effective management, effective supervision. 

Mr. STUPAK. But in all honesty, the FSA, you don’t require position limits, right? NYMEX has hard limits. You don’t require position limits? 

Mr.REID. We set our own limits. 

Mr. STUPAK. You set your own. 

Mr. REID. Yes. We look at what people have done and if we feel 

a small player has got beyond and may not be up to the sort of limits that NYMEX is talking about, we do something about it. 

Mr. STUPAK. On the Amaranth case then when NYMEX said to 

Amaranth, you’re getting too big, you can’t be here, you’re holding 

too much of the futures, they went to yours and to ICE and actually got bigger, and then they went bankrupt to the tune of about 

eight point something billion dollars. So where was the accountability? Where were the position limits there? 

Mr. REID. I have no difficulty. If limits are wanted, limits can be 

provided. As I said to you in my opening remarks, limits must not 

be used as a crutch to avoid you doing the effective supervision of 

the market. You can’t fall asleep under the governance of limits. 

You run the market as an effective supervisor. 

Now if I can just say a little bit more. 

Mr. STUPAK. Just a minute, my time is up. 

Mr. REID. It’s quite ample, your description of ICE. ICE acquired 

the Petroleum Exchange. And they acquired it simply because the 

Petroleum Exchange would not have continued to exist if it didn’t 

have an electronic solution. ICE provided that electronic solution, 

286 

and that’s what made the Petroleum Exchange as successful as it 

is today. And that is the reason that it has 24 percent of the WTI 

market because NYMEX did not have an electronic system at the 

time and we were able to attract people because of the electronic 

nature of our system. I don’t see why we should be criticized and 

penalized because in fact we’re ahead of the electronic revolution. 

Mr. STUPAK. No one is saying to penalize you or say you 

shouldn’t play by the same rules. Didn’t ICE buy NYBOT, New 

York Board of Trade? 

Mr. REID. Yes. 

Mr. STUPAK. So there is no U.S. company of BOT. So aren’t you 

really a U.S. company doing business in the United States with 

most of your research work done? 

Mr. REID. Well, our board for our exchange in London got independent directors that are directly responsible to the FSA. It is not, 

as it were, as people describe it as a dark pawn. In fact it’s a very 

open, clear pawn. 

Mr. STUPAK. Maybe your board is not, but the contracts you’re 

trading certainly affect the U.S. markets, U.S. prices, U.S. economy, therefore why should you not be subject to the CFTC regulation like NYMEX? 

Mr. REID. The CFTC has as much information as they want. The 

exchange of information in discussion with the CFTC is expensive. 

There’s no question that they have anything we want. I made that 

clear when I came to Washington in 2006. 

Mr. STUPAK. And my time has expired. Mr. Barton for questions, 

please. 

Mr. BARTON. Thank you, Mr. Chairman. I’m not used to being in 

the center. I’m used to being down there on the end. But if I’m 

going to be in the center, I want to move one more chair to the 

right. I want to start out. 

Mr. STUPAK. I’ll put you on ICE. 

Mr. BARTON. I want to start out by complimenting Sir Robert for 

testifying. In the 22 years that I have been on this subcommittee 

and the full committee I don’t believe we’ve had many foreign-born 

nationals testify at all. Most of them use that as a reason not to 

testify. So I want to compliment you for being here, and I can also 

tell you in the 22 years in the Oversight Subcommittee where we 

take testimony under oath, you’re the first person who ever refused 

to raise their right hand by saying you didn’t have one. 

Mr. REID. That is because I was next to Mr. Greenberger. 

Mr. BARTON. You’re doubly complimented. Now having said that, 

I want to start with Professor Greenberger. Is the ICE exchange 

that is physically based in Atlanta but is owned by the London 

agency, the London firm, is that a U.S. company or a British-based 

company? And who regulates it? 

Mr. GREENBERGER. Mr. Barton, it’s just the reverse of that. The 

Atlanta company owns the British office that Sir Robert comes 

under. 

Mr. BARTON. I was only 180 degrees off. 

Mr. GREENBERGER. There is a lot of confusion here, and I think 

it should be straightened out. So it’s run and headquartered in Atlanta, Georgia. It was founded by Morgan, Goldman and British 

Petroleum. Now it has gone public. They still own stock in it, but 

287 

it has gone public. The trading engine was brought, the mechanisms were brought, as the CFTC letter just the other day made 

clear, brought from London into the United States. In January 

2006, I’m sure much to Dr. Newsome’s surprise, they suddenly announced they are going to start selling U.S. West Texas delivered 

product. 

Mr. BARTON. Before you go further, the company, the exchange 

in Atlanta, who has regulatory authority, not information-receiving 

authority, but pure regulatory authority, is it the CFTC or is it the 

British equivalent of the CFTC? 

Mr. GREENBERGER. The CFTC allowed the British equivalent to 

have authority over U.S. trading terminals trading our contracts. 

Mr. BARTON. So in absolute bottom line, the exchange that is located in Atlanta selling West Texas, or trading, posting West Texas 

Intermediate, the CFTC does not have the same regulatory authority as they do over the NYMEX? 

Mr. GREENBERGER. They don’t. And I might just add, Mr. Barton, 

that they could if they wanted to because I drafted the template. 

They could terminate that status, and they threatened to terminate 

that status tomorrow, and this would be a U.S.-regulated exchange. 

Mr. BARTON. My question to Sir Robert, if the Congress directed 

or if the CFTC so chose under their existing charter to extend direct regulatory authority to the ICE exchange under the same 

terms and conditions as they currently do to the NYMEX, would 

your position or your company’s position be to accept it or to fight 

it? 

Mr. REID. As far as I’m concerned, when we discussed this with 

the CFTC in 2006 and the FSA were present, it was agreed that 

the regulatory system and regulatory information that was required by the CFTC would be provided for by ICE—— 

Mr. BARTON. That is all well and good, but that is not an answer 

to my question. 

Mr. REID. As far as we’re concerned, as it stands now, the FSA 

is our regulator. We operate in the City of London. 

Mr. BARTON. I understand that. But you’re not answering my 

question. 

Mr. REID. What was your question then? 

Mr. BARTON. You’re pretty good at this. I think you have testified 

before some parliamentary—— 

Mr. REID. If you don’t ask some questions, you won’t get any answers. 

Mr. BARTON. My question is you’re not regulated, ICE exchange 

is not regulated under U.S. statutes like NYMEX is. If we so chose 

by act of Congress or if the CFTC thinks they have the authority, 

like Professor Greenberger says, and wants to extend it by regulation, by administrative act, would ICE accept it or fight it? It’s 

pretty straightforward. 

Mr. REID. It’s not a straightforward question because it’s a matter of international politics. 

Mr. BARTON. I’m not asking about international politics—— 

Mr. REID. This is a matter in which I will need to take advice. 

Mr. BARTON. You’re going to fight it. I’m going to assume the default position, if it is not yes, is no. 

288 

Mr. REID. No. The answer is not a yes or no. The answer is the 

decision will be taken when the question is asked. 

Mr. BARTON. It’s an important question because we in the United 

States Congress and those agencies which we control by statute 

can enforce any law that we put on the books. If a foreign company, agency, individual, chooses to voluntarily cooperate with 

those rules and regulations, well and good. But if you take the position that you’re not subject to the regulations and choose not to voluntarily comply, it’s a very complex question how we enforce that. 

And if the end result is to set up, and each of you gentlemen with 

NYMEX and ICE, you’re in business to make money. You’re in 

business to gain market share. You’re in business, you want to provide all these great market transparency and price discovery and 

all that, but bottom line if nobody buys your contract, you go out 

of business and nobody takes your contract. So, if we do something 

that raises margins and has hard, hard rules against exemptions 

and all these things that increase transparency and try to dampen 

the pure so-called excessive speculation, whatever that is, a person 

who would tend to work on the NYMEX is going to say, aha, 

there’s another market here, we will just go over there. Now it has 

already been shown, as our subcommittee chairman has pointed 

out, in the natural gas market that happened. And the response 

was, we set our own regulation. We set our own limits based on 

a gentlemanly conversation between what we think is good for the 

client. That is not the same as a hard limit. 

Now, I may look dumb, and sometimes I actually say and do 

dumb things. But I understand competitive markets, and I understand that the reason ICE exists is to make money for whoever 

runs it and secondarily to provide competition for who dominated 

the market before, which is NYMEX. 

Now we wouldn’t be having this conversation if oil was at $15 

a barrel. You know, we’re having it because when we go home, people come up, if they see me gassing my car up, they say you’re Congressman Barton, which is not really, because it says U.S. House 

6 and a Barton bumper sticker on my car, what are you going to 

do about high gasoline prices? And one of the things that we can 

do is do something to dampen the speculative price impact in the 

market. So it’s very important whether your exchange—which I’m 

all for having two exchanges so that we give people a competitive 

option, but we’ve got to get you to play by the same rules. If you 

don’t play by the same rules, whichever exchange has the least 

stringent rules is going to get all the business. That is just pure 

common sense. 

So it’s important, my question. I will give you one more chance. 

You fight it or you welcome it? Or not welcome it, but accept it? 

Mr. REID. This is my last chance, is it? 

Mr. BARTON. Almost. I have one more question. Probably. I’m 

over 2 minutes. 

Mr. REID. Well, obviously in a situation of which if you want to 

do something regarding margins or you want to do something 

about the category of people who trade on these exchanges and 

change the structure of the Exchange, then obviously the regulators on both sides of the Atlantic are going to have to discuss how 

this is going to be interpreted. I don’t think you would expect me 

289 

to concede now that anything that you may decide to do, for example, on margins that we would necessarily agree with, right? 

Mr. BARTON. No, I don’t expect you to agree. 

Mr. REID. So what I’m saying is—— 

Mr. BARTON. It would be nice if you did, but I don’t expect you 

to. 

Mr. REID. Let’s hear what you want to do and then we will see 

from our point of view in the U.K. What we think would be a sensible thing to do. After all this is really about a global corporation. 

The relationship between the CFTC and the FSA is extremely 

close. 

Mr. BARTON. And I think it’s very fortunate that the exchange 

you’re talking about—— 

Mr. REID. I’m 100 percent behind—— 

Mr. BARTON [continuing]. Is based in London as opposed to in 

Moscow. I think that is a good thing that we have a London-based 

situation as opposed—— 

Mr. REID. We’re not so happy with Moscow at the moment. 

Mr. BARTON. But you have a history in your country of markets 

and regulation and the British system of trading has been around 

for 4 or 500 years. 

My last question, Mr. Chairman, is we’ve heard from all the 

other panelists what they think the speculative price is. We’ve 

heard some people say half the current price, which would be close 

to $70. What do you three gentlemen think if we did some of the 

things that we’re talking about doing, if we took Dr. Masters’ proposal, we increased margin, we set strong position limits, we limited the ability to get exemptions, we had more price transparency, 

how much would that impact the price? In other words, what do 

you think the speculative bubble is? Dr. Newsome? 

Dr. NEWSOME. I think it would have very little impact. 

Mr. BARTON. If you don’t change the underlying market fundamentals, it’s not going to do any good? 

Mr. NEWSOME. Correct. 

Mr. BARTON. Sir Robert? 

Mr. REID. Can I just take a few minutes on this? 

Mr. BARTON. It’s up to the chairman. 

Mr. REID. I was in Lagos in 1974 at the time of the first OPEC 

breakthrough, and they went to auction. They went to auction, and 

the oil price was down about $12. They went to auction, and the 

highest price bid was $42. People couldn’t believe that. They multiplied it by almost 4 times. The oil was never lifted, but that is 

what it was. Six years later, coming on through 1974 on to 1980 

when Khomeini actually took over power in Iran, that was a different thing. What happened there was he subtracted 3 million 

barrels a day out of the supply side. That set the whole world in 

a spin. Now if you remember here, you actually rationed your airplanes as to how they could fly. In fact you have a situation in 

which airplanes were tankering oil out of the Caribbean and moving it back into U.S. so as you could complete your domestic flights. 

I believe what you’re seeing now is a genuine concern that the oil 

is not going to be forthcoming irrespective of the price. 

If you take Nigeria, which I know well, if you take Nigeria, 

you’re looking at a situation in the delta and the swamps where 

290 

basically they cut out 230,000 barrels a day 5 days ago, they cut 

out another 200,000 barrels a day yesterday. The whole situation 

is very difficult. I think the market senses that this is a very, very 

uncertain period at this time, and I think that is where your speculation is coming from. That will change in time. 

Mr. BARTON. Thank you. 

Mr. GREENBERGER. I agree with what was said in the first panel 

this morning and I agree with that because I was a regulator in 

these markets and I know what happens when there is no police 

on the beat. It’s just not a matter of throwing money at the thing, 

throwing billions and billions of dollars, which is the, quote, excessive speculation. If you don’t have regulators looking at these markets with care, people engage in prearranged trades, running 

ahead. If you go to Mr. Newsome’s website he has his own market 

surveillance committee and they list all the things they look for in 

their markets. And these markets are not only free of police for 

purposes of throwing money excessively, but I’m very confident 

that if a thorough investigation were done we would find the kind 

of malpractices. 

And the final point I would say about this, if we keep pussy footing about this, we’ve got an investigation. It will come in September 15. We’ll have an interagency task force. We will negotiate 

with the United Kingdom. We don’t think there is speculation even 

before we ended the investigation. That is a signal to these traders. 

And these traders are low down, they’re the wild, wild west, which 

I’m sure being from Texas you would understand. And when they 

hear that the CFTC doesn’t think there’s speculation, they’re 

breathing a sigh of relief. The way these guys will get hit is with 

a two-by-four. 

And I might add, a guy who used the two-by-four was Sam 

Graves of Missouri in December of 2005. He walked to the floor of 

the House of Representatives and added on the floor a floor amendment to the CEA Reauthorization Act. The price of natural gas was 

$14 per million BTU. It was at an all-time record high. And he said 

I want transparency and the House adopted that legislation in natural gas. It never ultimately passed, but within 6 weeks the price 

of natural gas dropped to $9. If you threaten serious, tough business, you will drive this price down because right now, these traders are acting in the dark. And it’s not just throwing money at 

problems. There are the classic manipulations that led the farmer 

to get the Commodity Exchange Act passed to begin with. The 

farmers, as Chairman Dingell said, were getting hosed by the fast 

talking guys in Chicago. I have a quote in my testimony from 1892 

of a wheat farmer in the Farm Belt saying I look out at my field 

and I don’t own it. The guys in Chicago own it because they determine the price I sell my wheat at. 

Mr. BARTON. Thank you. Thank you, Mr. Chairman, for your 

courtesy. 

Mr. STUPAK. Mr. Dingell for questions. 

Mr. DINGELL. Thank you, Mr. Chairman. Professor Greenberger, 

what would be the price if we were to get transparency and what 

would be the price if we were to get rid of all this speculation in 

the marketplace with regard to a barrel of crude? 

291 

Mr. GREENBERGER. I’m in agreement with the experts who were 

in the first panel that it would go down between—somewhere between 25 and 50 percent. 

Mr. DINGELL. How much? 

Mr. GREENBERGER. 25 and 50 percent. 

Mr. DINGELL. Now you said something in your testimony earlier. 

You said that the CFTC could end excess speculation, and they 

could do it without new legislation. What would be required for 

them to bring this about? 

Mr. GREENBERGER. If Mr. Lukken would agree, as he has threatened to do in his most recent letter to the FSA, to terminate this 

phony foreign board of trade for a U.S. company and require—and 

I would require it within 30 days—that the London board, that the 

Intercontinental Exchange register as a designated contract market, that would drive the speculators because then they would be 

under speculation limits and Mr. Lukken could oversee the margins. And in fact he could use his emergency authority. And when 

the oil price spikes $11 in one day, he can go to ICE, he can go 

to NYMEX, takes names, kick ankle, and drive those prices down. 

Right now, a lot of traders, from Goldman Sachs and Morgan Stanley on down, may very well believe that nobody is watching them. 

My experience is once they know that someone is looking over their 

shoulder, the funny business stops. 

Mr. DINGELL. Appears to me maybe they’re right. I don’t think 

anybody is watching them. 

Mr. GREENBERGER. I worry that that is the case. And by the way, 

the swaps dealer problem, that was not a problem before the 

CFMA was passed. Let me be clear about that. There were swaps 

dealers out there, but they were operating in what they called legal 

uncertainty because the swaps dealers were trading futures contracts illegally off exchange. The CFMA made all of that legal. And 

if we just said, as Chairman Stupak has said, Congressman Van 

Hollen, DeRosa, many Members in the Senate, all energy futures 

must be traded on a regulated contract market like Mr. Newsome’s. 

Then all of this stuff, the index funds, everything, would have to 

be in a transparent market. By the way, I would add—— 

Mr. DINGELL. How do we make them be transparent? 

Mr. GREENBERGER. By bringing all—by doing what Chairman 

Stupak has recommended in his bill, energy futures must be traded 

on a regulated exchange. No Goldman Sachs index funds, no foreign board of trades. Everything would have to go through a transparent exchange, overseen by the CFTC, not just for position limits 

and spec limits, but for wash trades, prearranged trades, emergency authority could be used, they would self-police themselves. 

On December 19, 2000, that was the way these markets operated. 

Everybody had to be in an exchange. We freed that. We freed that. 

Now maybe people didn’t understand what they were doing at the 

time, but we now know it. 

Now when we hear that we, quote, closed the Enron loophole, as 

Mr. Lukken explained, he now has to go contract by contract to 

prove that a contract should be regulated. The old system was 

every contract was regulated, not having to prove it contract by 

contract. And then Mr. Lukken informed Congress after they 

passed the Enron loophole, by the way this doesn’t apply to crude 

292 

oil, because crude oil is being traded in a foreign board of trade. 

So no petroleum products are covered by the, quote, end the Enron 

loophole. 

Chairman Stupak has a very reasonable proposal that he has put 

forward that just takes us to the status quo of where we were on 

December 19, 2000. And by the way, Chairman Greenspan, Secretary Summers, Chairman Levitt of the SEC, all told Congress, 

don’t deregulate nonfinancial futures contracts. They’re too easily 

manipulated. It wasn’t unexpected that this was going to happen. 

They predicted it. 

Mr. DINGELL. Mr. Professor, how do you define excessive speculation? 

Mr. GREENBERGER. Excessive speculation to my mind is that 

speculation which exceeds speculation limits properly set and properly enforced. And I don’t want to belabor this point, with all respect for Dr. Newsome, and I have a great deal of respect for him, 

I don’t think the spec limits on NYMEX are adequate. 

Mr. DINGELL. Where 71 percent of the oil that is moved is moved 

through contracts but not through pipelines, that would be excessive, would it not? 

Mr. GREENBERGER. Absolutely. And you see the figures, I forget 

what the first figure was, 2000? 

Mr. STUPAK. Number 2. 

Mr. GREENBERGER. Look at what the figures were. It was 37 percent speculation. The rest, 63 percent, commercial. Once these markets were deregulated it flipped to 71 percent, 29. 

Mr. DINGELL. Can you identify the key loopholes in the Commodity Exchange Act which you think need to be closed? 

Mr. GREENBERGER. Yes. The Enron loophole needs to be completely closed. The farm bill was a good start. But it does not completely close. It doesn’t even apply to petroleum products. Foreign 

boards of trade who come into the United States with U.S. terminals selling U.S. delivered products should register with the CFTC. 

We heard something about you can’t regulate foreign board of 

trades. I deal with that exclusively and substantially in my testimony. You most certainly can. And Mr. Lukken threatened the ICE 

exchange if they don’t comply with his conditions, he is going to 

make them register. They should register. 

The final thing is the swaps dealer loophole. The swaps loophole, 

that is energy contracts traded off exchange. If you put—ended the 

Enron loophole, the Goldman Sachs, Morgan Stanley would have to 

Mr. Newsome’s shop and have their index funds or become an exchange themselves. We freed that. We are the enemy. 

Mr. DINGELL. Professor, my time is running out. I have to get to 

another question. If you please, Mr. Newsome, why—and Sir Robert—please inform us why the two of you should be treated differently under the laws of different countries? Why should you not 

be treated exactly alike for your actions which are in the United 

States and which affect U.S. Markets? 

Dr. NEWSOME. Mr. Dingell, when, under—ICE operating under 

the no action letters listing their own contracts, giving access to 

U.S. customers, we were fine under that scenario and the fact that 

we didn’t have exacting regulatory regimes. However, when they 

started listing U.S. delivered contracts, the WTI in particular, then 

293 

at that point we said that is not what the no action letters were 

intended to do, and we believe there should be the same regulatory 

regime. 

Mr. DINGELL. Why shouldn’t you be treated exactly the same? 

Dr. NEWSOME. We think you should be if you’re trading the same 

product. 

Mr. DINGELL. Sir Robert, why shouldn’t you be treated exactly 

the same? 

Mr. REID. What we have said is we will do whatever the CFTC 

wants you to do. 

Mr. DINGELL. Would you do that? 

Mr. REID. We, in fact, agreed to position limits. We have no difficulty with that. 

Mr. DINGELL. I want to make sure I heard you straight. You said 

you would do whatever the CFTC says—— 

Mr. REID. Yes. They’ve asked us for more information. We’ve 

given them more information. They’ve asked us to do the position 

limits, we have done the position limits. 

What I find hard to see is what more we need to do. I’m amazed 

at this level of suspicion created by Professor Greenberger that 

thinks we operate a casino, which we don’t. 

Mr. DINGELL. This is a fine answer. But it is not to the question. 

Why should you be treated any differently than NYMEX? And on 

top of that, the next question was, if CFTC told you to do something would you do it? 

Mr. REID. Yes. Why am I treated differently? I am treated differently. I’m treated twice. I’m treated by FSA and I’m treated by 

the CFTC. I get it two times. He only gets it once. 

Mr. DINGELL. Professor Greenberger, why should they be treated 

differently? 

Mr. GREENBERGER. They shouldn’t be treated differently. It’s essentially a United States entity, but even if it wasn’t, if they have 

U.S. trading terminals trading U.S.-delivered product and they’re 

in the United States they’re subject to our jurisdiction. And by the 

way, Mr. Newsome is a very, very bright, skillful executive. He has 

articulated in his testimony well, If you’re going to let this ruse go 

on, I’m going to London, I’m opening a London exchange, I’m going 

to get certified by the FSA. Then I’m going to get a no action letter 

to put my London terminals into the United States, and I will be 

regulated by the FSA instead of the CFTC. We’ve already let Dubai 

in on those terms. 

Mr. DINGELL. Out of curiosity. What would be the attitude of the 

American people if we were to find out that something was set up 

in Dubai which was going to do the same thing, or what would be 

the attitude of our people if something was to be set up in Moscow 

or in Jeddah or in Riyadh? 

Mr. GREENBERGER. Chairman Dingell, Dubai has already gotten 

permission to bring their terminals in the United States and to sell 

West Texas Intermediate to be regulated by the Dubai Financial 

Services Authority. That is the law under Chairman Lukken right 

now. 

Mr. DINGELL. So they have already gotten permission. 

Mr. GREENBERGER. Yes. They haven’t started trading but they 

have permission to trade. 

294 

Mr. DINGELL. I had heard this, and that is why I asked the question. 

Mr. GREENBERGER. So you will have to go back, such as Mr. Barton, when you’re stopped at gas stations and when they say to you, 

hey, we have to do something about this, you can say well, I have 

every confidence, Chairman Lukken has assured me, that the 

Dubai Financial Services Authority has comparable regulation to 

us. That is laughable. You’re laughing. It is laughable. But that is 

where we are right now. 

Mr. DINGELL. Occasionally I laugh when I hurt. 

Mr. Chairman, I have used more time than I’m entitled to. 

Thank you for your courtesy. 

Mr. STUPAK. Thank you, Mr. Chairman. Mr. Burgess for questions please. 

Mr. BURGESS. Thank you, Mr. Chairman. Dr. Newsome, if I could 

ask you, just following up the chairman’s line of questioning, does 

the CFTC have any authority over Dubai if they see bad things 

happening on their selling look-alike West Texas Intermediate contracts? 

Dr. NEWSOME. The CFTC has a much larger hook into the activities in Dubai than they currently do with ICE, primarily because 

NYMEX is one of the founding members of the Dubai Mercantile 

Exchange, the Oman contract is cleared by NYMEX in New York, 

and there is a clearing order with lots of regulatory bells and whistles tied to that. 

At the very beginning, in Dubai, we announced that if we ever 

traded the WTI contract, which we do have the no action letter to 

do so, that day one it would include full position limits, the full 

large trader reports that we have recommended that the ICE 

should submit to the CFTC as well. 

Mr. BURGESS. Very well. Now, too, Chairman Dingell was asking 

the question about transparency and how does transparency affect 

prices. He asked it to Professor Greenberger. I just wondered if you 

wanted to expound on that as well. 

Dr. NEWSOME. We are in full support of open transparency and 

competitive markets. So while we may have some disagreement on 

what is driving the price, there is no disagreement from us that 

these markets should be made completely transparent. 

Mr. BURGESS. Mr. Greenberger, you heard me questioning Chairman Lukken a few moments ago. Now, he made the statement to 

me that the final language in the Commodities Future Modernization Act was the same as passed in this committee, as passed on 

the House floor, as appeared in the appropriations bill, December 

15 or 19, whatever that day was, in 2000. That was before I was 

born, so I don’t know. So you tell me, is the language the same? 

Mr. GREENBERGER. It’s the same, but it’s misleading to say that 

for this reason. The Senate bill did not have the Enron loophole as 

passed in it. The Senate bill had a much more controlling deregulation of those markets. Chairman Lugar did that. And some Members in the House wanted to substitute the Senate bill for the 

House bill and they couldn’t do it. But here is what happened. On 

December 15th, out of the clear blue sky, maybe the 14th it starts, 

Congress comes back in a lame-duck session to pass an 11,000-page 

omnibus appropriation bill. The Senate has a voice vote. I have 

295 

gone back to the Congressional Record. The bill is not laid out in 

the Congressional Record. True, it was read, but I’m very confident 

the Senate did not understand that the Senate bill did not include 

the much more restrictive version than the House bill. And why is 

that important? Because if the Senate bill legislation had passed, 

we probably would still have Enron today. They would have been 

saved from themselves. Moreover, people have said Secretary Summers supported whatever happened on December 15th. I have gone 

to the Congressional Record. Secretary Summers’ letter appears 

not on December 15th, but on January 2nd, 2001, as something 

that was never read to the Senate on December 15th. 

Mr. BURGESS. Well, if I could, and I will enter this into the 

record, I have the page from the Congressional Record, Senate 

11897, December 15, 2000, Exhibit 1, December 15, 2000, Honorable Tom Harkin, Ranking Member, Committee on Agriculture, 

Nutrition, Forestry, U.S. Senate, Washington, D.C. 

‘‘Dear Senator Harkin, the members of the President’s Working 

Group on Financial Markets strongly support the Commodities Futures Modernization Act. This important legislation will allow the 

United States to maintains its competitive position in the over-thecounter derivative markets by providing legal certainty and promoting innovation, transparency and efficiency in our financial 

markets while maintaining appropriate protections for transactions 

in nonfinancial commodities and for small investors. Sincerely, 

Lawrence H. Summers, Secretary, Department of the Treasury; Arthur Levitt, Chairman, SEC; Alan Greenspan, Chairman, Board of 

Governors of the Federal Reserve; William J. Rainer, Chairman, 

Commodity Futures Trading Commission.’’ Again dated December 

15, 2000. I will submit that to the chairman for the record. 

[The information appears at the conclusion of the hearing.] 

Mr. BURGESS. Now I will just say that was before my time and 

I don’t know really all that was involved in that, but I do think we 

don’t do ourselves any service, we don’t further the cause when we 

misquote and misrepresent things. I think we heard from Chairman Lukken today that he has all the tools he needs right now to 

send the message to the excessive speculation that he could control 

it and it could stop. I for one don’t understand frankly why he is 

not doing that. I hope he takes it to heart what he learned on the 

committee today and perhaps tomorrow will dawn a new day and 

he will exercise that authority. But I don’t see that it furthers the 

cause in any way to continue to misrepresent things. 

This language was passed in this committee, was passed on the 

floor of the House, was passed in the omnibus bill. December 15, 

2000, the letter was read into the Congressional Record. I think it’s 

time to move on from that, repeal it by all means, but at the same 

time to indicate that there was something else going on I think 

does a disservice. 

Mr. GREENBERGER. Mr. Burgess, if I could have a point of privilege. The President’s Working Group on Financial Markets thought 

that the Senate’s version of the Enron loophole was in that bill 

when they wrote the letter, not the House version. A fast trick was 

pulled on the President’s Working Group and on the Senate. The 

letter that endorses what happened is in the January 2nd, 2001 

Congressional Record. I don’t think there is a Senator who knew 

296 

that the Enron loophole in the House version was on the Senate 

bill. And I might add, Mr. Burgess, that was considered to be extremely controversial, that Enron was going to be allowed to use 

its own exchange, which ultimately led, by enforcement actions, to 

the rising of electricity prices on the West Coast by 300 percent. 

Mr. BURGESS. Let me interrupt you there. And I’m not here to 

debate the merits of that legislative language. All I would submit 

is that that language was passed by the House, roll call vote 540, 

19 October 2000, 7:02 p.m., Commodities Futures Modernization 

Act. Many people on this committee on both sides of the dais voted 

aye in response to that bill. In fact, the total vote was 377 to 4, 

with 51 nonvoting. 

Mr. GREENBERGER. And I would submit the Senate did not understand that the House version instead of the Senate version was 

put on the Senate bill. It was never explained to the Senate. That 

was duplicitous. 

Mr. BURGESS. Sometimes you do have to speak slowly and clearly 

to the Senate in simple, declaratory sentences. But nevertheless it 

was passed by this House. I will yield back the balance of my time, 

Mr. Chairman. 

Mr. STUPAK. Thank you, Mr. Burgess. Mr. Melancon for questions, please. 

Mr. MELANCON. Thank you, Mr. Chairman. I appreciate it. I 

would like to ask Dr. Newsome, and just for the record he and I 

have been friends for some 20 years, back when he was just one 

of those lowly staffers over on the other side in the Senate, that 

august body we’ve been talking about for the last few minutes. But 

Dr. Newsome, I noticed you sitting here today making notes and 

such. But I would like you, if you would, just give me some of your 

thoughts and comments of what was said, what you feel was right, 

what you feel was wrong. I will allow you to go ahead and speak 

if you would. 

Dr. NEWSOME. Thank you, Congressman, for that opportunity. I 

think maybe one thing, when we started this hearing, we all had 

to stand up and take the oath that we were going to tell the truth 

and the whole truth, and that is what we did. So, a couple of things 

maybe I’d just go back and say that at least from our viewpoint are 

not completely accurate or may be at the very least misunderstood 

and one—and with all due respect to the chairman, the chart that 

has been showed all hearing long about speculators, the two pie 

charts, I think both of those are wrong. I think the one that shows 

the speculative activity at roughly 37 percent did not include some 

speculative activity that is trading through the swaps dealers, so 

that 2000 number was probably a little bit low. But on the flip 

side, assuming that all of the swaps dealer activity is speculative 

activity is equally as wrong, because at least from our experience 

in NYMEX a substantial portion of the volume going through the 

swaps dealers is commercial activity. So therefore making the assumption that 71 percent of the volume on NYMEX WTI is speculative is incorrect. 

Secondly, it was said a number of times by the first panel, particularly by Mr. Masters, that there is no position limits on WTI 

crude. Again that is a false statement. We do have hard position 

297 

limits on the last 3 days before expiration, and we do have position 

accountability then out the remainder of the curve. 

There was another comment that said there were margin loopholes and I know there was a debate about what to do with margins, but certainly there are no margin loopholes. Every market 

participant in our market is charged the same margin that is evaluated every day by our staff. It’s determined based upon volatility 

in the market, and every market participant pays that price. There 

are no loopholes. 

And then I guess the final thing I would say, there has been a 

lot of question about the flight from U.S. markets depending upon 

what might happen with further regulation. I can tell you with 100 

percent certainty if we overregulate these markets there will be a 

flight away from these markets. 

Dr. NEWSOME. It has happened in the past. It will happen again. 

Maybe not necessarily to other exchanges, but certainly to the overthe-counter marketplace, which dwarfs the size of our markets 

now. There is no question in my mind that we will lose business 

to the over-the-counter marketplace. 

Mr. MELANCON. And I don’t think that you are concerned with 

competition. It is just fair competition. Would that be a fair assumption? 

Dr. NEWSOME. Absolutely. We just want a level playing field. 

Mr. MELANCON. Thank you. Thank you, Mr. Chairman. I yield 

back my time. Thank you, Mr. Newsome. 

Mr. STUPAK. Thank you. Thank you, Mr. Melancon. Mr. Burgess 

has asked that we put in the December 15, 2000, Congressional 

Record Senate side. Without objection, that will be added. Mr. Burgess also asked a CRS report on Commodity Futures Modernization 

Act of 2000: Derivatives Regulation Reconsidered, dated January 

29, 2003. When the whole thing is provided, we will put it in the 

part of the record. A few more questions before I wrap up here, if 

I may. Mr. Newsome, when do you expect the West Texas Intermediate crude oil contract to be listed on the Dubai exchange? 

Dr. NEWSOME. Mr. Chairman, no date has been set. 

Mr. STUPAK. What is causing delay of not putting it on there 

then? That is the intent, isn’t it, to put it on there? 

Dr. NEWSOME. That is the intent certainly is to put it on. But 

that will be listed on the electronic system supplied by NYMEX. It 

is not in the queue yet to be listed, so we are months away. 

Mr. STUPAK. So the clearing of these trades then will be listed 

on your computers on NYMEX? 

Dr. NEWSOME. Yes. 

Mr. STUPAK. OK. With over 60 percent of the WTI contracts traded on ICE Futures originate in the U.S., given the preponderance 

of trades on this exchange originate in the U.S. and involve contracts with U.S. delivery points, why shouldn’t the CFTC require 

ICE Futures to register as a designated contract market? 

Dr. NEWSOME. Thank you for that question, because I appreciate 

the chance to comment on it. We think when we look at the marketplace and what is important with regard to transparency 

through the large trader reports, limiting the role of speculators in 

the market, that the items outlined in at least one of the Senate 

bills and by the CFTC are adequate without requiring ICE to beVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00303 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
298 

come a designated contract market. Certainly a concern from our 

standpoint is that if that was required, then U.S. exchanges would 

then be retaliated against by foreign jurisdictions and required to 

become full registrants in every jurisdiction around the world that 

we want to do business in. 

Mr. STUPAK. If you are doing business in Dubai, and if you are 

going to be selling product in Dubai intended for Dubai, why 

shouldn’t you come underneath Dubai law and not U.S. law? 

Dr. NEWSOME. Well, we are currently fully regulated by the 

Dubai Financial Services Authority and by the CFTC because of 

the nature of the way we set up the business. 

Mr. STUPAK. So then it shouldn’t make any difference then. 

Dr. NEWSOME. Well, I mean there is a lot—there are a number 

of markets around the globe much larger than the Dubai marketplace. And if we had to go to every foreign jurisdiction and go 

through the regulatory process it would cost us millions and millions of dollars and lots of time. If there wasn’t a method to achieve 

what we think is needed in terms of transparency and position limits, I would agree completely with you. But I think we have a 

methodology through the conditioning of the foreign board of trade 

no-action letter to achieve what needs to be achieved. 

Mr. STUPAK. OK. NYMEX Holdings is about to become a foreign 

board of trade in the United Kingdom, isn’t it? 

Dr. NEWSOME. We are going through that process now. 

Mr. STUPAK. So will this exchange mirror the same contracts on 

ICE Futures such as west Texas crude, heating oil, gasoline? 

Dr. NEWSOME. I think Professor Greenberger was three or four 

steps in front of us. First of all, we are very proud to be a U.S. entity and regulated by the CFTC, and that will not change. With regard to our efforts in the United Kingdom, what we are trying to 

do is get on a level playing field in the European marketplace with 

the Intercontinental Exchange. 

Mr. STUPAK. It sound likes you are saying if I can’t beat ’em, I 

might as well join ’em. 

Dr. NEWSOME. Only with regard to the European marketplace. 

Mr. STUPAK. Well, will you be applying for a no-action letter and 

tell the CFTC it is about to become a foreign-owned trade—— 

Dr. NEWSOME. We will supply—regardless of what we do where, 

we will always supply the position limits and the large—— 

Mr. STUPAK. So you won’t be applying for a no-action letter? You 

won’t apply for a no-action letter? 

Dr. NEWSOME. Well, we could. 

Mr. STUPAK. Sure you could. 

Dr. NEWSOME. But if we do, we will condition it up front to supply the information to the CFTC that we have asked them to collect from ICE. 

Mr. STUPAK. OK. You know, you said that if we regulate that 

these markets will go offshore. But first of all, any futures contract 

that calls for a physical delivery inside the U.S. is automatically 

subject to CFTC regulation, right? 

Dr. NEWSOME. Correct. 

Mr. STUPAK. So even if they are offshore, but if the contractis 

going to be for physical delivery within the U.S., they are still 

going to come underneath CFTC authority. 

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Dr. NEWSOME. Not necessarily. Only if they apply for the no-action letter to have access to U.S. customers. 

Mr. STUPAK. OK. But the questions was, statement was a future 

contract that calls for physical delivery in the U.S. comes underneath our jurisdiction. 

Dr. NEWSOME. If it was a physical contract—— 

Mr. STUPAK. Right. So whether I am on Dubai or on your London 

Holdings, as long as the physical delivery is going to be in the U.S., 

it comes underneath the U.S. law, right? 

Dr. NEWSOME. Absolutely. 

Mr. STUPAK. So there isn’t going to be a foreign flight if we do 

this regulation. If we pass H.R. 6330, the PUMP Act of 2008, that 

is not going to drive people out of this market here, is it? 

Dr. NEWSOME. No, I think it will because most of the foreign 

boards of trade are going to list a cash contract that is based on 

a physical U.S. contract, not the actual physical. 

Mr. STUPAK. But any future contract that cash settles against a 

U.S. contract with physical delivery provisions is also automatically 

subject to CFTC regulation. 

Dr. NEWSOME. No, sir. The other exchange in Dubai that has listed the WTI contract does so completely outside the purview of the 

CFTC because they have not applied for a no-action letter to have 

access to U.S. customers. So they can list any contract U.S.-based 

that they want to completely outside the purview of the CFTC or 

any U.S. regulator. 

Mr. STUPAK. Professor, I know you want to jump in there. 

Mr. GREENBERGER. Yes, I want to jump in on two points. Mr. 

Newsome said I am a couple steps ahead of him. In his testimony 

he said while that affiliate, the London affiliate, will follow the 

path of other exchanges regulated by other regulators and will be 

applying for CFTC no-action relief. So I am not two steps ahead. 

I just read his testimony. 

Dr. NEWSOME. I thought you were making the assumption that 

we are going to transfer all of our NYMEX business. 

Mr. GREENBERGER. No, no, no, no. All I meant was you are going 

to apply for relief, sell West Texas Intermediate, it will be regulated by the FSA directly instead of by the United States. I don’t 

know what your share is going to be between your U.S. and U.K. 

Exchange. Now with regard to the Dubai exchange that has not 

gotten a no-action letter, Mr. Newsome says, oh, they are outside 

of the CFTC jurisdiction. No, they are not. I briefed that completely 

in the testimony. The leading case in CFTC enforcement jurisdiction is a Japanese copper trader trading on the London Metal Exchange and driving up the price in the United States. No contacts 

or virtually none to the United States. A U.S. warehouse here, 

what have you. The CFTC imposed a $150 million enforcement action on 

Sumitomo, the Japanese corporation trading on the London Metal 

Exchange. If you harm our markets, we can go after you. The Justice Department has memos on this. The CFTC has memos. And 

that is the irony here. ICE is in the United States. We don’t have 

to go to London to get them. Mr. Newsome tells you that Dubai is 

going to do all this stuff, now, Mr. Newsome is in partnership with 

Dubai. My argument is if he is in partnership with Dubai when 

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Dubai comes to the United States, that is a United States entity 

if Mr. Newsome is in partnership with them. And he says, well, we 

will impose this, we will impose that. Great. But that is not U.S. 

law. He is doing that as a matter of largesse. Maybe Mr. Lukken 

will enforce that through his enforcement things. But I want to tell 

you when your gas-paying constituents come to you and say is 

Dubai, is ICE, is London NYMEX going through London and coming back to the United States fully regulated as a U.S. exchange 

would be, the answer is no. The foremost reason is I read you the 

emergency authority. Mr. Lukken will not have emergency authority to go in an emergency and tell ICE what it ought to do, set temporary margins, temporary position limits. You are not going to be 

fully regulated. If you want U.S. trading terminals with U.S.-delivered contracts on them to be fully regulated, you have the power 

to insist. 

The final point I would make is this idea that everybody is going 

to run abroad, I mean, Mr. Newsome is going to London because 

he wants to get the same loophole that ICE has by going through 

London. But there are 20 foreign exchanges who came to the 

United States and said please let us trade here, but don’t have us 

regulate fully. Why are they here? As the first panel said, it is the 

only fully liquid profitable market in the world. Everyone needs to 

be here. And if they go abroad and they do bad things to our gaspaying consumers we can go after them under U.S. law. 

Mr. STUPAK. Sure. And from a practical point of view, you need 

liquidity, you need critical mass. And we are 3 percent of the world 

population, but consume 25 percent of the oil. So, I mean, you are 

going to trade here no matter what. I don’t think you are going to 

go abroad. 

Mr. GREENBERGER. You need liquidity and you need mass, but 

you also need profits. And this is where the futures trading gets 

done on U.S. delivered West Texas Intermediate delivered in Cushing, Oklahoma. 

Mr. STUPAK. Sure. Largest consumer of energy and largest producer of food commodities. 

Mr. GREENBERGER. Exactly. 

Mr. STUPAK. There you are. Mr. Newsome wanted to add. 

Dr. NEWSOME. I would like to respond, Mr. Chairman, to that if 

I can. Several things. One, as I made the comments in my statement, I said there is a very real threat of that business leaving the 

regulated exchanges. I said it could go to foreign exchanges, but 

more likely than not it would go to the over-the-counter market. 

There is no question about that. With regard to the Dubai Exchange that is in question, in no way are they or will they be regulated by the CFTC. You should not be misled there. 

If there is some type of manipulative activity that occurs that 

has an impact on U.S. markets, Mr. Greenberger is exactly right, 

then the CFTC has a hook to go after them from an enforcement 

standpoint. But in no way are they regulated by the U.S. And then 

with regard to London, I simply can’t let Mr. Greenberger tell you 

what our business plan is in London when he is not aware of what 

it is. He has made some assumptions that are wrong. Our plans 

to go into London is simply onefold. There are differences in law 

with regard to clearing the business. We tried from New York on 

301 

a number of occasions to list the London contracts, the European 

contracts, and to pull that business to the CFTC-regulated marketplace. Because of differences in clearing, particularly with regard 

to bankruptcy, it was very difficult for us to compete in that marketplace. 

So we made the decision to partner with the London clearinghouse, who is a London clearer, to list those same contracts so that 

we could do a more effective job of competing in the European 

space period. 

Mr. STUPAK. Mr. Burgess, questions? 

Mr. BURGESS. Yes, thank you, Mr. Chairman. Dr. Newsome, Mr. 

Greenberger, just so I am clear that I understand, first on the issue 

of the West Texas Intermediate, my understanding was back in, I 

guess, 1974 those contracts had to be delivered to Oklahoma, and 

that was a method of keeping speculation in check during the Arab 

oil embargo of the 1970s? 

Dr. NEWSOME. No, I mean we have had speculative position limits on that contract since it was listed day one. 

Mr. BURGESS. OK. Then the look-alike that you reference on the 

Dubai market, the way that the CFTC would still have the ability 

to regulate that is they can take action against Dubai if they see 

evidence of bad behavior. Is that correct? 

Dr. NEWSOME. They would have complete transparency and position limits to keep the speculative activity low. If there was an enforcement option, they would have to cooperate with the Dubai Financial Services Authority. 

Mr. BURGESS. And what does that enforcement action look like? 

If that were to happen, what would we see? 

Dr. NEWSOME. It would depend upon what kind of activity was 

taking place in the market. If it was manipulative activity on 

Dubai that had an impact on the U.S. markets, as Mr. Greenberger 

commented on a moment ago, they could go after those market participants. If it is related—— 

Mr. BURGESS. And what is the enforcement hook that they have? 

What would they do? 

Mr. GREENBERGER. If they are impacting U.S. markets and they 

can get jurisdiction over those people, as they got over the 

Sumitomo Japanese copper company, they will fine them $150 million and reference them to the Justice Department for prosecution 

if they feel that is the case. And my point isn’t that the Dubai Gold 

Exchange, which is different than Mr. Newsome’s partner, which is 

selling West Texas Intermediate exclusively in Dubai, is not that 

they have to become CFTC-regulated, but what everybody is telling 

you is if you regulate here we are going to run somewhere else in 

the world to avoid transparency. And what I am saying is the only 

reason they are going somewhere else is to continue operating in 

dark markets. And if they think they are outside of U.S. jurisdiction, they are not. We can go after them there, and we have when 

there has been effective enforcement at the CFTC. 

Mr. BURGESS. I think that was the thrust of Mr. Masters’ testimony. I don’t want to put word in his mouth, but I think he so 

much as said that in the first panel this morning. But going back, 

of course, to Chairman Dingell when he was stressing or trying to 

get an answer about the question of transparency, again, if CFTC 

302 

sees a problem, if the transparency is there, if CFTC sees the problem they can go after it. So the transparency then becomes the key 

to this whole process. 

Mr. GREENBERGER. Well, the only addition to that is if Mr. 

Newsome has an emergency on his exchange, the CFTC can go 

there, set temporary position limits, temporary this, temporary 

that. If it happens on ICE, they have got to go to the FSA to ask 

the FSA to do it. Go to London to have the FSA do something in 

the United States, or go to Dubai to ask Dubai—for example, if we 

have a $11 rise in a single day and everybody goes nuts and the 

CFTC is enforcing and says we want to go in there and see what 

is happening, Dubai is going to have terminals in the United 

States, but they are going to have to go to the Dubai Financial 

Services Authority and ask them if it is OK if they look into the 

matter. There is a big difference between getting large trader data 

reporting from Dubai and be able to directly regulate things that 

are happening before your very eyes instead of having to go to 

Dubai and ask permission to do so. And as Mr. Newsome just said, 

if you see manipulative activity you have to go to Dubai to see 

whether you can enforce. 

Mr. BURGESS. Sir Robert, we will give you the last word. 

Mr. REID. One needs to correct a bit of reality as opposed to fiction. 

Mr. BURGESS. Please. 

Mr. REID. If there is a problem that worries the CFTC, they pick 

up the phone and they speak to the chief executive in our organization or they speak to the FSA. This is an open line. And it operates 

two, three times a week. So these people know each other and they 

deal with the problems. And really to describe it as you have to go 

cap in hand to Britain to actually get information, I actually think 

you are completely misrepresenting the position. Now, what I 

would say, in fairness to Dubai, Dubai is a new organization, it is 

a new country, but it really is trying to do the best it can. And I 

am sure the fact that NYMEX has gone there, they will help them 

with that. And essentially, you should get a regime there which is 

every bit as good as you will get in London. And so therefore, you 

are contributing to the development of global trade. It may be uncomfortable for the people who want to stay domestic, but basically 

for those who want to go international and have got an entrepreneurial flair like Jim, then let them go and support them. 

Mr. BURGESS. At the same time, though, the degree of transparency that we are all talking about is dependent on the CFTC’s 

enforcement ability. I am not reassured that someone can pick up 

a phone and call someone else half a world away. You may have 

that level of trust, but certainly after 6 hours of hearings today I 

don’t have that. But thank you, Mr. Chairman. You have been very 

generous with the time. And I will yield back. 

Mr. STUPAK. Mr. Melancon, anything? 

Mr. MELANCON. No. 

Mr. STUPAK. OK. That is going to conclude this panel. Professor, 

you look like you want to say something. 

Mr. GREENBERGER. I just wanted to say one other thing. Sir Robert says you can pick up the phone. The CFTC negotiated for sevVerDate Nov 24 2008 12:36 Jun 18, 2010 Jkt 037690 PO 00000 Frm 00308 Fmt 6633 Sfmt 6633 C:\DOCUMENTS AND SETTINGS\CWELLS1\HEARINGS\110-128 SCOM1 PsN: JIMC
303 

eral weeks to lead to the letter they just issued. They didn’t pick 

up the phone. They had to do a diplomatic negotiation. 

Mr. REID. OK, just one final word on that. 

Mr. STUPAK. Sure, Sir Robert. You came the farthest so you get 

the last word. 

Mr. REID. If you could put on the record we are not a loophole, 

we are a reef note. We are firm and stable and secure. 

Mr. STUPAK. That is on the record. It is so noted. I am not saying 

you are going to get agreement with this committee, but so noted. 

Mr. REID. Thank you, sir. 

Mr. STUPAK. Well, thank you. That concludes all questions. I 

want to thank all of our witnesses for coming today and for your 

testimony. It has been a long, but very interesting hearing. I ask 

for unanimous consent that the hearing record will remain open for 

30 days for additional questions for the record. Without objection, 

the record will remain open. I ask unanimous consent the contents 

of our document binder be entered into the record. Without objection, the documents will be entered in the record. I also ask unanimous consent that the letter we received from the U.S. Commodities Futures Trading Commission dated June 20th, 2008, addressed to myself and Mr. Dingell, be made part of the record. I 

also ask unanimous consent that this report from CS Commodities 

Group, Update and Key Commodity Themes for 2008, it is a report 

referenced by Mr. Masters in the first panel, be made part of the 

record. Without objection, these two documents will be added. That 

concludes our hearing. Without objection, this meeting of the subcommittee is adjourned. 

[Whereupon, at 6:24 p.m., the subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

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