S. Hrg. 110–382

SPECULATION IN THE CRUDE OIL MARKET

JOINT HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

AND THE

SUBCOMMITTEE ON ENERGY

OF THE

COMMITTEE ON ENERGY AND NATURAL 

RESOURCES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

DECEMBER 11, 2007

Available via http://www.access.gpo.gov/congress/senate

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs

(

SPECULATION IN THE CRUDE OIL MARKET

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40–506 PDF 2008

S. Hrg. 110–382

SPECULATION IN THE CRUDE OIL MARKET

JOINT HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

AND THE

SUBCOMMITTEE ON ENERGY

OF THE

COMMITTEE ON ENERGY AND NATURAL 

RESOURCES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

DECEMBER 11, 2007

Available via http://www.access.gpo.gov/congress/senate

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

BARACK OBAMA, Illinois 

CLAIRE McCASKILL, Missouri 

JON TESTER, Montana 

SUSAN M. COLLINS, Maine 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

BARACK OBAMA, Illinois 

CLAIRE McCASKILL, Missouri 

JON TESTER, Montana 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire

ELISE J. BEAN, Staff Director and Chief Counsel 

DAN M. BERKOVITZ, Counsel 

MARK L. GREENBLATT, Staff Director and Chief Counsel to the Minority 

MARK D. NELSON, Deputy Chief Counsel to the Minority 

MARY D. ROBERTSON, Chief Clerk 

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

MARIA CANTWELL, Washington 

KEN SALAZAR, Colorado 

ROBERT MENENDEZ, New Jersey 

BLANCHE L. LINCOLN, Arkansas 

BERNARD SANDERS, Vermont 

JON TESTER, Montana 

PETE V. DOMENICI, New Mexico 

LARRY E. CRAIG, Idaho 

LISA MURKOWSKI, Alaska 

RICHARD BURR, North Carolina 

JIM DEMINT, South Carolina 

BOB CORKER, Tennessee 

JOHN BARRASSO, Wyoming 

JEFF SESSIONS, Alabama 

GORDON H. SMITH, Oregon 

JIM BUNNING, Kentucky 

MEL MARTINEZ, Florida

ROBERT M. SIMON, Staff Director 

SAM E. FOWLER, Chief Counsel 

FRANK MACCHIAROLA, Republican Staff Director 

JUDITH K. PENSABENE, Republican Chief Counsel 

ANGELA BECKER-DIPPMANN, Professional Staff Member 

MELISSA SHUTE, Republican Counsel 

(III)

SUBCOMMITTEE ON ENERGY

BYRON L. DORGAN, North Dakota, Chairman

DANIEL K. AKAKA, Hawaii 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

MARIA CANTWELL, Washington 

ROBERT MENENDEZ, New Jersey 

BERNARD SANDERS, Vermont 

JON TESTER, Montana 

LISA MURKOWSKI, Alaska 

LARRY E. CRAIG, Idaho 

RICHARD BURR, North Carolina 

JIM DEMINT, South Carolina 

BOB CORKER, Tennessee 

JEFF SESSIONS, Alabama 

JIM BUNNING, Kentucky 

MEL MARTINEZ, Florida

JEFF BINGAMAN and PETE V. DOMENICI are Ex Officio Members of the Subcommittee

Page

IV

(V)

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1

Senator Dorgan ................................................................................................. 8

Senator Coleman .............................................................................................. 11

Senator Murkowski .......................................................................................... 14

Senator Collins ................................................................................................. 18

Senator Wyden .................................................................................................. 20

Senator Craig .................................................................................................... 22

Senator Barrasso .............................................................................................. 23

Senator Cantwell .............................................................................................. 24

Senator Menendez ............................................................................................ 25

Senator McCaskill ............................................................................................ 26

Prepared statements: 

Senator Tester .................................................................................................. 22

Senator Bingaman ............................................................................................ 61

Senator Salazar ................................................................................................ 61

WITNESSES 

TUESDAY, DECEMBER 11, 2007

Guy F. Caruso, Administrator, U.S. Energy Information Administration, U.S. 

Department of Energy ......................................................................................... 27

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

Co., Inc., New York, New York ........................................................................... 29

Edward N. Krapels, Special Advisor, Financial Energy Market Services, Energy Security Analysis, Inc., Wakefield, Massachusetts ................................... 30

Philip K. Verleger, Jr., President, PK Verleger, LLC, Aspen, Colorado ............. 32

ALPHABETICAL LIST OF WITNESSES

Caruso, Guy F.: 

Testimony .......................................................................................................... 27

Prepared statement with attachments ........................................................... 67

Gheit, Fadel: 

Testimony .......................................................................................................... 29

Prepared statement .......................................................................................... 76

Krapels, Edward N.: 

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 78

Verleger, Philip K. Jr.: 

Testimony .......................................................................................................... 32

Prepared statement .......................................................................................... 98

APPENDIX 

Charts submitted for the Record by Senator Levin .............................................. 63

EXHIBITS 

1. Crude Oil Prices (NYMEX), Jan 2002-Dec 2007, chart prepared by the 

Majority Staff, Senate Permanent Subcommittee on Investigations ........... 118

2. U.S. Crude Oil Inventories, 2007 Compared to Previous 5-Year Average,

chart prepared by the Majority Staff, Senate Permanent Subcommittee 

on Investigations ............................................................................................... 119

Page

VI

3. Crude Oil Futures and Options, Speculative Positions, 2002–2007, chart 

prepared by the Majority Staff, Senate Permanent Subcommittee on Investigations ....................................................................................................... 120

4. U.S. Crude Oil: Prices and Inventories at Cushing, OK, 2007, chart prepared by the Majority Staff, Senate Permanent Subcommittee on Investigations ............................................................................................................. 121

5. Why Are Oil Prices So High?, This Week In Petroleum, Energy Information Administration, November 7, 2007 .......................................................... 122

6. Distorting a Benchmark, International Energy Agency—Oil Market Report, April 12, 2007 ........................................................................................... 127

7. Trends in Hedge Fund Industry Assets and Oil Prices, chart prepared 

by Office of Senator Byron Dorgan ................................................................. 128

8. Decrease in the Price of Saudi Light Relative to WTI Since May 2007,

chart prepared by Office of Senator Byron Dorgan ....................................... 129

9. The Role of Market Speculation In Rising Oil And Gas Prices: A Need 

To Put The Cop Back On The Beat, Staff Report prepared by the Permanent Subcommittee on Investigations of the Committee on Homeland 

Security and Governmental Affairs, June 27, 2006 ....................................... 130

10. Letter to The Honorable Samuel W. Bodman, Secretary, U.S. Department 

of Energy, October 18, 2007, from Senators Levin, Wyden, Bingaman, 

Reed, McCaskill, Dorgan and Kerry, regarding the Strategic Petroleum 

Reserve .............................................................................................................. 182

11. STEO Supplement: Why are oil prices so high?, Energy Information Administration/Short Term Energy Outlook, August 2006 ............................... 184

12. Short-Term Energy Outlook Supplement: Why Are Oil Prices So High?,

Energy Information Administration/Short-Term Energy Outlook Supplement—November 2007 ..................................................................................... 191

13. U.S. Commodity Futures Trading Commission press releases ..................... 197

14. Speculative Interest in Crude Oil (Percent of Open Interest Held by Speculators), chart prepared by the Majority Staff, Senate Permanent Subcommittee on Investigations ............................................................................ 201

15. Crude Oil Futures Contracts, Open Interest, NYMEX, 2002–07, chart prepared by the Majority Staff, Senate Permanent Subcommittee on Investigations ............................................................................................................. 202

16. $100 oil and the ‘S’ word, quote from CCNMoney.com, chart prepared 

by Office of Senator Byron Dorgan ................................................................. 203

17. U.S. Crude Oil Stocks, chart prepared by Office of Senator Byron Dorgan 204

18. Quotes from October 21, 2007 Washington Post story by David Cho, 

Energy Traders Avoid Scrutiny, chart prepared by Office of Senator Byron 

Dorgan ............................................................................................................... 205

19. Letter to the U.S. Senate Energy and Natural Resources Committee, 

dated December 11, 2007, from Dr. Bert Zauderer, Coal Tech Corp, regarding oil and gas data ................................................................................... 206

20. a. and b. Inserts for the hearing record from The Honorable Guy F. 

Caruso, Administrator, Energy Information Administration, U. S. Department of Energy ................................................................................................. 208

21. Responses to supplemental questions for the record submitted to The 

Honorable Guy F. Caruso, Administrator, U.S. Energy Information Administration, U. S. Department of Energy ..................................................... 211

22. Responses to supplemental questions for the record submitted to Fadel 

Gheit, Managing Director and Senior Energy Analyst, Oppenheimer & 

Co. Inc ................................................................................................................ 230

23. Responses to supplemental questions for the record submitted to Edward 

N. Krapels, Special Advisor, Financial Energy Market Services, Energy 

Security Analysis, Inc ....................................................................................... 235

24. Responses to supplemental questions for the record submitted to Philip 

K. Verleger, Jr., President, PK Verleger, LLC ............................................... 240

(1)

1See Exhibit No. 1, which appears in the Appendix on page 118. 

SPECULATION IN THE CRUDE OIL MARKET 

TUESDAY, DECEMBER 11, 2007

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS,

JOINT HEARING WITH THE SUBCOMMITTEE ON ENERGY,

COMMITTEE ON ENERGY AND NATURAL RESOURCES, 

Washington, DC. 

The Subcommittees met, pursuant to notice, at 10:03 a.m., in 

Room 216, Hart Senate Office Building, Hon. Carl Levin, Chairman 

of the Permanent Subcommittee on Investigations, Committee on 

Homeland Security and Governmental Affairs, and Hon. Byron L. 

Dorgan, Chairman of the Subcommittee on Energy, Committee on 

Energy and Natural Resources presiding. 

Present: Senators Levin, McCaskill, Tester, Coleman, Collins, 

Dorgan, Wyden, Cantwell, Menendez, Bingaman, Salazar, Murkowski, Craig, Corker, and Barrasso. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. The Permanent Subcommittee on Investigations and the Subcommittee on Energy are 

conducting a joint hearing this morning into why U.S. oil prices 

keep rising despite what appears to be an adequate U.S. supply of 

oil. 

The price of crude oil recently rose above $99 per barrel, a record 

high. Just before Thanksgiving, the national average price of gasoline went over $3.10 per gallon for the second time this year. The 

price of diesel fuel is at a record high, as is the price of home heating oil. These record high prices severely hurt millions of Americans and American businesses. They raise the cost of virtually everything in our daily lives—the gasoline in our cars and trucks, the 

food we eat, air travel, heating our homes and offices, generating 

electricity, and manufacturing countless industrial and consumer 

products. It is our duty in Congress to do everything that we can 

to ensure that the price Americans pay for energy is a fair price. 

Just about a year ago, on January 18, 2007, the price of crude 

oil on the New York Mercantile Exchange (NYMEX), was about 

$50 per barrel. A few weeks ago, the NYMEX price reached an alltime high of just over $99 per barrel. The chart to my left, Exhibit 

1, shows that huge increase in the price of oil.1

2

1See Exhibit No. 2, which appears in the Appendix on page 119. 

2See Exhibit No. 14, which appears in the Appendix on page 201. 

And although the price of oil virtually doubled during this period, 

an unprecedented rise of nearly $50 in just 1 year, the overall inventory of oil in the United States has been above the 5-year average for the entire year. Exhibit 2 shows the way that inventory has 

remained above the 5-year average.1 It just defies the laws of supply and demand to have an astronomical increase in the price of 

oil at the same time the U.S. inventory of oil has stayed above average. 

On any given day, we can read in the newspapers or hear on the 

television the familiar explanations for why the price of oil is so 

high—instability in the Middle East, bad weather affecting oil production platforms, civil strife in oil-producing countries, the declining value of the dollar. These are just a few of the ‘‘usual suspects’’ 

that are often cited as the reasons for high prices. 

The problem with these explanations is not that they are false. 

Most of them are true. But most of them have been true for some 

time. Unfortunately, instability in the Middle East is not new. 

There is always bad weather somewhere around the globe that affects oil production and transportation. There is, unfortunately, a 

lot of civil strife in a number of oil-producing countries. The dollar 

rises and the dollar falls. The world is a dangerous place. These 

factors alone cannot justify a doubling in the price of oil. 

So what else can help explain these record prices? In this hearing, we will examine some of the other factors that are contributing 

to the high price of oil as well as what we can do about it. 

One key factor that has contributed to the rise in oil prices over 

the past few years is the virtual explosion of trading of paper contracts for oil delivery in future months, trading which is speculative and not intended to result in the actual delivery of oil. Traders 

are trading paper oil contracts in record amounts. In the last 4 

years, we have seen a huge increase in the number of oil futures 

contracts traded in the New York Mercantile Exchange, and there 

has also been tremendous growth of trading of U.S. crude oil in 

London. As Secretary of Energy Bodman recently said, the prices 

for crude oil are now set in New York, London, Tokyo, Singapore, 

and other trading hubs around the world. 

Data compiled by the Commodity Futures Trading Commission 

(CFTC), shows that in the past few years, out of this overall increase in energy trading, the amount of trading due to speculation 

has nearly tripled. Chart 3—that is Exhibit 14 2 in the exhibit 

book—shows that in the last few years, the percentage of oil futures contracts held by speculators has risen from around 15 percent to nearly 45 percent. These are traders who are solely interested in trading for a profit rather than hedging their positions to 

assure a stable supply at a price that they can count on. These energy speculators not only comprise a larger percentage of U.S. oil 

trades, but are also responsible for a larger dollar amount involved 

in U.S. energy commodity trades. 

A fair price is a price that reflects the forces of supply and demand for a commodity, not the trading strategies of speculators 

who are only in the market to make a profit by buying and selling 

3

1See Exhibit No. 9, which appears in the Appendix on page 130. 

of paper contracts with no intent to actually purchase, deliver, or 

transfer the commodity. But as we have all too often seen in recent 

years, when speculation grows so large that it has a major impact 

on the market, prices get distorted and stop reflecting true supply 

and demand. 

Last year, our Subcommittee released a bipartisan report called 

‘‘The Role of Market Speculation in Rising Oil and Gas Prices: A 

Need to Put the Cop Back on the Beat.’’ 1 The report found that 

trading of futures contracts by speculators had increased the demand for oil futures, and this additional demand for contracts had 

contributed an additional $20 to the price of oil. At the time, the 

price of oil was about $70 per barrel, so speculation was a major 

contributor to what was then thought to be sky-high crude oil 

prices. Our report recommended additional market transparency 

and stronger market oversight to reduce the effects of increased 

speculation. 

Given the hefty increases in speculation in the U.S. oil market, 

we need to know what the effect of all this speculation has been 

on U.S. oil prices. To what extent, for example, has dramatically 

increased speculation contributed to the extraordinary jump in 

prices that we have seen this year? Is speculation responsible for 

about $20 per barrel of oil or more? This is a vitally important 

question. If the extraordinary increase in oil prices is not based on 

actual supply and demand, then we need to figure out what role 

is being played by speculation and what steps can be taken to restore the market’s focus on supply and demand. 

Speculation is not, of course, the only reason for sky-high oil 

prices in 2007. One additional key reason that we want to examine 

is the policy of the Administration relative to adding oil to the 

Strategic Petroleum Reserve (SPR). One of today’s witnesses, Dr. 

Philip Verleger, will present his analysis of how the Administration’s program to fill the SPR with high-quality crude oil, known 

as sweet crude, has contributed to the recent price increases. He 

will tell us how the SPR fill program has helped deplete supplies 

of sweet crude normally used to fulfill crude oil futures contracts 

traded on the NYMEX and how those reduced supplies have, in 

turn, pushed up crude oil prices. 

There is a third problem, as well, that the SPR fill program has 

exacerbated. The fact that the standard NYMEX futures contract 

that sets the benchmark price for U.S. crude oil requires a particular type of high-quality crude oil known as West Texas Intermediate (WTI), to be delivered at a particular location, which happens to be Cushing, Oklahoma. Because the price of the standard 

contract depends upon the supply of WTI, which again is but one 

type of sweet crude oil, the supply and demand conditions in Oklahoma have a disproportionate influence on the price of NYMEX futures contracts. Four years ago, I called for reform of this outdated 

feature of the standard NYMEX crude contract, but it has never 

been fixed and the problems caused by the standard contract have 

gotten worse. 

4

1See Exhibit No. 4, which appears in the Appendix on page 121. 

The next chart, which is Exhibit 4, shows that in 2007, the crude 

oil inventory in Cushing, Oklahoma, fell.1 When that inventory 

crashed, it caused a big supply drop in Oklahoma, even though 

overall U.S. crude oil inventories remained above average. But because the Oklahoma supply fell, the benchmark price on the 

NYMEX jumped, since again the NYMEX price depends on the 

supply and demand for oil at Cushing, Oklahoma. 

According to Dr. Verleger, it is only sweet crude oil that now is 

in relatively short supply compared to demand, and that is part of 

the reason why oil on the NYMEX has become so expensive. Indeed, last month, the difference in price between sweet crude oil 

and some other types of crude oils reached $20, $30, or even $40 

per barrel in U.S. trading. That is a pretty striking price gap. 

Why does it matter that the Administration is depositing sweet 

crude into the SPR? It matters because the price of one key type 

of sweet crude, WTI, determines the price of the standard NYMEX 

contract. The standard NYMEX contract price, in turn, is a major 

influence on the price of fuels refined from crude oil, such as gasoline, heating oil, and diesel. That means when the WTI price is no 

longer representative of the price of U.S. crude oil in general, the 

prices of all these other commodities are also thrown out of whack. 

And the Department of Energy has made the situation much 

worse by purchasing several million barrels of sweet crude and depositing them into the SPR over the past few months. Those purchases removed sweet crude from the marketplace and reduced the 

supply of oil available for WTI contracts. And as you can see from 

this chart,1 the drop of several million barrels in the inventory of 

crude oil at Cushing since August has been accompanied by a huge 

increase in the price of U.S. crude oil. It seems that the only place 

in the United States where price really reflects supply and demand 

is in Cushing, Oklahoma. 

In the last 4 months, DOE has taken several million barrels of 

sweet crude off the market to fill the SPR, regardless of price. If 

DOE had simply postponed the SPR fill for 1 year, it would not 

only have alleviated the upward pressure on U.S. oil prices, but 

also saved U.S. taxpayers millions of dollars. Based on the market 

and futures prices at the time the DOE bought oil for the SPR, 

DOE could have saved $10 per barrel by simply locking in the futures price and deferring current deliveries for 1 year. That is because at the time the oil was acquired, the futures price for delivering the oil in 1 year was about $10 per barrel cheaper than the 

current price. Since the Administration bought enough oil to deposit another 8.7 million barrels in the SPR, that $10 million price 

difference would have translated into a 1-year taxpayer savings of 

nearly $87 million. 

In light of Congress’s direction in the Energy Policy Act of 2005 

to fill the SPR in a manner that minimizes costs to taxpayers and 

minimizes impacts on oil prices, it is incomprehensible why DOE 

continues to fill the SPR without taking advantage of the lower futures prices when they exist. 

This state of affairs raises two questions. First, why is DOE contributing to the shortage of sweet crude oil by placing it into the 

5

SPR and thereby helping boost the standard NYMEX price? What’s 

worse, it is our understanding that the DOE intends to deposit another 7 million barrels of sweet crude oil into the SPR beginning 

next month. DOE will be taking this high-quality oil off the market 

just at the time when it will be in the highest demand to produce 

gasoline and diesel fuel for the spring and summer driving seasons. 

Second, it appears that we have an oil futures market that reflects the supply and demand conditions in Oklahoma, but not necessarily the overall supply and demand situation in the United 

States as a whole. Our Subcommittee raised this very issue in 2003 

and called on the CFTC and NYMEX to work together to revise the 

standard NYMEX crude oil futures contract to reduce its susceptibility to local imbalances in the market for WTI crude oil. The Subcommittee report suggested that allowing for delivery at other locations could reduce the volatility of the contract. It is truly disappointing that since our report was issued, no progress has been 

made in allowing for delivery in other places than Cushing. Again, 

the price of oil to our consumers is higher because of that failure. 

The final problem is that a large portion of trading of WTI crude 

oil now takes place in London, regulated by the British authorities 

under British law. How can we really know what is influencing our 

oil markets when we can’t see all the market data? Although the 

CFTC has a data sharing agreement with the British authorities, 

none of this data is available to the public. Unlike the U.S. oil futures market, there is no public data on how much of the trading 

occurring in London is done by speculators. So a key issue is how 

can we improve the transparency of the crude oil market? 

In addition to stopping the SPR fill, fixing the NYMEX contract, 

and getting information about WTI trades in London, a number of 

us have introduced the Close the Enron Loophole Act to improve 

the transparency of U.S. energy markets. Our bill would give the 

CFTC the authority to police what are now unregulated electronic 

trading markets for large energy traders. This vitally needed legislation is more important right now for natural gas prices, but there 

is nothing preventing crude oil contracts from being traded on unregulated electronic markets, as well, and which took place until 

recently. Many of us are working together to pass this legislation 

as part of the farm bill. 

All of our witnesses today are very knowledgeable about the oil 

markets. I thank all of them for their willingness to testify at this 

joint hearing and we all look forward to their testimony. 

I would also like to express particularly my appreciation to the 

Ranking Member of the Permanent Subcommittee, Senator Coleman, and his staff for their support in organizing this hearing, and 

to our colleagues on the Senate Energy Committee for working together with us to conduct this joint hearing. In particular, I want 

to thank Senators Dorgan and Murkowski of the Subcommittee on 

Energy for all of their efforts. The price of oil is an important issue 

for all of us and our constituents, as it affects virtually every aspect 

of our economy. I am glad that we have worked together so closely 

so that we can focus our witnesses and our attention in a single 

forum where this issue can be examined. 

[The prepared statement of Senator Levin follows:]

6

OPENING STATEMENT OF SENATOR CARL LEVIN 

Good morning. The Permanent Subcommittee on Investigations and the Subcommittee on Energy are conducting a joint hearing into why U.S. oil prices keep 

rising despite what appears to be an adequate U.S. supply of oil. The price of crude oil recently rose above $99 per barrel, a record high. Just be- fore Thanksgiving, the national average price of gasoline went over $3.10 per gallon 

for the second time this year. The price of diesel fuel is at a record high, as is the 

price of home heating oil. These record high prices severely hurt millions of Americans and American businesses. They raise the cost of virtually everything in our 

daily lives—the gasoline in our cars and trucks, the food we eat, air travel, heating 

our homes and offices, generating electricity, and manufacturing countless industrial and consumer products. It is our duty in the Congress to do everything we can 

to ensure that the price Americans pay for energy is a fair price. 

Just about a year ago, on January 18, the price of crude oil on the New York Mercantile Exchange (NYMEX) was about $50 per barrel. A few weeks ago, the NYMEX 

price reached an all-time high of just over $99 per barrel. [Exhibit 1] Although the 

price of oil virtually doubled during this period—an unprecedented rise of nearly 

$50 in just one year—the overall inventory of oil in the United States has been 

above the 5-year average for the entire year. [Exhibit 2] It seemingly defies the laws 

of supply and demand to have an astronomical increase in the price of oil at the 

same time the U.S. inventory of oil has stayed above average. 

On any given day, we can read in the newspapers or hear on the television the 

familiar explanations for why the price of oil is so high. Instability in the Middle 

East, bad weather affecting oil production platforms, civil strife in oil producing 

countries, the declining value of the dollar. These are just a few of the ‘‘usual suspects’’ that are often cited as the reasons for high prices. 

The problem with these explanations is not that they’re false. Most of them are 

true. But most of them been true for some time. Unfortunately, instability in the 

Middle East is not new. There is always bad weather somewhere around the globe 

that affects oil production and transportation. There is, unfortunately, a lot of civil 

strife in a number of oil producing countries. The dollar rises, and the dollar falls. 

The world is a dangerous place. These factors alone cannot justify a doubling in the 

price of oil. 

So, what else can help explain record prices? In this hearing we will examine 

some of the other factors that are contributing to the high price of oil, as well as 

what we can do about it. 

One key factor that has contributed to the rise in oil prices over the past few 

years is the virtual explosion of trading of paper contracts for oil delivery in future 

months—trading which is speculative and not intended to result in the actual delivery of oil. Traders are trading paper oil contracts in record amounts. In the last four 

years we have seen a huge increase in the number of oil futures contracts traded 

on the New York Mercantile Exchange. And there also has been tremendous growth 

of trading of U.S. crude oil in London. As Secretary of Energy Bodman recently said, 

‘‘The prices for crude oil are now set in New York and London and Tokyo, Singapore 

and other trading hubs around the world.’’

Data compiled by the Commodity Futures Trading Commission (CFTC) shows 

that, in the past few years, out of this overall increase in energy trading, the 

amount of trading due to speculation has nearly tripled. This next chart shows that 

in the last few years the percentage of oil futures contracts held by speculators has 

risen from around 15% to nearly 45%. [Exhibit 14] These are traders who are solely 

interested in trading for a profit, rather than hedging their positions to assure a 

stable supply at a price they can count on. These energy speculators not only comprise a larger percentage of U.S. oil trades, but are also responsible for the larger 

amount of dollars involved in U.S. energy commodity trades. 

A fair price is a price that accurately reflects the forces of supply and demand 

for a commodity, not the trading strategies of speculators who only are in the market to make a profit for themselves by the buying and selling of paper contracts 

with no intent to actually purchase, deliver, or transfer the commodity. But as we 

have all too often seen in recent years, when speculation grows so large that it has 

a major impact on the market, prices get distorted and stop reflecting true supply 

and demand. 

Last year, my Subcommittee released a bipartisan report, ‘‘The Role of Market 

Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat.’’

The report found that trading of futures contracts by speculators had increased the 

demand for oil futures, and this additional demand for contracts had contributed an 

additional $20 to the price of oil. At the time the price of oil was around $70 per 

barrel, so speculation was a major contributor to what was then thought to be skyVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
7

high crude oil prices. Our report recommended additional market transparency and 

stronger market oversight to reduce the effects of increased speculation. 

Given the hefty increases in speculation in the U.S. oil market, we need to know 

what the effect of all this speculation has been on U.S. oil prices. To what extent, 

for example, has dramatically increased speculation contributed to the extraordinary 

jump in prices we have seen this year? Is speculation responsible for $20 per barrel 

of oil? More? This is a vitally important question. If the extraordinary increase in 

oil prices is not based on actual supply and demand, then we need to figure out 

what role is being played by speculation, and what steps can be taken to restore 

the market’s focus on supply and demand. 

Speculation is not, of course, the only reason for sky-high oil prices in 2007. 

There’s another key reason we want to examine, and that is the policy of the Administration relative to adding oil to the Strategic Petroleum Reserve (SPR). One 

of today’s witnesses, Dr. Philip Verleger, will present his analysis of how the Administration’s program to fill the SPR with high-quality crude oil, also known as sweet 

crude, has contributed to the recent price increases. He will tell us how the SPR 

fill program has helped deplete supplies of sweet crude normally used to fulfill crude 

oil futures contracts traded on the NYMEX, and how those reduced supplies have, 

in turn, pushed up crude oil prices. 

There’s a third problem as well that the SPR fill program has exacerbated—the 

fact that the standard NYMEX futures contract that sets the benchmark price for 

U.S. crude oil requires a particular type of high quality crude oil known as West 

Texas Intermediate (WTI) to be delivered at a particular location, Cushing, Oklahoma. Because the price of the standard contract depends upon the supply of WTI, 

which again is but one type of sweet crude oil, the supply and demand conditions 

in Oklahoma have a disproportionate influence on the price of NYMEX futures contracts. 

Four years ago, I called for reform of this outdated feature of the standard 

NYMEX crude oil contract, but it has never been fixed and the problems caused by 

the standard contract have gotten worse. This next chart [Exhibit 4] shows that in 

2007, the crude oil inventory in Cushing, Oklahoma, fell. When that inventory 

crashed, it caused a big supply drop in Oklahoma, even though overall U.S. crude 

oil inventories remained above average. But because the Oklahoma supply fell, the 

benchmark price on the NYMEX jumped, since, again, the NYMEX price depends 

on the supply and demand for oil at Cushing, Oklahoma. 

According to Dr. Verleger, it is only sweet crude oil that now is in relatively short 

supply compared to demand, and that is part of the reason why oil traded on the 

NYMEX has become so expensive. Indeed, last month, the difference in price between sweet crude oil and some other types of crude oils reached $20, $30, even $40 

per barrel in U.S. trading. That’s a striking price gap. 

Why does it matter that the Administration is depositing sweet crude into the 

SPR? It matters because the price of one key type of sweet crude, WTI, determines 

the price of the standard NYMEX contract. The standard NYMEX contract price, 

in turn, has a major influence on the price of fuels refined from crude oil such as 

gasoline, heating oil, and diesel. That means when the WTI price is no longer representative of the price of U.S. crude oil in general, the prices of all of these other 

commodities are also thrown out of whack. 

And DOE has made the situation much worse by purchasing several million of 

barrels of sweet crude and depositing them into the SPR over the past few months. 

Those purchases remove sweet crude from the marketplace and reduce the supply 

of oil available for WTI contracts. As you can see from the chart, the drop of several 

million barrels in the inventory of crude oil at Cushing since August has been accompanied by a huge increase in the price of U.S. crude oil. [Chart 4]. It seems that 

the only place in the United States where price really reflects supply and demand 

is in Cushing, Oklahoma. 

In the last four months, DOE has taken several million barrels of sweet crude off 

the market to fill the SPR, regardless of price. If DOE had simply postponed the 

SPR fill for one year, it would have not only alleviated the upward pressure on U.S. 

oil prices, but also saved U.S. taxpayers millions of dollars. Based on the market 

and futures prices at the time the DOE bought oil for the SPR, for example, DOE 

could have saved $10 per barrel by simply locking in the futures price and deferring 

current deliveries for one year. That’s because at the time the oil was acquired, the 

futures price for delivering the oil in one year was about $10 per barrel cheaper 

than the current price. Since the Administration bought enough oil to deposit another 8.7 million barrels in the SPR, that $10 price difference would have translated 

into a one-year taxpayer savings of nearly $87 million. In light of Congress’s direction in the Energy Policy Act of 2005 to fill the SPR in a manner that minimizes 

8

costs to taxpayers and minimizes impacts on oil prices, it is incomprehensible why 

DOE continues to fill the SPR without taking advantage of the lower futures prices. 

This state of affairs raises two questions. First, why is DOE contributing to the 

shortage of sweet crude oil by placing it into the SPR, and thereby helping boost 

the standard NYMEX price? What’s worse, it is our understanding that DOE intends to deposit another 7 million barrels of sweet crude oil into the SPR beginning 

next month. DOE will be taking this high-quality oil off the market just at the time 

when it will in the highest demand to produce gasoline and diesel fuel for the spring 

and summer driving seasons. 

Second, it appears that we have an oil futures market that reflects the supply and 

demand conditions in Oklahoma, but not necessarily the overall supply and demand 

situation in the United States as a whole. Our Subcommittee raised this very issue 

in 2003, and called on the CFTC and NYMEX to work together to revise the standard NYMEX crude oil futures contract to reduce its susceptibility to local imbalances in the market for WTI crude oil. The Subcommittee report suggested that allowing for delivery at other locations could reduce the volatility of the contract. It 

is truly disappointing that since our report was issued no progress has been made 

in allowing for delivery in other places than Cushing. Again, the price of oil to our 

consumers is higher because of that failure. 

A final problem is that a large portion of trading of WTI crude oil now takes place 

in London, regulated by the British authorities under British law. How can we really know what is influencing our oil markets when we can’t see all of the market 

data? Although the CFTC has a data-sharing agreement with the British authorities, none of this data is available to the public. Unlike the U.S. oil futures market, 

there is no public data on how much of the trading occurring in London is done by 

speculators. So a key issue is how can we improve the transparency of the crude 

oil market? 

In addition to stopping the SPR fill, fixing the NYMEX contract, and getting information about WTI trades in London, a number of us have introduced the ‘‘Close the 

Enron Loophole Act’’ to improve the transparency of U.S. energy markets Our bill 

would give the CFTC the authority to police what are now unregulated electronic 

trading markets for large energy traders. This vitally needed legislation is more important right now for natural gas prices, but there is nothing preventing crude oil 

contracts from being traded on unregulated electronic markets as well, and which 

took place until recently. Many of us are working together to pass this legislation 

as part of the Farm Bill. 

All of our witnesses today are very knowledgeable about the oil markets. I thank 

all of them for their willingness to testify at this joint hearing. I look forward to 

their testimony. 

I would also like to express my appreciation to the Ranking Member of the Permanent Subcommittee, Senator Coleman, and his staff, for their support in organizing this hearing, and to our colleagues on the Senate Energy Committee for 

working together with us to conduct this joint hearing. I want to particularly thank 

Senators Dorgan and Murkowski of the Subcommittee on Energy for their efforts. 

The price of oil is an important issue for all of us and our constituents, as it affects 

virtually every aspect of our economy. I am glad that we have been able to work 

together so we can focus our witnesses and our attention in a single forum where 

this issue can be examined.

Senator LEVIN. Senator Dorgan. 

OPENING STATEMENT OF SENATOR DORGAN 

Senator DORGAN. Mr. Chairman, thank you very much. We were 

intending to hold a hearing in our Subcommittee this very week 

with some of the same witnesses, and when we saw that you were 

holding this hearing, we suggested that it be joint. I very much appreciate your cooperation. I think this is a very important hearing. 

The Close the Enron Loophole Bill is essential. I chaired the 

hearings in the Commerce Committee where Ken Lay came and 

took the Fifth Amendment. I chaired a good number of hearings on 

Enron in that Commerce Subcommittee and know a fair amount 

about what happened back then. No one is suggesting there is an 

equivalent set of actions here. We now know that what happened 

with respect to the Enron loophole is that markets were manipuVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00016 Fmt 6633 Sfmt 6601 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
9

1See Exhibit No. 18, which appears in the Appendix on page 205. 

lated. Billions of dollars were extracted from the pockets of the victims, that is the consumers, particularly on the West Coast. We 

know that it was criminal activity and a criminal enterprise now. 

But we know that much of that was able to take place outside of 

the view of regulators. 

This question of the price of oil on the futures market raises the 

same sort of issues, and long past the time when we discovered 

Enron was a criminal enterprise, we have not yet closed the Enron 

loophole that allowed all that activity to take place outside of the 

view of regulators. I am proud to be a cosponsor, Mr. Chairman, 

of that legislation. 

There is not a free market in oil. With the substantial blockbuster mergers in the oil industry, the companies have more power 

and more muscle in the marketplace. The OPEC nations control 40 

percent of the world’s oil supply, including the faucet that feeds 

much of our oil addiction. Ninety percent of the oil is controlled by 

companies that are at least partially or wholly state-owned, and, of 

course, that moves them away from some of the market principles. 

And finally, the commodities futures market, in my judgment, has 

become an orgy of financial speculation, a carnival of greed almost, 

and I believe it is substantially increasing the market price for a 

barrel of oil. 

I used to teach a little economics, and some might hear that 

statement and say, well, it must have been very little, but I will 

say this. There are some, I think, thoughtful economists who take 

a look at what is happening in the futures market and say that 

this has become an unbelievable amount of speculative activity 

that is driving up the price of oil, having very little to do with supply and demand. 

There is so much money sloshing around in these markets these 

days. Hedge funds are up hip deep into these markets. Investment 

banks are also into these markets. I don’t know because I haven’t 

investigated it, but I have read investigative reports that investment banks in some cases are even constructing storage facilities 

in order to store oil, keep it off the market, anticipating the market 

price will increase. That means you reduce supply, and as you reduce supply, drive up price and hold oil for profits later. These are 

people that don’t want to buy any oil. They don’t want to ever own 

any oil except on paper, but they want to be in the futures market 

to be speculators and make a lot of money. 

Now, Mr. Chairman, if I might show Exhibit No. 18 1 first, your 

Subcommittee did some extraordinary work in detailing the Amaranth issue. A 32-year-old energy trader helped to lead to the collapse of an $8 billion hedge fund. This is in natural gas. You all 

did this. It was interesting to me, why is it that you were able to 

dig this out and the referees, the people that are supposed to wear 

the striped shirts, the people that are paid on the public payroll, 

didn’t know this. Why is it that the regulators couldn’t see this? It 

is because we have a system in which they are prevented from 

knowing what happens on the unregulated exchanges. 

10

1See Exhibit No. 16, which appears in the Appendix on page 203. 

And so if I might see Exhibit No. 16,1 after I read about Amaranth and the work that you had done on this Subcommittee, 

which seems to me to just be ‘‘case closed’’ in terms of should we 

do something, CNNMoney.com had this on it. It said, ‘‘It has been 

rumored that Goldman Sachs has over $80 billion in the market. 

Its influence is so big traders refer to the day of the month when 

the bank sells the current month contract and buys the future 

month as the ‘Goldman roll’ due to its effect on price.’’ Once again, 

the notion of big investment banks being involved in this speculative market. 

That is a change. That is new. And it dramatically affects the 

market in a way that is not related to ordinary supply and demand 

relationships. So something is wrong. 

I support the marketplace. I think it is a wonderful thing. When 

it works well, it is the best allocator of goods and service. And you 

must have a futures market for liquidity and so on. But it seems 

to me that the case has been made that we have a circumstance 

now where there is no shortage of oil. We can make a case that, 

yes, China is going to have 100 million additional cars on the road 

in 15 years and has demand. You can make lots of cases that we 

are going to be short of oil in the future. I understand that. 

But look at the fundamentals now and evaluate. Are we short of 

oil? What would cause these prices to move up and bob around at 

$90 and $100 a barrel? The cause, in my judgment, is unbelievable 

speculation and unregulated over-the-counter markets that leaves 

this country and the markets open to market manipulation of oil 

prices. 

We need to give the CFTC the broader ability to prevent fraud, 

manipulation, excessive speculation in these commodity markets, 

and a good start in doing that is the Close the Enron Loophole bill. 

If there is a legal loophole that can be exploited, our experience 

having served in Congress and watching this is it will be exploited. 

When we see it being exploited, we have a responsibility to change 

it. 

If price increases in oil are due to supply and demand imbalances, then economic policies can be developed to encourage investments in new energy sources and conservation. If price increases 

are due to geopolitical factors in producer countries, then you develop foreign policies to try to respond to that. If price increases are 

due to hurricane damage that damage investments, then you can 

develop other kinds of approaches in Congress to respond to that. 

But to the extent that energy prices are the result of excessive 

speculation, only a cop on the beat, only an effective regulator with 

the tools to regulate, with both oversight and enforcement authority, is going to solve this problem. 

So, Mr. Chairman, I thank you. I am pleased to join you. And 

once again, I see no justification in the marketplace for oil prices 

to reach $100 a barrel. I think there is a carnival of speculation 

out there that is unhealthy for this country and this Congress has 

a responsibility to give regulators the tools they need. 

Senator LEVIN. Thank you so much, Senator Dorgan. Senator 

Coleman. 

11

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. Thank you, Mr. Chairman. Over the past 5 

years, the Permanent Subcommittee on Investigations has conducted a number of investigations into volatility and price increases in essential U.S. energy commodities, including natural 

gas, gasoline, and crude oil. These investigations have examined 

not only the role of market speculation in rising energy prices, but 

also the adequacy of government oversight in the markets that set 

these prices. 

Today’s hearing, which focuses on the impact of market speculation on crude oil prices, continues the Subcommittee’s bipartisan effort to ensure the integrity of U.S. energy prices. As always, I 

would like to thank Chairman Levin and his staff for their hard 

work on these issues. 

Americans are upset because they are paying more for oil than 

ever before, and a lot of people are concerned that speculation is 

behind the record price surge. Today’s hearing is an important step 

in addressing these concerns and an important reminder that high 

energy prices affect all Americans. 

Over the past several years, U.S. oil and gas markets have experienced unprecedented volatility and significant price increases. 

Since 2000, the price of crude oil has jumped from a range of $25 

to $30 per barrel to over $90 per barrel. And since last year alone, 

crude oil prices have increased by $20 to $30 per barrel, often approaching a staggering $100 per barrel. 

Record high crude oil prices have affected everything from home 

heating bills to holiday travel, and American families and small 

businesses are feeling the squeeze. Today, the cost of gasoline at 

the pump hovers around $3 a gallon. Diesel fuel, which is often 

used by trucking companies and delivery services, remains even 

higher. And of particular concern back home in Minnesota, the cost 

of heating oil continues to rise. 

As a Senator from the Midwest, I know all too well that heating 

bills will place millions of Americans in financial jeopardy this winter. I will never forget the testimony I heard during the Subcommittee’s field hearing in St. Paul last year. Too many Americans find themselves in similar circumstances to Deidre Jackson 

and Lucille Olsen, who testified about the burdens caused by rising 

energy costs. In the case of Ms. Olsen, her home heating bill represented 30 percent of her monthly income. As a senior citizen trying to cope with the high cost of health insurance and prescription 

drugs, last year’s spikes in energy prices made it difficult for her 

to make ends meet. Ms. Jackson, a working mother of three and 

a college student, shared with me the financial jeopardy she faced 

as a result of a home heating bill that increased by more than 100 

percent. 

As crude oil prices have soared to record levels, Ms. Jackson’s 

and Ms. Olsen’s testimony provided powerful reminders of the real 

world impacts of high energy prices. In the short term, this situation means there is a lot of hardship for a lot of folks who can’t 

afford double-digit heating increases, and I have got to tell you, in 

Minnesota, where I have already been shoveling snow—it was 

minus-9 in St. Paul not too long ago, and I think minus-27 in 

Northern Minnesota—there is going to be a great impact. So it is 

12

important that Congress consider the factors that have contributed 

to the record price run-up. 

The Department of Energy has announced larger than expected 

stockpiles of both crude oil and gasoline, and most experts agree 

that there is no overall shortage of U.S. crude. Nevertheless, oil 

prices remain at near record highs, suggesting that forces other 

than supply and demand may have contributed to these increases. 

People are concerned that speculative trading is the reason for 

the unprecedented price surge for crude oil. We have called today’s 

hearing to specifically address these concerns. 

A number of Subcommittee investigations have focused on the 

troubling level of high-risk speculative trading that occurs on U.S. 

energy markets, much of it on unregulated over-the-counter energy 

exchanges exempted from government oversight. Financial institutions, pension funds, hedge funds, and other speculative investors 

have deployed tens of billions of dollars in speculative capital to 

U.S. crude oil markets. These traders bring important liquidity and 

vitality to our energy markets, but they should not be allowed to 

overwhelm the real buyers and sellers of crude oil, including utilities and industrial users. For this reason, it is imperative that Congress provide regulators with the statutory authority and budget 

necessary to police our energy markets and ensure the integrity of 

our energy prices. 

That said, it is still hard to pin the run-up on crude oil on speculation run amok. The markets still appear to respond to supply and 

demand fundamentals. Last year, as Chairman Levin noted, our report highlighted the impact of speculation on the price of oil and 

gas. Again, though, as we look at it in terms of responding to fundamentals, it appears that the long-term underlying trend for 

crude oil is that demand is increasing while supply remains tight. 

Geopolitical instability, including uncertain situations in Iraq and 

Iran, have created fears of potential supply disruption and a substantial risk premium has been built into current prices. 

Beyond those temporary concerns, global demand for crude oil 

fueled by China and India’s development continues to increase, 

leaving many investors worried that global supplies cannot keep 

pace with demand. Add to these concerns the fact that our refining 

capacity cannot satisfy projected demand, and it becomes clear that 

there is more behind high crude oil prices than just market speculation. 

Oil prices are at record highs because the United States and the 

rest of the world are consuming oil at unprecedented levels. It is 

a matter of when, not if, global supplies will be unable to meet our 

demand. And we here in Congress cannot forget that we are part 

of the problem. 

The Chairman noted and went through with great detail the impact on cost of putting sweet crude oil into the strategic reserve. 

I intend to question the witnesses about this. There are concerns 

about whether there are environmental regulations that impact 

this. But clearly, that is from a micro perspective part of the problem. 

We also have to look at the macro. We have not taken the necessary steps to reduce our dependence on foreign oil. More than 

ever before, it is imperative that we explore alternative sources of 

13

energy. At the same time, the U.S. Congress must work to ensure 

the integrity of U.S. energy markets by providing regulators, as I 

said before, with the statutory authority and resources necessary 

to do their job. As we do so, we must protect competition and avoid 

unintended consequences, namely creating incentives for investors 

to move to less-transparent energy markets, including those offshore. 

Just one last comment on this, kind of the macro issue. As we 

deal with the cost of oil today, one of the things that I can’t forget 

is that in the early 1970s, this country went through a run-up in 

the cost of gasoline, went through long lines, and for a moment it 

appeared that we would do something about it. Brazil went 

through the same thing. In 1970, they embarked on a course of 

ending their country’s dependence on foreign oil and what happened is despite then the rises and falls in the price of gas and a 

barrel of oil, Brazil stayed on course and today is in a situation 

where they don’t have to import foreign oil. It is hard to buy a car 

in Brazil that is not a flex-fuel engine. 

In this country, unfortunately, as prices dropped, it pulled the 

market out of a lot of alternative sources of energy, and 30 years 

later, we find ourselves still kind of at the starting gate. I think 

whatever we do here, that we have to take a long-term perspective 

and understand that we have to end dependence on foreign oil. 

So I hope as we address the situation this winter, that we are 

looking five, ten winters ahead so that the generation after me 

doesn’t come up to the plate and find themselves in the same situation. 

Again, I would like to thank Chairman Levin for initiating today’s bipartisan hearing. I would like to thank today’s witnesses for 

their testimony on these important issues. Thank you, Mr. Chairman. 

[The prepared statement of Senator Coleman follows:]

OPENING STATEMENT OF SENATOR NORM COLEMAN 

Over the past five years, the Permanent Subcommittee on Investigations has conducted a number of investigations into volatility and price increases in essential 

U.S. energy commodities, including natural gas, gasoline, and crude oil. These investigations have examined not only the role of market speculation in rising energy 

prices, but also the adequacy of government oversight in the markets that set these 

prices. Today’s hearing, which focuses on the impact of market speculation on crude 

oil prices, continues the Subcommittee’s bipartisan effort to ensure the integrity of 

U.S. energy prices. As always, I would like to thank Chairman Levin and his staff 

for their hard work on these issues. Americans are upset that they are paying more 

for oil than ever before, and a lot of people are concerned that speculation is behind 

the record price surge. Today’s hearing is an important step in addressing these concerns and an important reminder that high energy prices affect all Americans. 

Over the past several years, U.S. oil and gas markets have experienced unprecedented volatility and significant price increases. Since 2000, the price of crude oil 

has jumped from a range of $25-$30 per barrel to over $90 per barrel. In the last 

year alone, crude oil prices have increased by a $20-$30 per barrel, often approaching a staggering $100 per barrel. 

Record high crude oil prices have affected everything from home heating bills to 

holiday travel, and American families and small businesses are feeling the squeeze. 

Today, the cost of gasoline at the pump hovers around $3 a gallon. Diesel fuel, 

which is often used by trucking companies and delivery services, remains even higher. And of particular concern back home in Minnesota, the cost of heating oil continues to rise. 

As a Senator from the Midwest, I know all to well that heating bills will place 

millions of Americans in financial jeopardy this winter. I will never forget the testiVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
14

mony I heard during the Subcommittee’s field hearing in St. Paul last year. Too 

many Americans find themselves in circumstances similar to Deidre Jackson and 

Lucille Olson, who testified about the burdens caused by rising energy costs. In the 

case of Ms. Olson, her home heating bill represented 30 percent of her monthly income. As a senior citizen trying to cope with the high costs of health insurance and 

prescription drugs, last year’s spikes in energy prices made it difficult for her to 

make ends meet. Ms. Jackson, a working mother of three and a college student, 

shared with me the financial jeopardy she faced as a result of a home heating bill 

that had increased by more than 100 percent. As crude oil prices soar to record levels, Ms. Jackson’s and Ms Olson’s testimony provided powerful reminders of the 

real-world impacts of high energy prices. 

In the short-term, this situation means there is a lot of hardship for a lot of folks 

who can’t afford double-digit heating cost increases. It is critical that Congress examine the factors that have contributed to the record price run-up. The Department 

of Energy has announced larger-than-expected stockpiles of both crude oil and gasoline, and most experts agree that there is no overall shortage of U.S. crude. Nevertheless, oil prices remain at near record highs, suggesting that forces other than 

supply and demand may have contributed to these increases. 

People are concerned that speculative trading is the reason for the unprecedented 

price surge for crude oil. We have called today’s hearing to specifically address these 

concerns. A number of Subcommittee investigations have focused on the troubling 

level of high-risk, speculative trading that occurs on U.S. energy markets—much of 

it on unregulated, over-the-counter energy exchanges, exempted from government 

oversight. Financial institutions, pension funds, hedge funds, and other speculative 

investors have deployed tens of billions of dollars in speculative capital to U.S. crude 

oil markets. These traders bring important liquidity and vitality to our energy markets, but they should not be allowed to overwhelm the real buyers and sellers of 

crude oil, including utilities and industrial users. For this reason, it is imperative 

that Congress provide regulators with the statutory authority and budget necessary 

to police our energy markets and ensure the integrity of our energy prices. 

That said, it is still hard to pin the price run-up for crude oil on speculation run 

amuck. The markets still appear to be responding to supply and demand fundamentals. The long-term underlying trend for crude oil is that demand is increasing while 

supply remains tight. Geopolitical instability, including uncertain situations in Iraq 

and Iran, has created fears of potential supply disruptions, and a substantial ‘‘risk 

premium’’ has been built into current prices. Beyond those temporary concerns, 

global demand for crude oil, fueled by China and India’s development, continues to 

increase, leaving many investors worried that global supplies cannot keep pace with 

demand. Add to these concerns the fact that our refining capacity cannot satisfy our 

projected demand and it becomes clear that more is behind high crude oil prices 

than market speculation. 

Oil prices are at record highs because the U.S. and the rest of the world are consuming oil at unprecedented levels. It is a matter of when, not if, that global supplies will be unable to meet our demand. And we here in Congress cannot forget 

that we are part of the problem. We have not taken the necessary steps to reduce 

our dependence on foreign oil. More than ever before, it is imperative that we explore alternative sources of energy. Moreover, Congress must work to ensure the integrity of U.S. energy markets by providing regulators with the statutory authority 

and resources necessary to do their jobs. As we do so, however, we must protect 

competition and avoid unintended consequences—namely, creating incentives for investors to move to less transparent energy markets, including those offshore. 

Again, I would like to thank Chairman Levin for initiating today’s bipartisan 

hearing. I would like to thank today’s witnesses for their testimony on these important issues.

Senator LEVIN. Thank you so much, Senator Coleman. Senator 

Murkowski. 

OPENING STATEMENT OF SENATOR MURKOWSKI 

Senator MURKOWSKI. Thank you, Mr. Chairman, and thank you 

to the panel here before us this morning. I appreciate your being 

here. I do believe that your testimony this morning will be very 

helpful to us as we seek to determine whether increasing demand, 

market speculation, or a combination of those and other factors 

15

have led us to where we are today, with the price of crude oil approaching really an all-time high. 

In looking at how oil is traded, it is also important to focus on 

the basic fundamentals of the market. In the global market, the 

price of oil is set by supply and demand conditions. Economics 101 

teaches us that when demand is high and supply is low, the market will see an increase in price. So, therefore, even as we examine 

the possible role that speculation has played in the increase of 

crude oil prices, we must not lose sight of the fact that high oil 

prices are being driven by a lot of different factors out there. These 

include the increases in global oil demand, reduced supply, ongoing 

geopolitical concerns, and decreased refinery capacity. We all know 

that oil demand in China, for example, appears to be continuing its 

recent double-digit advances. 

Since the beginning of this year, oil prices have increased by 

nearly 40 percent, and while this is very steep, it is not unprecedented. Over the past 10 years, crude oil prices have increased by 

approximately 370 percent. Much of this increase occurred in the 

absence of heavy trading and is broadly attributed to the increase 

in global demand. 

According to the EIA, global demand for oil is projected to rise 

by 1.1 million barrels per day in 2007 and 1.5 million barrels per 

day in 2008. Total U.S. petroleum consumption is expected to increase by 0.5 percent in 2007 and 1 percent in 2008. This increase, 

which has brought the demand levels much closer to supply levels, 

can be connected to the economic growth of the United States and 

to colder winter temperatures, which will continue to boost the demand for our heating oil. 

So with the high prices and the growing consumption, we have 

got to figure out ways that we can increase our domestic production. Currently, the OPEC countries continue to be the largest oil 

producing countries and hold the largest percent of oil reserves. 

Seventy-seven percent of the world’s oil reserves are located outside 

of the United States. Since November 2007, OPEC’s production has 

decreased by 1.2 million barrels per day, partially the result of political instability in Nigeria, Venezuela, and Iran. We know that 

events in these countries have directly contributed to and quite 

honestly become a constant factor in higher crude oil prices. 

Also related to the topic of increasing supply is the need to increase our ability to refine the supply and to diversify the places 

where refining takes place. EIA has reported that the current domestic refinery capacity expansion plan estimates approximately 

one million barrels per day by 2012. This is the equivalent of five 

new refineries. Our domestic refining capacity is growing, but not 

as quickly as we would hope that it would. 

So we need to find ways to increase capacity at existing refineries more quickly, and we also need to explore and promote ways 

to build new refineries in places outside of the Gulf of Mexico. We 

look back to Hurricane Katrina and certainly realize that that 

made us painfully aware that the lack of refining capacity in this 

country must be addressed. We have got to ensure that new refineries are built. If we don’t address the need for more refinery capacity in the United States, our dependence on our imports for petroleum products will continue to increase, our record trade deficit 

16

will grow even larger as we have to import more finished products, 

and the number of skilled jobs lost from the construction, operation, and maintenance of domestic refineries will increase. 

So in spite of the increase in oil and petroleum costs, global oil 

markets will likely remain tight as world oil demands continue to 

grow. The best way to continue to address this issue is to increase 

domestic production, promote alternative fuels, and conserve greater amounts of energy, no great revelation there. Certainly as an 

Alaska Senator, I would be remiss if I didn’t take an opportunity 

to urge that in this Nation as we look to increased domestic production that we look to the Arctic Coastal Plain. We also need to 

increase development in the Outer Continental Shelf and to increase oil shale production in the West. 

I do appreciate the significance, the timing of this hearing this 

morning, the willingness to hold the hearing to examine crude oil 

speculation in greater detail, but I also view this as an opportunity 

to recognize that while speculation may contribute to high oil 

prices, it is just one piece in a much larger puzzle. 

So again, Mr. Chairman, I appreciate you convening this joint 

hearing this morning and look forward to the testimony from all. 

Thank you. 

[The prepared statement of Senator Murkowski follows:]

OPENING STATEMENT OF SENATOR LISA MURKOWSKI 

Welcome. I want to thank our panel of witnesses for taking time out of their busy 

schedules to join us today. Your testimony will be invaluable as we seek to determine whether increasing demand, market speculation, or a combination of those and 

other factors have led the price of crude oil to approach its all-time high. As oil prices approached the $100 per barrel mark, the media began to draw attention to financial energy market activity. Market analysts began to question 

whether supply and demand, coupled with geopolitical instability and a number of 

short-term incidents, were enough to drive crude prices as high as they are. 

This prompted those of us in Congress, private industry, and consumers to begin 

a similar debate, and to seek answers about the effects that energy trading has on 

the price of crude oil and its supply. Some have now concluded that energy prices 

are pushed and sustained at high levels because of speculation, and that the large 

privately owned oil companies and financial banks are manipulating the market. 

Oil is the world’s most actively traded global commodity, and there are several 

different ways it can be traded. For example, oil can be traded on the ‘‘spot’’ market, 

which involves transactions for immediate or short-term delivery of oil at a specific 

site. Oil can also be traded through futures contracts, which are agreements to purchase or sell a given amount of crude oil at a price determined when the agreement 

is reached. 

Futures contracts can be traded in two venues: 1) on the New York Mercantile 

Exchange (NYMEX) which is traded in units of 1,000 barrels of oil to be delivered 

at Cushing, Oklahoma, and 2) off the exchange in over-the-counter (OTC) transactions, which often occur through voice-brokers or online market platforms. Traders in each of these markets must follow certain guidelines, although the level of 

regulatory scrutiny that applies depends on the market in which the oil is traded 

in. 

The requirements for future energy contracts are laid out in the Commodity Exchange Act (CEA), last amended in 2000 with passage of the Commodity Futures 

Modernization Act. These requirements include record-keeping and reporting, market surveillance, curbs on excessive speculation, and the establishment of various 

financial standards. And even though OTC contracts are traded without Commodity 

Futures Trading Commission oversight under current law, they are still subject to 

the CEA antifraud and anti-manipulations provisions. 

In looking at how oil is traded, it is also important to focus on the fundamental 

basics of the market. In the global market, the price of oil is set by supply and demand conditions. Economics 101 teaches us that when demand is high and supply 

is low, the market will see an increase in price; when supply outpaces demand, the 

price of the commodity will decrease. Therefore, even as we examine the possible 

17

role speculation has played in the increase of crude oil prices, we must not lose sight 

that high oil prices are being driven by many factors. These include increases in 

global oil demand, reduced supply, ongoing geo-political concerns, and decreased refinery capacity. 

Since the beginning of this year, oil prices have increased by nearly 40 percent. 

While steep, this is not unprecedented—over the past 10 years, crude oil prices have 

increased by approximately 370 percent. Much of this increase occurred in the absence of heavy trading and is broadly attributed to the increase in global demand. 

According to the Energy Information Administration, or EIA, global demand for oil 

is projected to rise by 1.1 million barrels per day in 2007 and 1.5 million barrels 

per day in 2008. Total U.S. petroleum consumption is expected to increase by 0.5% 

in 2007 and 1.0% in 2008. This increase, which has brought demand levels much 

closer to supply levels, can be connected to the economic growth of the U.S. and to 

colder winter temperatures, which will continue to boost demand for heating oil. 

With high prices and growing consumption, we need to find ways to increase our 

domestic production. Even though U.S. oil production is projected to average 5.1 million barrels per day in 2007, which is an increase of 0.3% from 2006 production levels, this is just a portion of the supply needed to meet the demand. And unfortunately this country still relies heavily on foreign oil imports and so the Organization 

of the Petroleum Exporting Countries (OPEC) needs to increase supply production 

to fill in the gap. 

Currently, OPEC countries continue to be the largest oil producing countries and 

hold the largest percent of oil reserves. 77% of the world’s oil reserves are located 

outside of the U.S., with a large portion held by national or state-owned oil companies. These reserves are considerably larger than the reserves owned by 

ExxonMobil, the largest multinational oil company. Yet, since November 2006, 

OPEC has decreased production by 1.2 million barrels per day, partially because of 

political instability in Nigeria, Venezuela, and Iran. Events in these countries have 

directly contributed to, and become a constant factor in, higher crude oil prices. 

Related to the topic of increasing supply is the need to increase our ability to refine the supply, and to diversify the places where refining takes place. EIA reports 

that current domestic refinery capacity expansion plan estimates are approximately 

1 million barrels per day by 2012, equivalent to five new refineries. But this figure 

is one-third lower than EIA’s estimate in 2006, which projected refinery capacity of 

1.5 million barrels per day in 2012. So domestic refining capacity is declining, but 

demand is still increasing. 

We need to find ways to increase capacity at existing refineries. We need to explore, and promote, ways to build new refineries in places outside the Gulf of Mexico. Less capacity will not restrain demand—it will restrict supply, and ultimately 

increase prices at the pump. When supply and demand are tight, there is also little 

flexibility to accommodate unplanned refinery outages, which could have dangerous 

consequences. 

Hurricane Katrina made it painfully clear that the lack of refining capacity in this 

country must be addressed. Almost 50% of the U.S. refinery capacity is located in 

the Gulf Coast. Hurricane Katrina shut down 10% of U.S. refinery capacity. We did 

not have spare space at other refineries to absorb that shock. Over the past several 

years, refineries have been consistently running close to 90 percent capacity utilization, compared to 78 percent utilization in 1985. 

We need to ensure that new refineries are built. If we do not address the need 

for more refinery capacity in the United States:

• our dependence on imports for petroleum products will continue to increase, 

• our record trade deficit will grow even larger as we have to import more finished products, and 

• the number of skilled jobs lost from the construction, operation and maintenance of domestic refineries will increase, depriving hardworking Americans 

of a chance to earn a good living. 

In spite of the increase in oil and petroleum costs, global oil markets will likely 

remain tight as world oil demands continue to grow. The best way to address this 

continuing issue is to increase domestic production, promote alternative fuels, and 

conserve greater amounts of energy. 

As an Alaska Senator I would like to see development occur on shore from the 

Arctic coastal plain in Alaska. We also need to increase development in the outer 

continental shelf and to increase oil shale production in the West. 

Mr. Chairmen, I appreciate your willingness to hold this hearing and examine 

crude oil speculation in greater detail. But this is also an opportunity to recognize 

that while speculation may contribute something to high oil prices, it is just one 

piece of a much larger puzzle. Those of us in Congress have a responsibility to enVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
18

sure affordable energy for all Americans, but we will not succeed in this effort until 

we examine and address every factor which could be behind high prices. I look forward to hearing from today’s witnesses, and, going forward, to working with the 

members of these Subcommittees to resolve this serious matter.

Senator LEVIN. Thank you, Senator Murkowski. 

Let me now call upon the Ranking Member of the Homeland Security Committee, Senator Collins, and then we will call on the 

other Senators who are here in the order of their appearance for 

their opening statements, if they have any. Senator Collins. 

OPENING STATEMENT OF SENATOR COLLINS 

Senator COLLINS. Thank you. Thank you, Mr. Chairman. Long 

before the first official day of winter, the people of my State of 

Maine have been coping with cold weather and feeling the strain 

of high prices for home heating oil, gasoline, diesel fuel, and other 

products refined from fuel. According to the Energy Information 

Administration, last month, the benchmark price for a barrel of domestic crude oil averaged nearly $95. Compare that to $59 for November a year ago and you see a startling increase in a single year. 

That remarkable rise touches virtually every aspect of our economy. Oil prices significantly affect the costs of heating homes, driving family cars and commercial trucks, running fishing boats, operating farm and logging equipment, flying airplanes, making fertilizers, manufacturing plastics—the list goes on and on. 

Many causes contribute to the sharp rise in oil prices: Increased 

global demand for crude oil, instability in the Middle East and 

Venezuela, supply decisions of the OPEC cartel, insufficient U.S. 

refining capacity, the declining value of the dollar, and speculative 

trading on future markets. 

I would note that Chairman Levin and I joined forces a few years 

ago on a bipartisan amendment directing the Department of Energy to better manage the Strategic Petroleum Reserve. We worked 

on legislation, which I was proud to be the cosponsor of Senator 

Levin’s proposal, that the DOE should suspend purchases when 

prices were high so as not to further drive up prices by taking oil 

off the market. Now I question whether the intent of our amendment has been realized in the implementation by the Department 

of Energy. 

Our paramount challenge, of course, is to reduce our over-reliance on imported oil. That dependence threatens our economic and 

national security. We need to pursue the long-term goal of energy 

independence just as fervently as the Nation embraced President 

Kennedy’s goal in 1961 of putting a man on the moon. 

In the meantime, however, we must increase funding for the 

Low-Income Heating Assistance Program and take other actions to 

ease the current impact of high prices. For example, Congress 

should pass carefully crafted legislation to help curb speculation on 

futures markets that can artificially drive up energy prices beyond 

what normal supply and demand considerations would produce. 

As has been mentioned this morning by Senator Levin and Senator Coleman, an investigation by the Permanent Subcommittee 

concluded that speculators can create additional demand for oil, 

driving up the price even when they seldom deliver or receive any 

oil themselves. I have heard recently from the Maine Oil Dealers 

19

Association and from commercial truckers in Maine who firmly believe that speculation has been a factor in the most recent oil price 

increases that are hurting their businesses and their customers. 

Unfortunately, there is a lack of publicly available data to track 

the effect of speculation on market prices and manipulation can go 

undetected on certain unregulated markets, and that is why I support expanding the authority of the Federal Government to oversee 

energy futures markets and to provide greater transparency, which 

I think is the best safeguard against manipulation. 

I recognize that such legislation must be carefully crafted, however. The ability to have contracts keyed to future prices can provide significant benefits. Legislation is needed, but it must be carefully targeted so as not to damage legitimate risk hedging functions. 

Well-functioning markets obviously benefit consumers by promoting price competition, by encouraging the development of new 

products and by attracting capital for new enterprises. But it is 

also a fact that when the government and the public have little information about trades on unregulated or lightly-regulated markets, real abuses can occur. Unsupervised markets are open to deceptive practices and active or passive collusion. Government has 

a vital role to play in ensuring that markets are transparent and 

competitive, and regulators must have the information and authority that they need to limit excesses that can cause disruptive price 

swings or artificial increases in price levels. 

This hearing will help us better identify and quantify the role of 

excessive speculation in the level and volatility of oil prices. It will 

also help us identify exactly what steps we should take to ensure 

that Federal regulators have the right tools to guard against manipulation and other abuses. 

I want to commend both the Chairmen and the Ranking Members for their leadership in pursuing these issues and I look forward to the testimony of our expert witnesses. Thank you, Senator 

Levin. 

[The prepared statement of Senator Collins follows:]

OPENING STATEMENT OF SENATOR SUSAN M. COLLINS 

Long before the first official day of winter, the people of Maine have been coping 

with cold weather and feeling the strain of high prices for home heating oil, gasoline, diesel fuel, and other products refined from oil. 

According to the Energy Information Administration, last month the benchmark 

price for a barrel of domestic crude oil averaged nearly $95. Compare that to $59 

for November a year ago, and you see a 60 percent increase in a single year. 

That remarkable rise touches virtually every aspect of the economy. Oil prices significantly affect the costs of heating homes, driving family cars and commercial 

trucks, running fishing boats, operating farm and logging equipment, flying airplanes, making fertilizers, manufacturing plastics, and so on. 

Many causes contribute to the sharp rise in oil prices: increased global demand 

for crude oil, instability in the Middle East and Venezuela, supply decisions of the 

OPEC cartel, insufficient U.S. refining capacity, the declining value of the dollar, 

and speculative trading on futures markets. 

I would also note that Chairman Levin and I joined forces a few years ago on a 

bipartisan amendment to the 2005 energy bill directing the Department of Energy 

to better manage the Strategic Petroleum Reserve by suspending purchases when 

prices were high so as not to drive up prices further by taking oil off the market. 

There are questions, however, about whether the Administration has implemented 

this program effectively. 

20

Our paramount challenge, of course, is to reduce our over-reliance on imported oil. 

That dependence threatens our economic and national security. We need to pursue 

the long-term goal of energy independence just as fervently as the nation embraced 

President Kennedy’s goal in 1961 of putting a man on the moon. 

In the meantime, however, we must increase funding for the Low Income Heating 

Assistance Program and take other actions to ease the current impact of high prices. 

For example, Congress should pass carefully crafted legislation to help curb speculation on futures markets that can artificially drive up energy prices beyond what normal supply-and-demand considerations would produce. 

In 2005, an investigation by this Subcommittee concluded that speculators can 

create additional demand for oil, driving up the price even though they seldom deliver or receive any oil themselves. I have heard recently from the Maine Oil Dealers Association and from commercial truckers in Maine who firmly believe that 

speculation has been a factor in the oil-price increases that are hurting their businesses and their customers. 

Unfortunately, there is a lack of publicly available data to track the effect of speculation on market prices, and manipulation can go undetected on certain unregulated markets. That is why I support expanding the authority of the federal government to oversee energy futures markets and to provide greater transparency to 

guard against manipulation. 

Such legislation must be carefully crafted, however. The ability to make contracts 

keyed to future prices can provide significant benefits, such as allowing heating-oil 

dealers and other businesses to hedge their risk exposure to future price changes. 

Legislation is needed but should be carefully targeted so as not to damage legitimate risk-hedging functions. 

Well-functioning markets benefit consumers by promoting price competition, by 

encouraging development of new products, and by attracting capital for new enterprises. 

But it is also a fact that when government and the public have little information 

about trades on unregulated or lightly regulated markets, real abuses can occur. 

Unsupervised markets are open to deceptive practices and active or passive collusion. Government has a vital role to play in ensuring that markets are transparent 

and competitive. Regulators must have the information and authority to monitor 

trading and to limit excesses that can cause disruptive price swings or artificial increases in price levels. 

This hearing will help us identify and quantify the role of excessive speculation 

in the level and volatility of oil prices, and highlight the steps we must take to ensure that federal regulators have the right tools to guard against manipulation and 

other abuses. 

I commend the Chairman and the Ranking Member for their leadership in pursuing these issues and look forward to the testimony of our expert witnesses.

Senator LEVIN. Thank you, Senator Collins. Senator Wyden. 

OPENING STATEMENT OF SENATOR WYDEN 

Senator WYDEN. Thank you, Mr. Chairman, and I, too, want to 

join colleagues in commending you and the bipartisan leadership of 

both of these Committees. 

I have been digging into this issue, as well, for a number of 

years. What really triggered it was 2 years ago—I think Senator 

Cantwell was there, as well—Lee Raymond, who was then the head 

of Exxon Mobil, came before the Energy Committee and I asked 

him about speculation in the oil market. And Mr. Raymond, obviously one of the most knowledgeable people in the oil business, said 

that he believed that speculation in the oil markets was adding $20 

a barrel to the price of oil when oil was then $55 a barrel. I note 

we have experts at the table. Mr. Gheit has been quoted in the 

paper, obviously one of the most knowledgeable people in the business, saying that speculation is adding as much as $30 to the price 

of a barrel of oil. 

So given what we came to learn from these experts, I began to 

look at the landscape with respect to speculation generally, and I 

think that Chairman Levin, Senator Coleman, and others described 

21

how complicated this is. And it is quite clear that there are a variety of different ways in which the speculators engage in their various activities. 

Some do it on the financial side, which is primarily what we have 

been talking about today, efforts that come under the jurisdiction 

of the Commodity Futures Trading Commission, agencies charged 

with overseeing the financial side. Some, and I am very concerned 

about this now and will touch on it in just a second, are simply 

buying oil and holding it. The effort to oversee this has been pretty 

much non-existent, which gets me to Mr. Caruso, I have always 

thought is a very good guy, but I think this agency really has its 

head in the sand with respect to the extent of this problem. 

I want to read into the record now, Mr. Chairman, just a couple 

of comments from this agency, which is the lead agency, the lead 

Federal agency for analyzing information about prices and supply. 

They say, for example, in August 2006, ‘‘available evidence suggests that increased speculative activity in the oil markets is a 

symptom of rather than a cause of high oil prices.’’ In their analysis in November 2007, they pretty much dismiss the whole issue 

because they say ‘‘it is difficult to assess.’’

Now, there is no question about that, because the markets are 

tight. Certainly they are volatile. These are all conditions where 

you would naturally have speculators try to take advantage of 

those factors, but that is all the more reason why the lead Federal 

agency in this area ought to get off the sidelines, abandon this ‘‘see 

no evil, hear no evil, speak no evil’’ approach, and get into the business of analyzing this information. 

I will close, Mr. Chairman, by saying I am particularly interested 

in how they have responded to this question of those who are holding oil in the physical market. There is no doubt, and some of our 

witnesses are going to talk about this today, that there are a number of commodities speculators that are buying and holding oil, literally barrels of oil sitting in storage. Now, despite record prices for 

the purchase of each of these barrels, inventories have been above 

average because they obviously believe they can make good money 

when the price goes higher. 

The Energy Information Agency reports inventory levels. When 

they were before the Energy Committee earlier, I asked that they 

report what data they had on who was holding the oil. The answer 

is they don’t know because they don’t collect the information. So 

they really don’t have good data. And that is what they are supposed to be in the business of, on one of the key issues that I think 

the American people have a right to know as we dig into this speculation issue. I think they ought to be in the position of really looking at what is going on, collecting the sort of large trader information on, for example, physical energy inventory, and we get to the 

bottom of this. And we continue the work that you, Mr. Chairman, 

and our colleagues on a bipartisan basis are pursuing. 

I thank you. 

Senator LEVIN. Thank you, Senator Wyden. 

On an early bird basis, let me see if the following Senators have 

opening statements. Senator Corker. 

Senator CORKER. I would just as soon hear the testimony. 

22

Senator LEVIN. Thank you very much. Senator Craig would be 

next. 

OPENING STATEMENT OF SENATOR CRAIG 

Senator CRAIG. Mr. Chairman, let me thank all of you for this 

hearing. Critical to the American consumer is the price of their energy, and we know that it is pinching, it is binding, it is distorting 

disposable income in households. It will change the way Americans 

think and react. 

That is good in many respects as the markets change and as a 

need in pricing for new forms of energy begin to shape the market 

and shape our policy, and we see that happening now, Mr. Chairman, and it is critically important that, in part, it continue. Renewable fuel standards, diversity in the marketplace, a full portfolio of 

energy is increasingly important. We are all here scurrying to find 

resources to build incentives into new technologies and to the laboratory to bring things to market. 

While all of that goes on, clearly, Mr. Chairman, transparency is 

important. There is no excuse for profiteering against the pocketbook of the poor, and the marketplace has to be transparent so that 

it is visible when it happens. 

We also know, and I have listened to all of the statements this 

morning, I don’t disagree with most of it. It is a phenomenally integrated world market with forces and demands that are new and 

different and diverse. At the turn of the century, 4 percent of the 

energy supply was oil. Today, it is now 96 percent when we talk 

about transportation. Whether it is Caruso or others looking at the 

markets in the out years, we know that by 2020, based on current 

demand curves, that it is going to be a 60 percent increase in demand. We have got to diversify. We know that. At the same time, 

we recognize current uses and the need to supply those uses. 

I am not quite sure that I have any ability to look out 20 years 

from now and predict what the American economy will be like 

based on the adjustments it is currently making as a result of unprecedented high energy. Speculators will try to judge that. Markets will try to judge that. At the same time, in judging it, we 

ought to demand open and clear transparency in the markets so 

that those judgments are sound and so that the distortion is as limited as possible. 

Gentlemen, I am anxious to hear from you. 

Senator LEVIN. Thank you, Senator Craig. 

Senator Tester has a statement that shall be made part of the 

record. He had to leave to preside. 

[The prepared statement of Senator Tester follows:]

OPENING STATEMENT OF SENATOR JON TESTER 

Thank you Mr. Chairman, 

As the cost of oil has risen to record levels—Montanans along with Americans 

from across the country—have had to bear the cost of rising oil prices whether they 

are filling up their vehicles, heating their homes, or buying goods that were transported by truck, ship, or rail. 

In the last 15 years, the price of oil has gone from selling consistently around $20 

in the 1990’s to $66 per barrel in 2006, and is projected to average $72 per barrel 

in 2007 with a possible increase to nearly $85 per barrel on average in 2008. 

Oil prices are a complicated issue with global implications. China, India and other 

growing economies will continue to consume larger quantities of the world’s oil supVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
23

ply and the demand will continue to grow exponentially. Furthermore, natural disasters like Hurricane Katrina and political upheaval in the Middle-East, Africa and 

South America disrupt supplies and increase the cost worldwide. 

But the fact of the matter is that 100 dollar oil cannot be explained by supply 

and demand alone. Speculation in the crude oil market is driving up costs and making fortunes at the expense of the American consumer. 

Normally I don’t think the government should meddle too much in the affairs of 

business, but in the case of big oil companies and the companies that speculate and 

trade the product, there need to be some checks and balances. Energy is an issue 

with broad economic and national security implications and without taking steps to 

slow the pace of rising energy costs, the economy of our whole nation will suffer. 

This issue also highlights the need of this Congress to pass an energy bill that 

creates a comprehensive strategy for energy production and conservation. It is mandatory that we act to ensure that Montanans can afford to fill up the tanks in their 

trucks and farm equipment, that Minnesotans can afford to pay their heating bills 

and the small businesses from New England to California have the resources to pay 

for their energy costs. Homegrown fuel, alternative energy and, and better fuel efficiency can all help get energy costs back in line with American consumer’s ability 

to pay.

Senator LEVIN. Senator Barrasso is next. 

OPENING STATEMENT OF SENATOR BARRASSO 

Senator BARRASSO. Thank you very much, Mr. Chairman. While 

I am not a Member of this Subcommittee, I am a Member of the 

full Committee and the Energy Committee has an open policy of allowing Members to attend and thank you very much for allowing 

me to be here, Mr. Chairman. 

Senator LEVIN. You are welcome. 

Senator BARRASSO. Coming from Wyoming, whose economic wellbeing and tax base is so reliant on oil and natural gas production, 

I am particularly interested in today’s discussion. Much of the oil 

production background is literally discussed every day around Wyoming’s coffee shops. Even in the submitted testimony, they talk 

about a differential of $30 per barrel of oil when one of the refineries was down in Colorado a year ago. So this is a key point for 

us. 

Our State coffers in Wyoming literally boom and bust on the 

prices of energy commodities. Revenues for our schools, our municipalities, our counties, and the State is closely tied to energy prices. 

Significant market moves, whether caused by natural disaster, by 

geopolitical forces, or basic supply and demand, have an enormous 

impact on my constituents and the government services on which 

they rely. 

With respect to oil prices and the associated markets, I am here 

today to learn from this distinguished panel. From a legislative 

perspective, I want to make sure that the Federal Government is 

doing the right things, and if the government policies are causing 

harm to the market, I want to know about that and how we can 

participate. 

From the demand side, I am here for my consuming constituents. 

As all of the other Members of the Senate testified, in Wyoming, 

I think we are even more impacted by gasoline prices due to the 

significant distances that my constituents travel from town to 

town. 

Again, thank you for holding the hearing. I look forward to the 

discussion. 

Senator LEVIN. Thank you, Senator Barrasso. Senator Cantwell. 

24

OPENING STATEMENT OF SENATOR CANTWELL 

Senator CANTWELL. Thank you, Mr. Chairman. I, too, want to 

add my thanks to you for holding this hearing. This is an issue 

that I have been involved in following since 2002 with Senator 

Feinstein when I first cosponsored her legislation regarding derivatives. I should just say that that experience, having dealt with the 

manipulation of electricity markets, with the perpetration of specific schemes to manipulate price, led us to an oversight and investigation about what statutes really are in place to protect consumers from these kinds of activities, whether they are the manipulation of physical supply and demand, or in this case that we are 

discussing today, in the moving around of resources. 

I want to say to you, Mr. Chairman, I believe it is the Permanent 

Subcommittee on Investigations and their continued focus on this 

issue that will actually bring us results, because you are saying 

that we are going to hold the agencies accountable for the oversight 

that needs to happen here. So I want to thank you personally for 

your due diligence and to the Ranking Member, as well. 

This simply today is a question about why oil should receive special treatment as a commodity that is traded. Now, when we look 

at this, this commodity, if you want to say that it is a commodity, 

we are spending $1 billion a day importing oil, and yet oil does not 

have the same regulations that other commodities have. They don’t 

have the same recordkeeping, the reporting, the market surveillance, and the detection to prevent price manipulation, distortions, 

curbs, and excessive speculation and various other financial standards. 

Now, why in America do we regulate, as I have heard before at 

various committees, things like corn, hamburger, orange juice, but 

when it comes to oil, we seem to think that it shouldn’t have the 

same market transparency functions and market oversight of those 

other products? 

And when people tried to say in the past, it is about derivatives, 

that somehow derivatives is too complicated for Members of the 

U.S. Congress to understand, they are wrong. We understand what 

is going on, and derivative contracts based on commodities, of agriculture commodities, cannot be traded on the future exchanges 

without those regulations. So you can’t say that it is about derivatives because we have derivative agriculture products that we are 

not allowing to be over-the-counter trades. We are saying, no, there 

has to be transparency. There has to be reporting. There has to be 

bookkeeping. We have to be able to go in and see if manipulation 

has occurred. 

So the fundamental question here today is why should oil be allowed to be traded on the ICE Exchange, on an international exchange, without the oversight to prevent, as my colleagues have already pointed out, that manipulation and speculation are not driving this market? 

Now, there are lots of issues about speculation. There are lots of 

issues about speculation in any market. But that is why you have 

rules in place. That is why you have reporting. That is why you 

have accounting. That is why you have bookkeeping, so you can go 

back and track and make sure that it is not, as some people have 

been in my office saying, some of those in the energy field who 

25

probably don’t really like that their price has been speculated by 

hedge funds, that somehow people are holding supply off the shore, 

as my colleague Senator Wyden said, just to drive up the price so 

that 3 days later they can get the best price for the market. 

Consumers are getting squeezed, and in my State, I just came 

back from looking at the flood damaged areas of Washington State 

and we are still paying over $3 a gallon for gasoline and still pay 

the highest in the Nation, along with California and Oregon. We 

cannot let a commodity like energy, which is the lifeblood of our 

economy and affects so many other areas of how well our economy 

will do, to continue to have these loopholes, and I hope that the 

gentlemen testifying today will help elaborate about why transparency and recordkeeping is so important to protecting the consumers and the price they pay at the pump. 

I thank the Chairman. 

Senator LEVIN. Thank you very much, Senator Cantwell. Senator 

Menendez. 

OPENING STATEMENT OF SENATOR MENENDEZ 

Senator MENENDEZ. Thank you, Mr. Chairman. I want to thank 

you and the other leadership of our respective Committees here for 

calling this hearing. 

Oil prices and the market that set these prices are incredibly important to the world’s economy, but it is also important to every aspect of working people’s lives. Right now, Americans are paying 

twice as much for gasoline than they were 5 years ago, and if the 

price of crude jumps again as we approach next year’s summer 

driving season, it would not be surprising if the price of gasoline 

reached $4 a gallon. The constant squeeze our citizens feel on their 

bank accounts are not isolated to gasoline, of course. The winter 

that we are upon is already seeing record home heating prices, 

which is devastating, particularly for those on a fixed income. And 

in addition, any product that needs to be transported to market is 

becoming more expensive as the cost of transportation rises and 

the domino effect, the ripple effect, continues. 

With the unchecked rise in oil prices, people are losing faith in 

our markets. They see oil companies pocketing record profits. They 

see greedy market manipulators like Enron and Amaranth being 

caught and brought to justice, but they do not see actions being 

taken to make sure such crimes do not happen in the future. 

And Mr. Chairman, when we see the difference between the extraction price, in essence, what it costs to physically extract a barrel from the ground, and where oil is being sold at today, we see 

that there is a very significant difference, and whether that is by 

possible manipulation or a lack of transparency, I think the consumers have a right to have faith in this market of such an incredibly important commodity in their lives. 

And at the same time, moving beyond the domestic for a moment 

to the international, it seems to me that this is a huge boon to oil 

exporters who reap the benefits, as well, like Iran, which we are 

all engaged in a great debate on these days. There are some estimates that they are getting another $5.5 billion extra a month because of this premium, so to speak. So it is interesting. We talk 

26

about sanctions. Just the call for sanctions raises the price of the 

oil, therefore giving Iran more money. 

We look at this whole process and the lack of transparency and 

manipulation, and I agree with Senator Cantwell about why should 

oil be the one commodity, and that is why I am proud to have 

joined you, Mr. Chairman, in your legislation. I am an enthusiastic 

cosponsor of your Close the Enron Loophole Act and I am hopeful 

that this will give us the opportunity to ensure that our markets 

function properly and restore people’s confidence specifically in the 

commodities markets that are so critical in their personal lives, 

and I look forward to the testimony of the witnesses. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Senator Menendez. Senator McCaskill. 

OPENING STATEMENT OF SENATOR MCCASKILL 

Senator MCCASKILL. Thank you, Mr. Chairman. As others have 

said already this morning, in the last 5 years, we have seen almost 

a 100 percent increase in speculative trading on crude oil futures 

and that is just the trading we know about. That doesn’t count all 

the trading we can’t track that is not through a regulated exchange. 

During that same period of time, as Senator Menendez said, gas 

prices have doubled. The purpose of this hearing is to try to figure 

out what is driving that increase. 

Well, I am positive of one thing. I am positive that America’s 

middle class and working families are not behind the wheel driving 

this increase in speculation. Something has changed that is causing 

this massive amount of speculation that we have not seen before, 

and I think it is hard for us to imagine that it is not connected to 

the massive increase we have seen in gasoline prices for the people 

that I represent in Missouri. Greed is driving the speculation and 

grossly inadequate oversight to prevent manipulation. 

Who benefits from the unregulated markets? I think that is the 

question that we must try to answer today. I hope that the witnesses will think about that question in the context of their testimony. Who is benefiting from the unregulated markets? Speculators, no question about it. Oil companies, hard to imagine they 

are not, but we need to figure that out. Missourians who are paying more for gasoline than they ever imagined possible, I don’t 

think so. 

I think it is very important that we try to get to the bottom of 

this, and we all understand, and I don’t think we need to be told, 

the importance of liquidity in commodities markets. But as Senator 

Cantwell so articulately said, this is a commodity. It should be 

treated no differently. And until we treat it the same as other commodities, the American public is always going to assume that they 

are getting the short end as opposed to those who are sitting at the 

trading table making hand over fist. 

Thank you, Mr. Chairman, for holding this hearing today. I appreciate the opportunity to make a statement. 

Senator LEVIN. Thank you, Senator McCaskill. 

Let me now welcome our panel of witnesses to this morning’s 

hearing: Guy Caruso, Administrator of the Energy Information AdVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00034 Fmt 6633 Sfmt 6601 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
27

1The prepared statement of Mr. Caruso appears in the Appendix on page 67. 

ministration at the U.S. Department of Energy; Fadel Gheit, Managing Director and Senior Energy Analyst at Oppenheimer and 

Company in New York; Edward Krapels, the Director of Natural 

Gas and Power Markets at Energy Security Analysis, Inc., in 

Wakefield, Massachusetts; and Philip Verleger, Jr., President of PK 

Verleger, LLC, in Newport Beach, California. We welcome you this 

morning to this joint hearing of our two Subcommittees. 

Pursuant to Rule 6, all witnesses who testify before the Permanent Subcommittee on Investigations are required to be sworn. 

Since this is a joint hearing, we will follow that rule. We would ask 

all of you to please stand and raise your right hand. 

Gentlemen, do you swear that the testimony you are about to 

give before our two Subcommittees is the truth, the whole truth, 

and nothing but the truth, so help you, God? 

Mr. CARUSO. I do. 

Mr. GHEIT. I do. 

Mr. KRAPELS. I do. 

Mr. VERLEGER. I do. 

Senator LEVIN. A timing system today will give you a yellow 

light about 4 minutes from the time you begin, giving you a minute 

to conclude your remarks. We would very much appreciate it if 

your oral testimony consumed 5 minutes. We will put your full 

statements in the record, of course, and we will start with you, Mr. 

Caruso. Thank you for being here. 

TESTIMONY OF GUY F. CARUSO,1 ADMINISTRATOR, U.S. ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT 

OF ENERGY 

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

Dorgan, and Members of both Subcommittees. It is an honor to be 

here to discuss recent developments in crude oil markets and the 

factors contributing to the increase in petroleum prices. The Energy Information Administration is the independent statistical and 

analytical agency within the Department of Energy. Our views are 

strictly those of EIA and should not be construed as representing 

those of the Department or the Administration. 

Oil prices have trended upward over the past several years, as 

a number of the other witness statements have indicated. The price 

of West Texas Intermediate (WTI), crude oil has climbed from $56 

on average in 2005 to almost $100 per barrel last month. With 

these rising prices, oil markets have drawn the increasing interest 

and participation of investors and financial entities who do not directly engage in physical oil markets. 

The precise impact of these non-commercial market participants, 

as Senator Wyden pointed out, is difficult to assess. EIA believes 

that tight supply and demand fundamentals are the main drivers 

behind the rise in oil prices over the last several years. These factors include strong world economic growth, leading to increases in 

consumption; moderate growth in supply from non-OPEC nations; 

production decisions by members of OPEC; low spare production 

capacity in the world; tight global commercial inventories; refining 

28

bottlenecks around the world; and ongoing geopolitical risks and 

concerns about supply. 

Strong economic growth around the world continues to foster 

strong oil demand growth, with China, other developing countries 

in Asia, and the Middle East countries projected to account for a 

large share of the total world oil consumption growth this year and 

in 2008. At the same time, growth in non-OPEC production has 

been significantly less than growth in consumption. This is concentrated in a few areas and there have been project delays and 

increasing decline rates in Mexico, the United Kingdom, and Norway. As a result, supplies must increasingly come from OPEC 

members or from inventories. 

OPEC members have altered production targets over the past 

few years, thereby keeping markets fairly tight. EIA expects OECD 

commercial inventories measured on a days supply basis to remain 

in the low end of the 5-year range in 2008. 

World surplus production capacity is expected to remain fairly 

low, averaging two to three million barrels per day through 2008, 

leaving the market vulnerable to unexpected supply or demand 

events that put upward pressure on prices. Because of the lack of 

supply or inventory cushions and low short-term price responsiveness of demand, large price increases are required to rebalance 

supply and demand. 

In the downstream markets, there is a low level of excess refinery capacity worldwide, which reduces flexibility when supply and 

demand balances are tight or there are unplanned refinery outages. 

Geopolitical instability in many OPEC as well as non-OPEC 

countries also puts additional upward pressure on inventory demand and crude oil prices. 

Some oil market observers are citing speculation as the main 

driver of the current high prices. However, the staff of the Commodity Futures Trading Commission have analyzed the behavior of 

managed money traders and found that they are most likely to follow than to lead position changes by other market participants. 

There have been many instances over the past few years when 

crude oil futures prices have risen along with an increase in the 

net long positions of non-commercial participants, that is, more 

buyers than sellers. However, there have been key periods in which 

the net position of these non-commercial participants did not move 

in the same direction as prices, particularly in July and early November of this year. 

It appears that any correlation between speculative activity and 

rising prices is loose, at best. Evidence, reinforced by the CFTC 

study, suggests that speculators shift positions in response to price 

changes. If the tight supply and demand conditions weaken or are 

expected to weaken, we would expect speculative activity to decline, as has been seen very recently. Speculators and others are 

investing in oil markets because of tight market fundamentals and 

geopolitical security. Increased speculative activity is more of a 

symptom of market conditions than the cause, in our view. 

This completes my oral statement, Mr. Chairman, and I would 

be glad to answer any questions at the appropriate time. 

Senator LEVIN. Thank you very much, Mr. Caruso. Mr. Gheit. 

29

1The prepared statement of Mr. Gheit appears in the Appendix on page 76. 

TESTIMONY OF FADEL GHEIT,1 MANAGING DIRECTOR AND 

SENIOR OIL ANALYST, OPPENHEIMER & CO., INC., NEW 

YORK, NEW YORK 

Mr. GHEIT. Thank you for having me. I have over 30 years of energy industry experience, the last 21 years as an analyst on Wall 

Street. My view, which represents my own and does not represent 

the company that I work for, which is Oppenheimer and Company, 

oil is unlike any of the commodities that we deal with. It is critical 

to global economic growth and our national security. It impacts our 

lives, influences our national policies, both domestic and foreign, 

and is likely to play a key role in shaping our future. Over the last 40 years, oil prices fluctuated from under $3 to a record of more than $98 only a few weeks ago. Oil traders and the 

media were cheering the rising oil prices and hoping for oil to 

break the $100 mark. Some analysts even predicted that oil prices 

are heading for $120 by the end of this year and expect it to be 

between $150 and $200 next year. 

I don’t know where oil prices will go next month or next year, 

but I believe that the current high oil prices are inflated by as 

much as 100 percent. I don’t think industry fundamentals of supply 

and demand justify the current high prices, which I believe are 

driven by excessive speculation. Based on various press accounts, 

others who share this view include our Energy Secretary, most 

OPEC ministers, and the heads of major international oil companies. 

Oil prices were close to $60 per barrel in August, rose sharply 

to almost $100 in November, although there was no changes in 

world supply and demand. The price surge, in my view, was a result of excessive speculation about potential supply disruption in 

the event of a military attack or strike against the Iranian nuclear 

facilities. The passing of the Senate resolution regarding the Iranian Revolutionary Guard as a terrorist organization seems to have 

been the catalyst speculators needed to fan the fire. The drop in 

the value of the U.S. dollar against major currencies also pushed 

for higher oil prices. 

No one has been able to accurately and consistently forecast oil 

prices, not oil companies, government, or people on Wall Street. 

However, this lack of reliable oil price forecasting has created a 

vacuum that has been filled, in my view, by financial players with 

very short investment horizon, which significantly increased the 

price volatility. Globalization of the financial market, ease of trading, rapid movement of large sums of capital, information overflow, 

and increased global tension have created an ideal environment for 

excessive speculation in the world market. 

Oil price volatility has attracted a large and growing number of 

speculators seeking the highest profit in the shortest time. Volatility, however, has an adverse impact on the oil industry because 

it increases uncertainty and distorts market fundamentals, which 

could result in poor investment decisions in securing adequate supply to meet world growing demand for oil. 

The oil industry operates in an environment driven primarily by 

factors it does not control—global economic growth, increased world 

30

1The prepared statement of Mr. Krapels appears in the Appendix on page 78. 

oil demand, and reduced OPEC spare production capacity to historically low levels. Non-OPEC production is hampered by project 

delays, rising costs, and technical problems. These factors increase 

the risk of potential supply tightness. 

I believe that the oil markets need assurances from leaders of 

both major exporting and major importing countries as well as the 

oil industry. People need to know that the world is not running out 

of oil, that supplies are adequate, and that global stockpiles are 

sufficient to make up for any potential supply shortfall or demand 

surge. It is worth noting that the current global oil inventories of 

more than four billion barrels exceed the oil export volume from 

Iran for more than 21⁄2 years, and Saudi Arabia for 15 months, and 

the entire Middle East for 6 months. 

I believe that oil speculators use weekly petroleum data published by the Energy Information Administration to manipulate oil 

prices for their short-term gain. Speculators have used declining inventory levels to spread fears about potential shortages, when in 

fact it indicates exactly the opposite. Reducing inventory levels improves capital efficiency, especially in a high oil price environment. 

In addition, oil price backwardation makes it even more prudent 

for the oil industry to reduce inventories further. But more importantly, declining inventories, in my view, underscore that the industry is less concerned about shortages and is more confident 

about supply availability. 

While oil trading helps with its long-haul crude shipment against 

price volatility, I believe it should be regulated to ensure transparency, discourage excessive speculation, and prevent potential 

conflict of interest and abuse by traders. Several measures should 

be considered to regulate oil trading by financial players, including 

major investment banks, the commodity traders, hedge funds, and 

private equity funds. These include raising the current margin requirement to 50 percent of the value of the trade; setting limits on 

the number of oil contracts by each account; establishing a minimum holding period to hold these contracts; preventing conflicts of 

interest by financial institutions; and finally, imposing stiff penalties on violators, including minimum jail sentences. Thank you. 

Senator LEVIN. Thank you very much, Mr. Gheit. And now, Mr. 

Krapels. 

TESTIMONY OF EDWARD N. KRAPELS,1 SPECIAL ADVISOR, FINANCIAL ENERGY MARKET SERVICES, ENERGY SECURITY 

ANALYSIS, INC., WAKEFIELD, MASSACHUSETTS 

Mr. KRAPELS. Good morning. Thank you, Mr. Chairman, Senators. Thank you very much for the invitation to come here. I am 

speaking today as a representative of my consulting company, Energy Security Analysis. We have been in the oil market forecasting 

business for 25 years, and as a matter of corporate survival, we 

have to take into account all the factors that influence oil prices. 

About 10 or 15 years ago, we began to divide the oil world into 

two sets of forces, physical and financial, and so you can see that 

from our perspective, we look at the fundamentals of financial marVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
31

kets as being as important to the price of oil and gas as the fundamentals of physical markets. That is my first point. 

Let me make four more practical points, because my old friend 

Phil Verleger is here and he is a true economist and I am a practical economist. Let me make four points as a practical guy. 

The discussion about the proper influence or how to depict the 

influence of speculators on oil prices to me often achieves a level 

of how many angels can dance on the head of a pin. When you get 

formal trained economists to address this problem, they will usually say, ‘‘I am sorry, we can’t find a correlation.’’ But when you 

look at the market from the standpoint of a practitioner or people 

in the financial business, you will hear anecdotal evidence all the 

time that of course, financial trading is influencing the price of oil. 

I am in that camp. 

Of course, financial trading and speculation affect the price of oil 

because they affect the price of everything we trade. We live in a 

trading culture. We have funds that flow out of the dot-com sector 

into the housing sector, out of the housing sector into the commodities sector. Wherever these trillions and trillions of dollars go, they 

affect the price of whatever it is that they are trading. It would be 

amazing if oil somehow escaped this effect. 

So there is a bubble in oil prices that has lasted for several 

years, and in my opinion, it will last for several more years because 

the underlying condition of the world oil market is extremely tight 

and the demand responses, unfortunately, are very slow. 

My next point is do we have information that indicates how this 

mechanism works, and I suggest that the outstanding work done 

by your own staff on the Amaranth case and published last year 

in your special report constitutes the best piece of work I have seen 

in this respect and I congratulate the staff for the outstanding 

work that they did. Clearly, here was a market that was manipulated by a very large trader that from time to time had 40 or 50 

percent of the open interest in the NYMEX market, and that was 

only the visible market because we didn’t know how large their positions were in other markets. So for me, the debate is over. Of 

course, speculation affects commodity energy prices. There is no 

question about it. 

My next question, though, is what do you do? What do you do 

about that? I think that Mr. Gheit has told you, and I think your 

own staff has told you the things that need to be done. You do need 

to regulate these markets in the way that you have traditionally 

regulated these markets. I come out of the R.H. Coase School at 

the University of Chicago. R.H. Coase pointed to a paradox decades 

ago. He is a Nobel Prize winning economist. He said, isn’t it paradoxical that the best markets have very clear regulation, and he 

pointed to American commodity markets as prime examples of that 

effect. 

We need to simply hold all the exchanges that trade energy to 

the same standards that we hold the New York Mercantile Exchange. I think the New York Mercantile Exchange is an outstanding market. The WTI market is a wonderful market. We simply need to have more disclosure, more information about how 

these other markets trade. 

32

1The prepared statement of Mr. Verleger appears in the Appendix on page 98. 

The solution to the problem of what do we need to do about these 

exchanges is simple to me. It is disclosure, disclosure, disclosure. 

We simply don’t have enough information. When your staff got the 

information through their subpoenas, they were able to see the effect that Amaranth had. The rest of us, including my clients, which 

include universities and people who buy oil, would love to have had 

that information about what the effects of the speculation on natural gas prices was, but we didn’t have it because the CFTC didn’t 

release it. 

So my last point, and this is awfully important, I think futures 

markets, like all the rest of you, I think futures markets are invaluable, that we need the liquidity, we need the financial services, 

we need the ability to hedge. So whatever we do, we mustn’t throw 

out the baby with the bathwater. It is not an onerous obligation to 

say to the futures markets in energy, hold to these high standards 

that the NYMEX has. If we do that, I believe that we can have 

very effective oil and natural gas and power forward markets that 

are in the interests of all of us. Thank you very much. 

Senator LEVIN. Thank you very much, Dr. Krapels. Dr. Verleger. 

TESTIMONY OF PHILIP K. VERLEGER, JR.,1 PRESIDENT, PK 

VERLEGER, LLC, ASPEN, COLORADO 

Mr. VERLEGER. Senator Levin, thank you very much. Thank you 

for your kind comments on your introduction. It is a pleasure to appear here again and I thank the Senators for coming. It is a real 

pleasure to appear in this famous hearing room. 

Let me associate myself with Mr. Krapels’s comments and especially with the comments on the Subcommittee’s report on Amaranth. I have been studying the futures markets as an academician 

and policy maker for 20 years—and that report is the best. I 

learned more from it, particularly the deep data digging. 

Senator LEVIN. Thank you. 

Mr. VERLEGER. This is an important hearing, particularly on oil 

prices, and let me summarize my testimony. It is 20 pages and I 

will do it in 4 minutes. 

The rise of prices to almost $100 a barrel is first led this year 

by the removal of light sweet crude oil from the market by DOE 

beginning in the middle of August. 

Second, the price has also been pushed higher by liquidation of 

inventories. Senator Wyden would like to see inventories lower. We 

are all going to see substantial liquidation of inventories. Inventories are built or liquidated according to profit incentives. The incentives to hold inventories were profitable last year and in part 

by investment in passive futures. They are not profitable now and 

we are seeing massive liquidation. 

Third, sweet crude oil demand is being boosted by environmental 

regulations, particularly the new regulations requiring the limit of 

sulfur to 10 parts per million in both the United States and in Europe in diesel fuels. 

Fourth, I have been studying the oil market since 1971 and have 

been policy maker. I can’t find any international event which explains why oil prices have risen recently. And as I said, I have been 

33

1Figure 1 appears in the Appendix on page 100. 

2Figure 4 appears in the Appendix on page 103. 

3Figure 8 appears in the Appendix on page 106. 

writing about commodity markets, studying futures markets. I 

think this is speculation. 

Let me start my prepared testimony at Figure 1 on page three 

of my prepared statement.1 I show there the price of WTI from 

January through December last year and January through November of this year. In that graph, I have taken the price of WTI from 

February through this last August by calculating the price of Brent 

and adjusting it using the traditional differential because the WTI 

market, as Senator Levin noticed, was distorted with the shutdown 

of a single refinery, the Valero McKee refinery. 

If you look, the price last year up until August was identical, 

within 50 cents to a dollar a barrel, to this period of time. Then, 

since August, we have had the largest increase in prices in 30 

years in absolute terms. It exceeds the price increase for the fall 

the Shah fell. It exceeds the price when Iraq invaded Iran. And it 

exceeds the price increase that we saw in 1990 when Iraq invaded 

Kuwait. 

Why is this? Well, if you look at a series of factors as a detective 

you cannot find any event such as a change in demand in China 

or in India this year to explain the increase. You also cannot attribute it to a shortage of crude oil on world markets. Between August and December, Saudi Arabia cut its price of oil by $10 a barrel. The Saudis couldn’t sell their crude. You also can’t explain it 

at this point by speculation. 

Now, in speculation, I want to distinguish between investors and 

speculators. Investors have poured billions of dollars—and if you 

turn to Figure 4 on page six of my prepared statement to a graph 

we prepared 2—into passive investment vehicles, the Dow Jones 

AGI Index and the S&P Goldman Sachs Index. These are pushed 

by academics who argue that, in fact, commodities are an investment class. They earn returns like bonds and like assets and it is 

better to invest in these diversified commodities than, say, an oil 

company. We have seen money go up, but it is steady. It is not 

volatile. 

You can, to a certain extent, explain the price increase by the 

change in the profitability of holding oil, and I show in Figure 8,3

nine graphs which show the return on investment, that is how 

much money a company made, and last year, companies could buy 

oil, put it in tanks, and earn a return that was seated on bonds. 

Not now. 

But the big change that came since August of this year was the 

decision to put oil in the SPR, to take royalty in kind, and the decision to take sweet crude oil, because the sweet crude oil they are 

taking accounts for between three-tenths and six-tenths of a percent of the world’s available sweet crude supply. Only 6 million 

barrels a day of world supply qualify for going into sweet crude for 

the SPR. Given the pressure for, need for light sweet crude, particularly in refining to make the low-sulfur diesels and other lowsulfur products, this has created a tightness on the market. If you 

apply the standard price elasticities, and Senator Dorgan taught 

economics, for demand for crude oil, particularly the ones Professor 

34

1See Exhibit No. 14, which appears in the Appendix on page 201. 

Nordhaus has produced at Yale, you come to the conclusion that 

this probably added $8, maybe $5, maybe as much as $10 a barrel 

to the price, just in terms of demand. 

This then was magnified by what is called delta hedging in the 

market. Many consumers have hedged their fuel costs using options. To do this they buy options so that if the price goes up, they 

still get their oil at $50 a barrel. This is a good way of hedging. 

But as the price goes up, the firms that have written those options have to buy more crude. Last year, when the prices started 

to fall after August 18, producers of crude oil who had bought puts 

were protected and the financial firms sold futures, so what happened is prices fell, say, to $60 on a cyclical decline and they were 

pushed down to $50 a barrel by what we call delta hedging in the 

financial community. This year, as the price has been pushed up from $75 to $80 as 

oil was added to the SPR. This created a need by the banks and 

the other financial institutions that have written the options to buy 

oil futures. The purchases accelerated the price rise to $100. 

Now, my view—and I have always been an outlier of views on 

oil markets—this view is not widely held and I commend the Department of Energy, we are going to get a test of how right I am 

because they are going to double the rate at which they put sweet 

crude oil into the market over the next 6 months, from January 

until June. 

Senator LEVIN. Into the market? 

Mr. VERLEGER. Into the Strategic Petroleum Reserve. Excuse me. 

If, in fact, I am right, we are going to see prices be magnified up 

again by delta hedging because the physical refiners who need the 

light sweet crude will be bidding the price higher. They will be 

competing with DOE and we could see prices, if the experience 

from last August to November applies, we could see prices go, say, 

to $120 a barrel. If I am wrong, and I hope I am wrong, it won’t 

happen. But all the economics now plus the way people hedge in 

terms of using options, particularly the airlines, other end users, 

set us up for an even larger price increase over the next 6 months. 

Thank you very much, and I am sorry to have gone over my 

time. 

Senator LEVIN. Thank you very much, Dr. Verleger. 

Mr. Caruso, let me start with you. Exhibit 14, if you will take 

a look at it, it shows that the number of speculative trades in crude 

oil has tripled from 2000, and these trades from speculators used 

to make up 15 percent of the outstanding crude oil future contracts 

on NYMEX.1 Now they make up 35 to 40 percent of the outstanding contracts, so-called open interest. Is that dramatic increase shown by that chart in outstanding crude oil future contracts relevant? Might it be relevant in terms of oil prices? Just 

might it be relevant? 

Mr. CARUSO. Definitely. I would agree with Mr. Krapels’s comments that speculative trading has had an impact on the market. 

My distinction is it is not the cause of the rising prices, it is following the market up. 

Senator LEVIN. Well, you said it had an impact——

35

Mr. CARUSO. It is not the driver of the market. It is part of the 

reason prices have gone up. We are not saying that it is irrelevant. 

It is definitely relevant and it is definitely part of the reason that 

we are seeing prices go up. We are just saying we can explain most 

of the change by the fundamental factors and the geopolitical 

risks——

Senator LEVIN. Right. It might be a cause of increased prices? 

Mr. CARUSO. It is part of the combination of factors. 

Senator LEVIN. So it may—I am not saying it is the cause. I am 

saying it might be a cause. 

Mr. CARUSO. It is one of the many causes, yes. 

Senator LEVIN. What are you doing to determine the extent to 

which it is a cause? In your statement, the Energy Information Administration issued a report a few weeks ago that says, with the 

rapid rise in prices, oil markets have been drawing increased interest and participation from investors in financial entities without direct commercial involvement in physical oil markets. Those are 

folks we call speculators. The role of these non-commercial future 

markets participants in recent price developments is difficult to assess. 

Mr. CARUSO. Yes. 

Senator LEVIN. Now, since there, in your judgment, may be a 

cause, and you are the most cautious on that—at least our other 

witnesses say they are clearly a cause, but your Administration 

says they might be a cause—instead of looking at the extent to 

which they are a cause, you turn to general principles. You say, let 

us focus instead on general principles because that favors a focus 

on fundamentals rather than consideration of alternative price 

drivers. 

Well, fundamentals obviously also have a major role, but since 

this amount of speculation even in your judgment may be a cause, 

and you are the most understated witness we have got here, but 

nonetheless it may be a cause, I want to know why your Administration is not acting to determine the extent to which it is a cause. 

Instead, you just simply go back to, we are going to look at the fundamentals. 

Mr. CARUSO. We look at all——

Senator LEVIN. Why don’t you look at that? 

Mr. CARUSO. We are looking at all the factors and——

Senator LEVIN. To what extent are speculators a cause? 

Mr. CARUSO. I don’t think it is possible to actually accurately estimate the dollar amount, but——

Senator LEVIN. How about a percentage? 

Mr. CARUSO. I don’t think it is possible. 

Senator LEVIN. But are you trying? 

Mr. CARUSO. And what we do is rely on those who are providing 

the oversight and the enforcement, such as CFTC, and we rely on 

the studies that they have done and their studies show that it is 

not the fundamental cause of the prices going up. 

Senator LEVIN. So long as it may be a cause, it seems to me you 

are not doing your duty by not looking at the extent to which it 

is a cause. You have got very capable people, including witnesses 

sitting right next to you, who believe it obviously has a significant 

impact, and yet your Administration, which is supposed to deterVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00043 Fmt 6633 Sfmt 6601 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
36

mine these kinds of issues, has basically delegated that to someone 

else, and that is a major problem, I believe. And so all we can do 

is tell you that we think—I am speaking for myself, obviously—

that the Department of Energy is failing to do what consumers in 

this country rely upon you to do, and that is to look at the causes 

of these oil prices skyrocketing. You have abdicated that. You have 

delegated that. You acknowledge it may be a cause, this excessive 

speculation, and yet you have not done your own analysis. 

Finally, before my time runs out, let me quote not just the Exxon 

Mobil chairman that was already quoted here this morning, but 

also Lord Browne, who when he was the BP Group chief executive 

said the following recently in 2006. ‘‘There has been no shortage of 

inventories of crude oil and products have continued to rise. The 

increase in prices has not been driven by supply and demand.’’ You 

disagree with that, is that true? 

I want to repeat it. ‘‘The increase in prices has not been driven 

by supply and demand,’’ Lord Browne. 

Mr. CARUSO. I think the increase in prices has been determined 

by supply and demand and other factors, such as geopolitical risks 

which also have contributed to the speculation, in a sense, is what 

we are saying. It is a combination——

Senator LEVIN. Whatever has contributed to the speculation, 

wouldn’t you agree that the tremendous increase in the amount of 

speculation that has gone on is likely to be a factor in the increase 

in prices? Can we get that much out of you? 

Mr. CARUSO. I would agree, it is a factor, and our analysis of the 

fundamentals indicates it is not a large factor, and we have done 

our diligence on this and we think it is part of the factor, but not 

a major factor. 

Senator LEVIN. Well, the diligence that you refer to is the CFTC 

that you have delegated this assessment to. 

Mr. CARUSO. No, we have done our own work and then we have 

looked at other studies, such as CFTC, such as the IMF, other academics who are experts in the field of oversight and enforcement 

in the financial and commodities markets. 

Senator LEVIN. OK. My time is up. Senator Dorgan. 

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

Mr. Caruso, I have been looking at your appropriations. I chair 

the Appropriations Subcommittee that funds the EIA and I was in 

the last week taking a look at how many people we have down 

there and what we are getting out of EIA, and I was just thinking 

about this as you were answering these questions. Your organization plays a very important role and has a very important function 

and Senator Levin is trying to understand what appears to be a 

contradiction. 

I think what you are saying today is that the fundamentals exist 

that are supportive of the current price trends in oil. Do you mean 

that you look at the fundamentals and say you believe the fundamentals support and justify what is happening to prices. 

Mr. CARUSO. Not ‘‘justify.’’ I am saying that we can explain the 

behavior of the oil market by looking at the fundamentals of supply 

and demand and the other factors that go into decisionmaking by 

participants in the marketplace, such as concern over Iran, Iraq, 

and Nigeria. So it is a combination of all of those factors. 

37

1See Exhibit No. 8, which appears in the Appendix on page 129. 

Senator DORGAN. Let me put up a chart.1 Again, when I was 

looking at it, we spend about $100 million a year, roughly, for what 

you all do, and I want you to do it and do it well and provide us 

a lot of very important information. We need you to do your job 

well. 

One of the witnesses mentioned the decrease in the price of 

Saudi light crude relative to the price of west Texas Intermediate 

crude since May 2007. Since May 2007, the spot price of oil has 

skyrocketed $30 a barrel, but the Saudis have had to continue to 

discount the price of their Saudi light relative to WTI crude by 

pricing it by nearly $10 a barrel discount. 

Now, it seems to me that just suggests that this is not market 

fundamentals. There is something upside down, something not 

working here. Do you sense that, as well? Is there something wrong 

with that? 

Mr. CARUSO. Well, one of the factors that is not reflected in this 

chart is that at the same time as prices were behaving such as they 

are shown here, the Saudis were actually reducing production. 

Senator DORGAN. But that is not the issue. The issue is at what 

price are they selling what they produce? You have just changed 

the subject on me. 

Mr. CARUSO. Yes. 

Senator DORGAN. When they have to discount by $10 a barrel 

what they are selling, isn’t that at odds with the suggestion that 

the market system is working, that the fundamentals of supply and 

demand somehow work? It seems to me that relationship is counter 

to that. Do you agree with that? 

Mr. CARUSO. I would agree with that. But at the same time, the 

Saudis have been leaders within OPEC to try to prop up the price 

of oil through——

Senator DORGAN. Again, a different subject, but let me go to a 

couple of the other witnesses. I am trying to understand what we 

are learning here. It seems to me that there is a massive amount 

of speculation occurring, and one of the witnesses—maybe it was 

you, Dr. Verleger—you talked about the DOE’s decision to fill the 

SPR, and I want to come back to Mr. Caruso to see whether DOE 

got information from you about what the impact of that might be. 

You talk about the price impact of the decision to fill the SPR 

with sweet crude and that the total world market for that is five 

million barrels, and then you indicated that was amplified by option hedging. I want to try and understand that a little more. Can 

you amplify on that? 

Mr. VERLEGER. I would be happy to, sir. There are a number of 

types of derivatives. The futures is the standard that we have had 

for 150 years. There are options on futures, through which a firm 

takes a long position or a short position. It is not obligated to take 

delivery. The option is essentially an insurance policy. 

So Southwest Airlines has bought call options on crude oil that 

keep its cost of crude oil at about $50 a barrel this year, next year, 

and the year after. That means if the price falls below $50, they 

pay a lower price because they are not required to take delivery. 

38

The firms that write the calls write an insurance policy to Southwest. These firms will buy futures as prices rise. This is called 

delta neutrality. When the prices go up, they buy futures. 

This year, what we have seen is we got the additional upward push in the light sweet crude price of $5 to $10 a barrel from the 

DOE policy. Then the firms that had written calls to Burlington 

Northern, to many other major consumers and speculators who buy 

calls had to buy futures to protect themselves. This magnified the 

price increase. This is why, as I said, this is the largest price increase in a 90-day period of time in 30 years. 

Senator DORGAN. And that is very important and I appreciate 

the answer and the better understanding. 

Mr. Gheit, I have seen in print, that you said there is not any 

justification for the price of a barrel of oil given the fundamentals 

these days to be over $55 a barrel. Is that correct? 

Mr. GHEIT. Absolutely. 

Senator DORGAN. You feel strongly about that? 

Mr. GHEIT. The industry can replace a barrel of crude today prof- itably and at less than $15 per barrel. There is an old rule of 

thumb that you expect the price to be three times what your replacement cost is, and the industry replacement cost could be well 

below $15 a barrel. That is given the fact that we still have access 

to reserves who have obviously been closing down between Russia 

and Venezuela and elsewhere. But having said that, rising costs in 

the industry, and with that all said, the industry can still be profitable at $45 oil. 

Senator DORGAN. One final question, Mr. Chairman. I am trying 

everything I can in some sort of an omnibus bill, some sort of appropriations process, to put a stop to this royalty in kind, taking 

sweet crude off the market and sticking it underground at this 

point. That is absolutely nuts, in my judgment. I am running into 

all kinds of bureaucratic problems in trying to stop the Department 

of Energy from continuing that activity and exacerbating it. But I 

still hope we can get that done. 

Mr. Caruso, has anybody at the Department of Energy consulted 

EIA and asked what the impact would be if we take sweet crude 

and start sticking it underground storage at current prices? Has 

anybody asked you what the impact would be? 

Mr. CARUSO. I have not been asked, no. 

Senator DORGAN. Should they have asked you? 

Mr. CARUSO. Well, we are available. 

Senator DORGAN. What would you have told them? Would you 

have told them what Dr. Verleger just suggested, that it is going 

to pump up the price of oil on the markets and it is going to exacerbate the price problem? 

Mr. CARUSO. I don’t know. Listening to Mr. Verleger’s argument, 

it seems to be what he is saying is that world oil prices are really 

hyper-sensitive to these very small changes in light sweet crude, 

and I am unconvinced of that—because we have had large changes 

in light sweet crude, such as in Nigeria, a reduction of 500,000 barrels a day. We have had nothing like the kind of rise in price that 

Mr. Verleger has alluded to in the last part of 2007. So I have trouble reconciling how such a small reduction of supply of light sweet 

crude—I think it is about less than 20,000 barrels a day—could 

39

1See Exhibits No. 1 and 3, which appear in the Appendix on pages 118 and 120 respectively. 

have caused such a large price change. Whereas in Nigeria, a much 

larger reduction, 500,000 barrels a day, did not cause that big of 

an increase. 

Senator DORGAN. My time has nearly expired. 

Mr. CARUSO. So I have a problem with——

Senator DORGAN. Mr. Verleger, do you want to respond to that? 

Mr. VERLEGER. It depends on when the timing of the cut is. I 

mean, we had high inventories thanks to the actions of the financial firms. Mr. Krapels and I were in Vienna a year ago talking 

with the OPEC and EU countries about this, and since the money 

has come out and the stocks have gone down, markets are much 

more sensitive. But Mr. Caruso raises an interesting question. The 

royalty in kind oil is oil that is there. It is dependable. This is an 

expectation phenomena. And Nigeria’s oil is oil that oil producers 

always are a little more concerned, and it goes to another market. 

The Nigerian oil—well, some of that oil doesn’t come here, so I 

would have to look at that. 

Senator DORGAN. Let me just thank the witnesses, and Mr. Caruso, I would like you to be the whistle on the teapot here, but I 

don’t hear a whistle from you. I just hear you sort of saying, well, 

things are OK and we look at the market. It all adds up. I don’t 

think it adds up at all. Mr. Chairman, thank you. 

Senator LEVIN. Thank you very much. Senator Coleman. 

Senator COLEMAN. I thank you, Mr. Chairman. I am trying to 

understand what we do about what we are learning. I think we 

have learned in certain Subcommittee investigations that speculation has an impact. I don’t think there is much argument over that. 

The question is how much impact, but it has an impact. 

Let me just kind of step back a little so we are all operating on 

the same plane, because some of my colleagues have raised concerns about the Enron loophole. As I understand it, when we 

looked at Amaranth, the Enron loophole related to natural gas and 

ICE and not having the same transparency in the ICE market. In 

terms of oil, as I understand it, what we have seen with the charts 

of the Chairman,1 at least in the NYMEX New York market, that 

is regulated, and ICE, as I understand it, has moved the oil trading 

off to London. So that is also regulated. So I want to make clear, 

does the Enron loophole impact the trading of oil? Any of the witnesses there? 

Mr. GHEIT. Well, the ICE is actually the Intercontinental Crude 

Exchange and it is operated in London under the rules and regulation, but it is owned by a U.S. firm. 

Senator COLEMAN. Right, but the Enron loophole, the problem we 

had with natural gas is that there was not transparency. They 

were not regulated. At least with, as I understand it, ICE now has 

moved off to London and then those are regulated by London. So 

in other words, I am always looking to see whether transparency 

is going to make a difference here. I am trying to understand what 

transparency is. A lot of my colleagues have talked about the 

Enron loophole, but that is not the situation with oil. 

In terms of transparency, perhaps Dr. Verleger, what I got from 

you was an indication that perhaps we should require greater 

40

transparency in bilateral swaps, and I can tell you in regard to natural gas, a lot of folks said that would be a terrible thing and that 

would have a terrible impact on getting capital in the marketplace, 

on the ability to hedge in a proper way. So are you advocating that 

we somehow regulate bilateral swaps and can you tell me how we 

do that? 

Senator COLEMAN. Dr. Verleger. 

Mr. KRAPELS. He is much better looking than I am. 

Senator it is a critical question and it is kind of a lawyer’s question, and I am not a lawyer but I will give it my best shot anyway. 

When Mr. Veleger and I were in Vienna a year ago and we were 

discussing this issue with the OPEC members and with the European Union members, they had the same questions that you have 

today and what do we do about it. 

The issue of communication and harmonization of regulations between the United States and the United Kingdom is an important 

issue and I think the perfect world would be one in which both 

countries impose the same disclosure and margin requirements on 

all exchanges operating in the oil market. The British have their 

own views on this. I think it would be wonderful for the U.S. Government to reach out to the British Government and see if that 

kind of harmonization could occur. 

The fear that if the U.K. and Britain somehow teamed up and 

had effective regulation of this market, that the markets might go 

somewhere else, like Singapore, is a risk I would be willing to take, 

because the only places these markets can really work is in London 

and New York. 

Mr. VERLEGER. You said U.K. and Britain. Do you mean the 

U.K.——

Mr. KRAPELS. I am sorry, the U.K. and the United States. 

Mr. VERLEGER. I think it is key in looking at this, is transparency. Position limits are also important. If you read the Amaranth report, the ability of Amaranth to act was limited—NYMEX 

was watching them. They moved their business off to the ICE. It 

has always been important in terms of commodity markets to have 

some sort of position limits and exemptions. Now, I spent a long 

time taking apart the collapse of Metall Gesselshaft for their side 

and they managed to skirt around the position limits and their actions actually depressed the price of crude oil through their trading 

by about $8 a barrel in 1993 to 1994. 

So as you look at this, it is position limits, oversight by these regulatory bodies, and NYMEX does a great job, and the NYMEX is 

losing business because of this movement. So the harmonization. 

Those two requirements, because the light of day, that is what 

Enron didn’t want, and just getting those things would take us a 

long way. 

Senator COLEMAN. It is your testimony that I think I heard 

about regulating bilateral swaps. I have a question with transparency for Dr. Verleger. Again, though, understanding position 

limits, understanding transparency, which you have in the 

NYMEX, you have somewhat in the London exchange, are you advocating that somehow there should be greater regulation of bilateral swaps? 

41

Mr. KRAPELS. Well, the ICE exchange by nature is a derivatives 

market and I think you can probably apply some sort of filter that 

says below a certain volume level, you do not need to regulate. But 

when you have these central core contracts like WTI and rehub 

[ph.], those, I think, should be fully disclosed. 

Senator COLEMAN. And then the last thing is Dr. Verleger raised 

a very ominous prospect about continuing to put sweet crude in the 

SPR. Would it make a difference, then, if regulation were changed 

so that we could use sour crude? Would that somehow diminish the 

ominous forecast that you have provided? 

You responded to Mr. Caruso’s concern about Nigeria by saying, 

well, that goes to a different market. My sense in oil is that these 

markets are malleable, unlike gas where there are different markets. Wouldn’t you admit that oil markets are not focused here or 

focused there? Ahmadinejad does well, whether we buy it from Iran 

or not. 

Mr. VERLEGER. Well, there are two things. One, in a future hearing, you are going to talk about the way the Chinese are lining up 

some supplies. There are at least 400 different types of crude. A 

number of these crude streams are, in fact, locked up under longterm contracts. That is, the oil will go to specific consumers, like 

the Algerian crude tends to all go to Italy. The price is set off the 

market. It used to be there were official prices. It is now tied to 

WTI or to Brent or to Dubai. But diverting the oil to a different 

source is hard. I went through and I tried to trace out where some 

of this Nigerian crude is going and I just, frankly, don’t know—forget which of the supplies got disrupted. 

So yes, it is fungible to a certain point, but that gets back to the 

other thing. The reason light sweet crude is so valuable is that we 

have now gone to these very tight environmental specifications and 

so refiners can take the three-tenths percent sulfur crude and run 

it through a unit and it doesn’t slow down the desulfurization 

units. 

The IEA has written several studies in their Monthly Oil Market 

Report that worldwide in Europe and now the United States, refinery utilization rates are going down because of these new 

desulfurization rules. The units don’t work as well. Tesoro just last 

week reported they are having longer delays, and the long-term experience in California and the West Coast where we have had 

lower sulfur requirements is that we lose three percentage points 

of operation. 

In these circumstances, what I understand from people who run 

refineries, and in one way it is saying it is making sausage, except 

it is toxic, but it is that the light sweet crude is just very valuable 

because it bypasses these critical units and so it has become much 

more important. 

Now, I have read EPA’s rulings and I have read the DOE studies 

on what the low-sulfur diesel rules were going to do, but nobody 

has gone back and asked the question, in fact, has shifting to this 

essentially pure diesel fuel led to a reduction in the rate of refinery 

operation rates and has that contributed to the price increase. One 

of my good friends who is a politician says it is not a question we 

want to ask because the answer is not going to be helpful. But that 

is the nature of the problem. 

42

1See Exhibit No. 8, which appears in the Appendix on page 129. 

So to answer your question, we have SPR facilities that have 

heavy sour crude and we have them that hold sweet crude. I would 

sell off the sweet crude and fill them with sour crude. In an emergency, if we really have to replace the crude, we can relax the environmental standards the way we did in Hurricane Katrina. I think 

there is a likely probability that we would be dealing with a much 

lower price of crude. 

Senator COLEMAN. Thank you. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much. Senator Murkowski. 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

To follow up on this discussion about the sweet crude versus the 

sour crude, recognizing that it is the sweet crude that WTI looks 

to to set that price, and then the higher demand for this sweeter 

crude, is there an alternative benchmark that we could use, a suitable alternative to this sweet crude that might make a difference 

one way or the other? 

Mr. VERLEGER. Actually, I ought to plead guilty. I was at Drexel 

Burnham that created the NYMEX crude contract in 1983, and the 

reason they picked NYMEX at the time was there were a number 

of suppliers and a larger number of buyers, and no market control. 

Cushing was the perfect place. There is a second one, Brent, that 

has been created. It is much harder because you don’t have as 

many producers or consumers. 

It is certainly possible now—Mars, a sour crude produced in the 

Gulf of Mexico, was not in production. There are other fields with 

larger production. The ideal would be a Middle East crude, but the 

Saudis have always refused to allow resale of their crude or sale 

of the crude on the open market. This essentially bars us from 

using something like that. 

But yes, one could pick a crude. That chart,1 presented by Senator Dorgan, showed the price of Saudi crude has not gone up as 

much as the price of light crude. It could be done. We didn’t have 

financial settlements of futures contracts in 1983 as we do today. 

One could move to a financial settlement. One could use the large 

volumes now of much more sour crude coming south from Canada 

from the tar sands because there are a number of producers and 

their pipelines are being built to bring them down. So there are 

substitutes and you could move the market. 

Senator MURKOWSKI. It seems to me that since 1983, we have 

seen a great deal of change. Mr. Gheit, do you want to comment 

on that? 

Mr. GHEIT. Just to explain why WTI has moved up faster than 

any other type of crude and didn’t come down. One of the reasons 

that you have unprecedented shutdown or unexpected shutdown in 

refinery capacity over the last 7 or 8 months, or even longer. Whiting in Indiana and Dixon City were shut down a couple of years 

ago, and these refineries, their conversion unit which is able to 

take heavy sour crude, convert it into light product, which is really 

where that profit is, obviously could not operate because of the fire 

and explosion and everything else, so they had no other choice but 

to operate on pure light sweet crude. So the demand for light sweet 

crude obviously moved up very sharply. That is why you see the 

43

differentiation between the oil coming from Canada and the WTI 

increased almost $30, $40 per barrel over the last few weeks. 

But the idea for us to increase the buying of light sweet crude 

into the SPR also sends the wrong message to the world and to the 

traders that we could be facing potential supply disruption. We are 

just sending the wrong message to the world market, saying that 

we are worried about the future availability of crude oil. That is 

why we have 700 million barrels of crude oil inventory, or SPR, but 

we want to increase it even more. 

So as I said, traders will take anything that they can get their 

hands on to exploit the situation, to make profit, to exaggerate the 

situation. A pipeline was shut down a couple of weeks ago, and before you know it, obviously, the traders in London spiked the price 

before we get into the office. I walked into my office and all of a 

sudden, what happened overnight? Well, there was an explosion. 

Everybody said there is going to be $100 oil or whatever. The fact 

of the matter, it was repaired in no time, but this is after the fact. 

They already made the money. The whole idea is that they amplify 

the bad news because——

Senator MURKOWSKI. How much does the fear factor really factor 

into the speculation, then? 

Mr. GHEIT. I personally believe that there is at least a $30, $35 

premium in oil prices as we speak. One of the reasons is that nothing has changed in the physical supply and demand since August 

of this year, yet oil prices moved up by almost 50 percent. 

Senator MURKOWSKI. It has gone——

Mr. GHEIT. Yes. Everything else is equal. China is going. We 

have winter, we have summer. We have driving, we have seasons, 

we have everything. Nothing was new, in my view. Everything else 

is equal, and all of a sudden, oil prices went from $65 to almost 

$98. There was no justification for it. 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Murkowski. 

I think I will, unless it makes a difference, I will go back and 

forth now if that will be all right. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Mr. Caruso, you run the lead Federal agency for analyzing information about energy prices and supply, and yet, as you have in the 

past, which is why I started the discussion an hour ago about you 

all, you have again told the Subcommittee that speculation is not 

a serious problem and it doesn’t warrant a serious response. I disagree profoundly with it, and obviously my colleagues do, as well. 

So let me get into a few of the specific issues and have you tell me 

whether you think it is in the public interest to know information 

about areas I think are important. 

With respect to physical inventory, and you all issue these reports, you put them out, there are millions and millions of barrels 

of oil sitting in storage now. Do you think it is important for the 

public to know who the large holders are of those barrels of oil? 

Mr. CARUSO. Yes, I think that is public information. I mean, the 

owners of inventories are the big oil companies. We don’t publish 

them by company. That is confidential. But the fact that those companies are——

44

Senator WYDEN. That is what I am asking for. I think that the 

public ought to have a right to know who the large holders are. I 

don’t know of anywhere where people can get that information. Are 

you saying that there is somewhere where I can get that information? 

Mr. CARUSO. We do not publish it because we——

Senator WYDEN. But I asked you——

Mr. CARUSO [continuing]. We collect it on a pledge of confidentiality. 

Senator WYDEN. But do you think it is in the interest? Is it in 

the public interest for our people to know who are the large holders? I do, because I think it goes right to the heart of being able 

to track speculative activity here. I mean, this is not a question of 

price controls or somebody introducing legislation. It is a question 

of information that I think people ought to have. But you don’t 

think it is something you ought to be doing? 

Mr. CARUSO. We collected data on a pledge of confidentiality, 

based on statutes that established the EIA in 1977, as other statistical agencies do. 

Senator WYDEN. Do you think you ought to make that information available to the Congress, because you have resisted——

Mr. CARUSO. We will do whatever is the law. 

Senator WYDEN. You have resisted that in the past. 

Mr. CARUSO. We comply with the law. There is a law. 

Senator WYDEN. Do you think that ought to be done in the future? 

Mr. CARUSO. I would leave that up to the policy makers——

Senator WYDEN. But I am asking you because you are the person 

who right now is on the front lines of collecting information about 

speculative practices when people like Lee Raymond are coming in 

here and telling us it is a very significant factor. Do you think that 

kind of information ought to be made available to the Congress so 

that the Congress can make judgments in this area? Yes or no? 

Mr. CARUSO. From a statistical point of view, no, because it 

would——

Senator WYDEN. Thank you. 

Mr. CARUSO [continuing]. Stifle the data collection. 

Senator WYDEN. OK. Then let me ask you about the relationship 

of CFTC to the role that I think you ought to be performing, which 

is to be looking, for example, at large holders in matters that go 

to speculation. Now, the CFTC has issued a variety of announcements recently—a million dollar settlement penalty against Marathon Oil, the settlement penalty against a former British Petroleum gasoline trader, and Amaranth. We are talking about a variety of these different settlements. So what this all goes to is the 

manipulation of the very prices your organization is insisting can 

be explained by the laws of supply and demand. Why do you all 

think that you should sort of ignore these documented examples of 

market manipulation? 

Mr. CARUSO. We don’t ignore them. We work in cooperation with 

CFTC when those instances are required through the procedures 

that are already in place. 

Senator WYDEN. Well, you don’t collect large trader information 

on who is holding physical energy inventory. I mean, it seems to 

45

me you say, well, some other people are taking action in this area, 

but you have got hundreds of people and you can’t put a few people 

on this particular issue of looking at speculation? 

Mr. CARUSO. This is the role of the CFTC and the Federal Trade 

Commission and others to provide oversight and enforcement. We 

are a data collection and analysis agency. I think the CFTC is 

doing its job. 

Senator WYDEN. I just think for you to say, in effect, that it is 

not your job, even though you have come up to the Congress and 

said it is really market forces. I mean, Senator Levin asked you 

about that. I have asked you about it in the past. You have got it 

in your reports. You say this is really not a very serious thing. So 

you are making a conclusion, it is not a serious thing, but you 

won’t put anybody on the question of actually analyzing what is 

going on in some areas like finding out who the large holders are. 

And I think that is a dereliction of what the lead Federal agency 

ought to be doing. 

I am telling you, I am going to bird dog this until we change your 

agency’s role on this. I think you are a decent fellow. We have 

talked about this in the past. But I think the agency is profoundly 

wrong with respect to sitting on the sidelines about speculation and 

I suspect, having listened to colleagues here this morning, we are 

going to have some allies as we try to get you all off——

Mr. CARUSO. I just want to clarify. I am not saying it is not a 

serious issue. It is a very serious issue. 

Senator WYDEN. Chairman Levin had to ask you at least three 

times the question of whether you thought speculation was even a 

factor. You haven’t—and that is why I quoted the reports. Do you 

want me to read them back to you? In 2006 and 2007, you said 

that it was not a serious problem, and you have dismissed it again. 

It is, and your agency is not doing what it ought to be doing in 

terms of collecting this information. I, for one, am going to stay at 

it until we get it. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you. But you just said 20 seconds ago it 

is a serious problem. 

Mr. CARUSO. No. I said we are not saying it is not a serious 

issue. 

Senator LEVIN. It is a serious issue. 

Mr. CARUSO. It is a serious issue that should be looked at by the 

appropriate——

Senator LEVIN. It is the first time we have heard you use the 

word ‘‘serious’’ relative to speculation, that is a serious issue. As 

often as a number of people have tried to get you to acknowledge 

that, you have been unwilling to say that. 

Mr. CARUSO. Well, it may have been the different ways the question was worded. I am saying that the issue that is being discussed 

here, looking at the role of speculation in the market, is definitely 

a serious issue and I agree that it is the appropriate thing to be 

looked at by the Commodity Futures Trading Commission and others that are charged with oversight and enforcement. 

Senator LEVIN. But not by you? 

Mr. CARUSO. We look at it as one of the many factors in the oil 

market analysis——

46

Senator LEVIN. Thank you. 

Mr. CARUSO. And that is the way I responded to your question. 

It is one of many factors. 

Senator LEVIN. Thanks. Senator Collins. 

Senator COLLINS. Thank you. 

Mr. Caruso, current law requires the Department of Energy to 

evaluate the impact on markets when the SPR is being filled, and 

as a result of an amendment which Senator Levin authored in 2005 

and I was his chief cosponsor, the law specifically says that decisions that the Department makes with regard to the Strategic Petroleum Reserve must be made to ‘‘avoid incurring excessive cost 

or appreciably affecting the price of petroleum products for consumers.’’ So the law is very specific, yet you have testified today 

that those in charge of filling the reserve have not consulted with 

you on what the impact on prices would be. Is that correct? 

Mr. CARUSO. That is correct. We have not been asked to analyze 

the impact of——

Let me just correct that. I was asked in late 2003 and we presented a memorandum to Secretary Abraham at that time. 

Senator COLLINS. But as we have all pointed out, we have had 

a huge jump in oil prices in the last 6 months and yet the Department is continuing to fill the Strategic Petroleum Reserve, thus 

taking oil off the market. So I am left at a loss why you have not 

been asked by those responsible for making the decisions on when 

and whether to fill the reserve to make those purchases, that you 

have not been asked what the impact would be on consumer prices, 

on supplies, on inventories as the law specifically directs that to be 

taken into consideration. Do you believe the Department of Energy 

is complying with the law? 

Mr. CARUSO. I would have to defer to, of course, the policy makers in the Department, but they have other analytical resources—

such as the Office of Fossil Energy, which is where the Strategic 

Petroleum Reserve exists——

Senator COLLINS. But you have described yourself this morning 

as the agency that does data collection and analysis. Aren’t you the 

logical agency within the Department for those making this decision to turn to? 

Mr. CARUSO. Senator, as I indicated, we are certainly available 

to do what is required by the Administration or the Congress. 

Senator COLLINS. Well, back when Secretary Abraham was in 

charge of the Department, you said you were asked what the impact would be, correct? 

Mr. CARUSO. That was correct, in 2003, I believe. 

Senator COLLINS. And you have not been asked since that time, 

despite the fact that we have had a huge spike in oil prices, which 

would suggest that it is the worst possible time to be buying oil for 

the reserve, is that correct? 

Mr. CARUSO. I have not had any formal request to do that. 

Senator COLLINS. Mr. Chairman, I hope this is an issue that we 

can pursue, because it seems evident to me that the Department 

is not complying with the law that you wrote and I was pleased to 

be your principal cosponsor. The law is very explicit on what the 

standards are, and yet it appears that the Department is not even 

making the analysis necessary. So I look forward to——

47

Senator LEVIN. In that regard, why don’t we do this, Senator Collins, and thank you for pointing this out. We are going to ask you, 

Mr. Caruso, to ask the policy makers at the Department of Energy 

why it is that they have not consulted with you and whether or not 

they have complied with the provision that Senator Collins has 

identified which is law, and if not, why not, and report back to 

these two Subcommittees. Will you do that? 

Mr. CARUSO. Yes, Senator. 

Senator LEVIN. Thank you. 

Senator COLLINS. May I ask one quick question? 

Senator LEVIN. Yes. 

Senator COLLINS. Dr. Verleger, I very much appreciated your testimony on the Strategic Petroleum Reserve because I, too, believe 

that was a factor that we can influence that has the potential to 

affect prices. You say in your testimony that the current oil price 

increase has not been spurred by speculation, and I just want to 

make sure I am understanding your testimony. It seems that you 

and Dr. Krapels have come to different conclusions, is that correct? 

Mr. VERLEGER. I am not exactly sure where Mr. Krapels is on 

that. One of the problems, as the CFTC noted in its paper on large 

trader activities, it is very easy to look at the same data and reach 

two different conclusions. 

What I have observed since August 18—I think I first followed 

this data in an academic article in 1985—a couple of things have 

happened. One is we have a financial crisis and as part of that financial crisis, we have seen people look for any sort of asset that 

is liquid that they can price, like the Special Investment Vehicles 

(SIVs), and so on. So to a certain extent, I think there has been 

downward pressure on prices. I think we will learn later when we 

get the data there is downward pressure on prices from speculators 

as financial organizations scramble for liquidity. This is something 

that Charles Kindleberger wrote about in ‘‘Manics, Panics, and Crises’’ years ago and is something many of my classmates at MIT 

have studied and I have been following. 

As I said, we have had this very big price increase and this is—

speculation just doesn’t fit with this right now because the people 

who were long oil or were long physical assets are desperate for 

cash and they are going to Treasury bills. So I think in this cycle, 

this particular time, I don’t think we are going to find it is speculation that did it. 

There are pension funds that are buying assets, and that is what 

Dr. Krapels and I were talking about in Vienna, and those pension 

funds have continued to buy assets. Harvard has bought assets, 

and so on. They view those as a better return than, say, buying 

Exxon stock, and it is perfectly legitimate. That is not speculation. 

These are people who own stock and stay in that asset for long periods of time. They may have to roll their futures positions every 

month. They may choose to buy oil and then just every month replace the futures contract. But that is not speculation. That is investment and that is a new form of speculation. 

Senator COLLINS. Thank you. Dr. Krapels. 

Mr. KRAPELS. I completely agree with Mr. Veleger. I don’t think 

we are in a different position here and I think the use of the word 

speculation tends to narrow the discussion. When a pension fund 

48

decides to buy a lot of oil contracts as an ongoing strategic acquisition of assets and intends to hold those contracts for years and 

years and just simply rolls them over, is that speculation? It is, but 

it is not a speculative organization that is doing it because it is 

likely representing people that you wouldn’t typically associate 

with speculation. 

So one of the things I tried to share with you in my written testimony is that there are four or five different types of financial entities engaging in this market. It has created a hyper-sensitive situation. If delta hedging is having the effects that Mr. Velerger describes, then what we really have here is just a hyper-sensitive 

market created by the very size of the positions that hedgers and 

speculators constantly deal with. 

Senator COLLINS. Thank you. I think your final comments show 

how difficult this issue is. I am convinced that we do need better 

oversight, much more transparency. I think that is absolutely key. 

And exactly how to draft this legislation, I think is going to be a 

real challenge to us, and yet I think something needs to be done. 

Thank you for your testimony. Thank you, Mr. Chairman. 

Mr. KRAPELS. Thank you. 

Senator LEVIN. And we will have another round now of questions. 

Dr. Verleger, you indicated in this cycle, you didn’t think that 

speculation was the cause of the jump. In the previous cycle, 1 year 

earlier, I believe you did feel that in that cycle, as I remember, $20 

of the $70 price of oil in that cycle you felt could be attributed to 

speculation. You are not saying, as I understand it, that it is not 

that speculation doesn’t impact prices, it is just that in this particular cycle, you don’t see that is the cause of this particular increase? 

Mr. VERLEGER. I would have to go back. I think one of the things 

Mr. Krapels and I say is that when we first started looking at this, 

we both had color in our hair. I think if you read the history of agriculture and so on, speculation always gets more credit than it deserves. I think at one point, $20 was done a couple years ago. 

Senator LEVIN. Let us be clear. Twenty dollars was on a $70 barrel? 

Mr. VERLEGER. When the price got up to $70, yes. 

Senator LEVIN. That was your feeling at that time? 

Mr. VERLEGER. That was the feeling at the time. I probably 

wouldn’t say it again today. I think if I looked at it, I would come 

to a different conclusion. 

Part of it is, as Dr. Krapels has just pointed out, commodity—

what we have had is a move into commodities as an asset class. 

That started in 1990. I refer to a paper by two Yale and Penn academics, but there have been a series of them, and it took—very little money came for years and then a lot of cash started coming in 

around 2004 and some of that got seen as speculation. But essentially what it did was these firms would buy oil, buy other commodities. It is a diversified portfolio that they follow, and they follow 

a very rigid set of rules. 

From 2004 to 2006, we benefited because that converted backwardation to contango and that promoted inventory building, so 

that a year ago, Morgan Stanley was holding a great deal of heatVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00056 Fmt 6633 Sfmt 6601 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
49

ing oil in New York Harbor and earning a good return on this. This 

is how Cargill became famous. They buy at $20 and you sell forward in the futures market to $40 and earn a return of, if that is 

a year, 100 percent. Those inventories were available last winter 

and so they reduced the price of heating oil in Maine and Minnesota and they reduced the price of crude oil. The investors lost 

money because of the way they were structuring their instruments 

and they have changed that. And I think I picked up some of that 

was speculation. 

Senator LEVIN. All right. Let me go back to you, Mr. Caruso. In 

your Energy Information Administration report, which I have 

quoted before, you said that the role of these non-commercial future market participants in recent price developments is ‘‘difficult 

to assess.’’ But then you say general principles favor a focus on fundamentals rather than consideration of alternative price drivers. 

You are saying that the reason you are not assessing them is because it is difficult. 

Mr. CARUSO. It is difficult to actually get at a specific——

Senator LEVIN. But now you are saying——

Mr. CARUSO [continuing]. A specific number, let us say—you just 

asked Mr. Veleger, $20 out of the $70. 

Senator LEVIN. Right. 

Mr. CARUSO. What we are saying is that we do not believe it is 

possible to actually pinpoint the dollar amount that is related to 

speculation. 

Senator LEVIN. But what troubles me is that here in this report 

you are saying it is difficult to assess. 

Mr. CARUSO. Yes. 

Senator LEVIN. Here, you are telling us it is someone else’s job 

to assess it, not yours. You said CFTC assesses it. 

Mr. CARUSO. No. I am saying that when one looks at what is the 

impact of speculation on the marketplace, there are other——

Senator LEVIN. Of course. We all agree to that. It is not the only 

factor. It is one of many factors. 

Mr. CARUSO. Yes. 

Senator LEVIN. Since it has been such an increase, a huge increase in speculation, we have asked you to assess it. Here you are 

saying it is difficult in your report. Therefore, you will look at more 

fundamental things. 

Mr. CARUSO. Yes. Our assessment——

Senator LEVIN. Yet you tell us today, well, someone else is assessing it, CFTC. 

Mr. CARUSO. What I am saying is that our assessment is that we 

can explain most of the price increase through fundamentals and 

the other factors that are listed there. I won’t go into all the factors 

again. 

Senator LEVIN. Right. 

Mr. CARUSO. But when one looks at whether manipulation is the 

cause of the price increase——

Senator LEVIN. Let us try speculation. 

Mr. CARUSO. There are studies out there, such as by the CFTC, 

the IMF, your own Committee, that we look at, and after looking 

at all of the available evidence, our assessment is that we can exVerDate 0ct 09 2002 11:52 May 21, 2008 Jkt 040506 PO 00000 Frm 00057 Fmt 6633 Sfmt 6601 P:\DOCS\40506.TXT SAFFAIRS PsN: PAT
50

plain most of the price increase through the fundamentals and the 

other geopolitical and political factors that are listed there. 

Senator LEVIN. Right, but we are interested in the part that is 

not explainable that way and we are asking you to——

Mr. CARUSO. We think it is very small. 

Senator LEVIN [continuing]. To do your job. 

Mr. CARUSO. We think it is very small. 

Senator LEVIN. To do your job. 

Mr. CARUSO. And we say——

Senator LEVIN. But I thought it was difficult to assess. Now you 

are saying it is very small. It sounds like you have assessed it. 

Mr. CARUSO. It is difficult to assess, and after doing our assessment of the fundamentals, most of it can be explained by those factors, those fundamental factors. 

Senator LEVIN. Is it CFTC’s job to analyze the causes of oil price 

increases or decreases? Is that their job——

Mr. CARUSO. No. 

Senator LEVIN [continuing]. Or is it yours? 

Mr. CARUSO. No. That is our job, and I have given you our best 

assessment of that. 

Senator LEVIN. Your best assessment was that you pointed to 

someone else’s assessment. That is what you told us this morning. 

Mr. CARUSO. No. 

Senator LEVIN. I just want to get back to——

Mr. CARUSO. That is not what I said this morning. 

Senator LEVIN. OK. We will let the record speak for itself. 

Mr. Gheit, you have heard Mr. Caruso here this morning. Do you 

have any reaction to the Energy Information Administration’s position as to whether or not speculation is a significant factor in the 

price increase or not and whether or not they are pursuing carrying 

out their responsibility and giving us an assessment? 

Mr. GHEIT. Well, what I heard is that it is very difficult to estimate or assess, and then I also heard it is very little. That means 

that there is a conclusion that it is not big enough, so——

Senator LEVIN. That it is not very big? 

Mr. GHEIT. Yes. On one hand, we said it is very difficult to assess. On the other hand, we are saying it is small. Either it is difficult to assess and I don’t know exactly what it is, or it is very 

small and I did my homework and I can tell you that it is small. 

Senator LEVIN. And now when you have given us your opinion 

this morning about this is a significant cause of the recent major 

jump, 100 percent increase in the price of oil, are there studies that 

you point to, or is that based on experience? 

Mr. GHEIT. It is, as I said before, I have been in this business 

30 years. I have seen cycles and this is another cycle. This is an 

oil bubble. It is a classic case of oil bubble. You talk to people in 

OPEC, they cannot explain it. You talk to people in the industry, 

they cannot explain it. The speculators know the number of contracts outstanding. When people say oil prices are going to go up 

this Friday because of the expiration date, that has nothing to do 

with supply and demand fundamentals. That is the flow of paper 

coming into somebody’s desk and just pushing a button and saying, 

buy me more or buy me less. So it has nothing to do—basically, we 

51

have a disconnection between the physical market and the financial market. 

Senator LEVIN. OK. Let me call on Senator Murkowski and I will 

come back. Thank you. Senator Murkowski. 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

I think if I listen or try to read between the lines here that everyone is at least in agreement that when you have tight supplies, 

it can lead to speculation, which can ultimately lead to the manipulation that we are all concerned about here. So I want to talk just 

a minute about the supply, the inventory aspect, and Mr. Caruso, 

you mentioned in your testimony, you stated that OPEC has altered the targets over the years. Do you think that OPEC has purposely created an inventory tightness and continues to keep its production at levels that deprive the markets of our ability to build 

inventories? 

Mr. CARUSO. I think it was definitely their goal when they reduced quotas late in 2006 and the beginning of 2007. There were 

two reductions of OPEC targeted production levels, in the fall of 

2006 and another one in the early part of 2007, mainly because 

they saw that inventories in the United States and other OECD 

countries were relatively high relative to the 5-year average and 

they saw prices coming down. In the latter part of 2006 and the 

beginning of 2007, prices had gotten into the $50 to $60 range. 

This clearly was, in OPEC’s view, a price that they would like to 

have seen increased, and that is why they reduced production. 

From the period of the fourth quarter of 2006 through the third 

quarter of 2007, OPEC production was reduced by about 800,000 

barrels a day, leading to lower inventories and a tight, very tight 

market leading, we believe, to most of the price increase. 

Senator MURKOWSKI. In the aftermath of Hurricane Katrina, we 

know that there were refineries that were offline and we know that 

there were wells in production that were taken off at that time. Are 

we at 100 percent now after Hurricane Katrina in terms of those 

wells that were producing prior to? Are we missing anything domestically then in terms of our ability to produce domestically? 

Mr. CARUSO. Well, the oil and gas production in the Gulf of Mexico is increasing, but it is still below the level that would have been 

expected had the major hurricanes not occurred. 

Senator MURKOWSKI. But is everything online? 

Mr. CARUSO. We are a bit below. Some decisions were made not 

to bring certain wells and other facilities back online because the 

cost was believed to have been prohibitive given the revenues that 

could be earned by bringing that back online. The cost-benefit decision was made to leave some of that production offline and it delayed the new production in some fields, including Thunderhorse, 

which, of course, was damaged by the hurricane directly. 

Senator MURKOWSKI. But in terms of significant amounts, would 

you describe that as being significant to what we are seeing in our 

inventories now? 

Mr. CARUSO. I would say it was important, but clearly not nearly 

a major driver—about one to two hundred thousand barrels per 

day lower than it would have been. 

Senator MURKOWSKI. Let me ask you a little bit different tact 

here. This was in your written testimony and you also mentioned 

52

briefly in your oral testimony here the impact of the U.S. dollar, 

recognizing that we are seeing a decline there, adding to continued 

oil consumption because oil is trading in U.S. dollars, making the 

increase in the price of oil less severe on foreign economies. Is it 

likely that oil prices might move from dollar pricing to being based 

on some other currency? I know that this was discussed in some 

recent OPEC meetings. You look at European nations, you look at 

Japan with very strong currencies of their own. Is that price of oil 

affecting them as we are seeing here? Just give me a little discussion on whether or not we will continue the direction that we are 

currently on in terms of the oil pricing. 

Mr. CARUSO. The appreciation of other currencies relative to the 

dollar has meant that the costs to consumers in the Euro zone, in 

the yen in Japan and even in some other currencies, the full cost 

of the price increase is not being borne by the consumers in those 

areas. Therefore, it has contributed somewhat to an increase in demand because it is a lower real price. It has also contributed to, 

I believe, thinking in the discussions and the OPEC meetings that 

have been reported—that OPEC ministers have said their revenues, in effect, are buying less because of the purchasing power 

loss—and so it is certainly possible that is part of the decisionmaking process within OPEC, as well. Whether it would lead to a 

change in the way oil is priced, I continue to believe that it will 

not because so many of the assets held by OPEC countries are in 

dollar-denominated assets that it would be detrimental to their 

own assets. 

Senator MURKOWSKI. Does anybody else disagree? 

Mr. GHEIT. But also in OPEC, some of the countries have their 

own currency pegged to the dollar, and therefore when they have 

the revenue come in dollars and then they have to pay their costs 

with their foreign workers coming from Korea and elsewhere, these 

workers now are demanding to be paid either in Euro or their own 

country currency because the money they are sending home is really less than before because of the depreciation of the U.S. dollar. 

So there is tremendous pressure on OPEC. 

I was in Dusseldorf last week and there was a TV interview with 

the Chilean oil minister who said that I wish we had known about 

the drop in the dollar. We would have thought about switching to 

another currency before the fact. But obviously, if you plot the dollar against the Euro, for example, it is down almost 40 percent in 

the last couple of years here. So you are going to see additional 

pressure, upward pressure on the oil price as a result of the decline 

in the U.S. dollar. 

Senator MURKOWSKI. Thank you, Mr. Chairman. I have no more 

questions. 

Senator LEVIN. Thank you. Let me get back to the NYMEX contract for a minute. We were talking, Senator Murkowski and others 

were talking about valid benchmarks and the benchmark which is 

used for the NYMEX price is the Cushing, Oklahoma price. Now, 

that price can be affected, I take it, when we are using sweet crude 

for the SPR. Dr. Verleger, that is basically the heart of your testimony, is it not? 

Mr. VERLEGER. Yes. Now, when they say the NYMEX contract is 

the West Texas sweet crude, it is actually light sweet crude. 

53

1See Exhibit No. 20a., which appears in the Appendix on page 208. 

Senator LEVIN. Light sweet crude. 

Mr. VERLEGER. There are a number of crude oils that can be delivered against the NYMEX contract and the list has changed over 

the years with the NYMEX to expand the deliverable. For example, 

a Brent could be delivered into Houston and then piped up. It has 

to be moved into Cushing unless an alternative delivery procedure 

is agreed to by both the long and the short. But there are a number 

of crudes and they are all kind of light sweet. Many of them are 

also on the list of sweet crudes that qualify for submission to the 

DOE’s West Hackberry, where they keep sweet crude in the Strategic Petroleum Reserve.1

Senator LEVIN. Would it be wise for the SPR to use a greater 

percentage of non-sweet, I guess sour crude, in terms of price? 

Mr. VERLEGER. That is in my testimony. Yes. 

Senator LEVIN. That is the heart of your testimony? 

Mr. VERLEGER. Yes, the heart of my testimony. 

Senator LEVIN. All right. Now, Mr. Caruso, why is the DOE not 

doing that? 

Mr. CARUSO. My understanding, as I am not in the policy making 

business, but my understanding is the way the crudes are chosen 

is to try to have the best mix that fits our refinery configurations 

in this country and that is what the Strategic Petroleum Reserve 

Office has used as a criteria for that. 

Senator LEVIN. All right. So now Dr. Verleger——

Mr. VERLEGER. I was at Treasury when we created this in the 

1970s. In the 1970s, we had a number of refineries that could only 

process sweet crude and so they developed a number of facilities. 

If you read the international energy programs, there are a number 

of different storage salt domes and we put sweet crude in those and 

that is 30 years ago. 

Now, we have moved to a situation where more refiners can process heavier crudes. We also have gone to these very tight environmental specifications which could in an emergency be relaxed, as 

they were after Hurricane Katrina. And yet to my knowledge, there 

has been no study as to whether the mix of crudes we are putting 

into the reserve today is appropriate given today’s refining standards. 

Senator LEVIN. Or the capability of taking action if they are not 

perfectly reflective of refineries, then. 

Mr. VERLEGER. Right. Yes. 

Senator LEVIN. Either one. 

Mr. VERLEGER. Yes. This is——

Senator LEVIN. Mr. Caruso, why doesn’t the DOE make that 

change to save American consumers some money? 

Mr. CARUSO. I am not aware why they have not. I do know that 

the current mix of fill is one-third light sweet and two-thirds heavy 

sour. 

Senator LEVIN. We set in law, we know that, but that is apparently the way it has been for some time. Has it changed that mix? 

Mr. VERLEGER. Well, next June, the material the Subcommittee 

staff provided me said that it is going to be two-thirds sweet crude, 

one-third sour crude in the first half of this next year. 

54

1See Exhibit No. 20b., which appears in the Appendix on page 209. 

2See Exhibit No. 4, which appears in the Appendix on page 121. 

Senator LEVIN. Now, why is that being done? 

Mr. CARUSO. I would have to answer that for the record because 

it is a decision made by the office within DOE that runs the Strategic Petroleum Reserve. 

Senator LEVIN. Yes. Would you find that out? 

Mr. CARUSO. Yes, sir, I will be happy to. 

Senator LEVIN. We have been pressing this point. We have a law 

which says that you have got to fill the reserve in a way that minimizes the cost. It looks to me like the DOE is ignoring the law, as 

Senator Collins pointed out, but also ignoring the pocketbook of 

Americans. This is a reserve. This isn’t oil that we are going to 

have to refine. It is oil that someday we may have to refine, and 

we may have to waive environmental laws to refine it. But if an 

emergency is such that we have to take oil out of the reserve, why 

would the DOE ignore the law, but ignore the pocketbooks of 

Americans? 

Mr. CARUSO. I will take that question back to the Department, 

Senator.1

Senator LEVIN. There is a chart that is up there.2 This is the 

price of oil at Cushing and this shows the relationship, at least at 

Cushing, of supply and demand, and we show here that when the 

demand goes up and when the supply goes down, the price goes up. 

It relates inventories to price. Mr. Caruso, can you see that chart? 

Mr. CARUSO. Yes, sir. 

Senator LEVIN. Does it make sense for us to be decreasing the 

supply at Cushing of sweet crude by putting that sweet crude in 

the SPR when the direct effect of what we are doing is increasing 

the price at Cushing, Oklahoma, which has a direct impact on the 

NYMEX price, which has a direct impact on future contracts? Does 

that make sense to you, or do you disagree with that? 

Mr. CARUSO. Well, the facts are the facts. I mean, those are the 

facts that are on the chart. I don’t disagree with the facts of 

the——

Senator LEVIN. You believe that supply and demand is the thing 

that is the most controlling in terms of the cost of oil. We have argued this morning about ignoring the impact of speculation. But 

here at one location where there is not speculation, there is direct 

supply and direct demand, we see the relationship of price to supply. You are a big believer in that as being the cause instead of 

speculation in the general market. Why in the name of heaven 

would the DOE not follow the law to reduce that cost to Americans? Why would it want to increase the price of oil at Cushing, 

Oklahoma? 

I know you are going to take it for the record. You are an expert 

at this. You make assessments of energy prices. Can you give us 

any idea from your perspective why they would do that? 

Mr. CARUSO. Well, obviously, a decision was made based on a 

number of factors——

Senator LEVIN. But why would that decision be made? Do you 

know? Do you have any idea? 

Mr. CARUSO. I can’t answer that question. 

55

Senator LEVIN. We will get off that. Senator Murkowski. 

Senator MURKOWSKI. Go ahead, Mr. Chairman. I am finished 

with my questions. 

Senator LEVIN. OK. All right. Should we, and I can ask all of you 

or most of you this question, should we encourage the NYMEX—

which does a terrific job, I think most people concede—should we 

encourage them to broaden what their benchmark is? This is something also Senator Murkowski asked. Should we encourage them to 

not just look at Cushing, Oklahoma, but broaden it? I guess the 

main determiner of that price, which has got such a huge impact 

on the future contract prices, is Cushing, Oklahoma. Dr. Krapels, 

let me start with you. 

Mr. KRAPELS. Creating a successful futures market is really difficult, and I think they have tried again and again and again to 

create a benchmark sour crude contract and have failed. There is 

simply that alchemy that they have somehow got the WTI to get 

working in the 1980s has never repeated itself in any other crude 

contract other than Brent, which looks like and smells like WTI. 

I am not sure Mr. Veleger would agree with this, but there has 

recently been an effort to create a sour crude futures market in the 

Middle East. I don’t think it is going to succeed. The reasons for 

it, we would probably need a whole new set of hearings to discuss 

it. It is extremely difficult to create a successful futures market. 

Senator LEVIN. A different benchmark. 

Mr. VERLEGER. I agree. 

Senator LEVIN. All right. 

Mr. VERLEGER. But part of it is a delivery location. Futures markets work best when you have a number of producers and a number of consumers and there is really no choke point, and Cushing 

is unique in that it is where a number of pipelines come together 

and there were a number of storage companies, and since NYMEX 

has been there, they have built more tanks. 

I think that there is some hope as pipeline reversals are finished 

and sour crudes are coming down from Canada, one may be able 

to move it, move and create a contract tied to the Alberta contracts. 

The big problem, though, is that you have so much financial interest now tied. You now have over 2 million NYMEX plus ICE lookalike contracts, and that is just momentum and that is just—one 

of the things they will tell you if you are marketing futures contracts is the first exchange to be successful wins. 

Senator LEVIN. Would it be possible to broaden the delivery 

points? Isn’t that what you were suggesting? 

Mr. VERLEGER. I was going to change the kind of crude——

Senator LEVIN. Well, we can’t change the crude. 

Mr. VERLEGER. Well, no, if you deliver south so you could change 

it to a sour contract in Cushing, which would change things. There 

are a number of delivery points available on this. 

The other thing is to go to a cash-settled contract. Brent is cash 

settled with no delivery point, and it wouldn’t have worked in 1983 

because no one believed energy was a commodity. Now, that is not 

a problem, so you could go to a cash-settled contract off of a series 

of indices and that would work very well and that would take some 

of the distortions that were identified here out. 

56

Senator LEVIN. Let me go back to you, Dr. Gheit. You make reference in your testimony to raising the current margin requirement. What is the current margin requirement for these contracts? 

Mr. GHEIT. It is all over the lot. The trends are about 8 to 12 

percent. 

Senator LEVIN. Eight to 12 percent? 

Mr. GHEIT. Right. 

Senator LEVIN. And what is the margin requirement for stock 

that the SEC has set? 

Mr. GHEIT. Fifty percent. 

Senator LEVIN. Fifty percent for stock? 

Mr. GHEIT. Right. 

Senator LEVIN. This is 8 to 12 percent here. 

Mr. GHEIT. Correct. 

Senator LEVIN. Does that affect the amount of speculation? 

Mr. GHEIT. Absolutely. What we are trying to do here is to slow 

down the traffic and to put a speed limit, because we don’t want 

people to get hurt. We are not saying that we should block the traffic. We should allow it to proceed, but in a safe manner——

Senator LEVIN. Now, the stock market has a lot of traffic, does 

it not? 

Mr. GHEIT. Absolutely. 

Senator LEVIN. Even though it has got a margin requirement. 

Mr. GHEIT. Absolutely. 

Senator LEVIN. So we don’t want to—we obviously want to have 

some traffic, as you say, Mr. Gheit. Would you have a problem, Dr. 

Krapels, with increasing the margin requirements? 

Mr. KRAPELS. I would not. I think it is an overdue idea. 

Senator LEVIN. Could you comment on that? 

Mr. KRAPELS. Well, I think for exactly the reasons Mr. Gheit has 

mentioned. We tend to get over-leveraged in these markets. Big 

traders, especially speculative hedge funds, using the amount of leverage that they use, it magnifies their impact on price. I am not 

sure 50 percent is the right number, but something well north of 

where we are right now seems to me like good public policy. 

Senator LEVIN. Anyone else? 

Mr. VERLEGER. It seems to me that both Mr. Krapels and Mr. 

Gheit are right. The one point to add is that all these passive investors that are coming in that have bought into this market essential have a 100 percent margin because they set aside, when they 

buy a commodity contract, they set aside. So the liquidity is there 

in the market already, and I think in terms of reducing speculation, there is a longstanding history in financial markets where you 

raise the margins and you reduce the speculation. Whether it 

changes the behavior of prices, I am not sure. 

Senator LEVIN. OK. 

Mr. GHEIT. But also if we change, if the dynamics were to switch 

into other types of crude, I do believe that will have a negative impact on WTI and will just pull it down sharply. We need to burst 

the bubble. Whether it is going to come from economic slowdown 

or government action, but I feel that this is like 24/7 open gambling 

hole that people are saying that nobody will get hurt, but with the 

subprime, that with the S&L and all these things, a lot of people 

57

1See Exhibit No. 3, which appears in the Appendix on page 120. 

were saying it is going to be a win/win. There will be no casualties 

here. 

The fact of the matter, it is different and I don’t believe that this 

party will last forever. It will come to an end, and I think the sooner the better, because the longer it stays, it is really going to distort and disrupt future capital spending, because right now, a lot 

of oil companies will end up throwing in the towel, believing that 

oil prices of $100 are here to stay, and they will make investment 

decisions that we will regret sooner or later. And that is obviously 

going to hurt the oil industry. It is going to hurt the supply-demand situation. So speculators are making money, but at a huge 

cost in the future to the economy, to the oil industry, to everybody. 

So a few people will make a lot of money at the expense of a very 

large number of people. 

Senator LEVIN. Many Members of this panel believe in that very 

deeply, not all of us perhaps. I can’t speak for anybody else, but 

it is obvious that many of us think that this speculation has run 

wild. The chart on the amount of speculation demonstrates it.1 I 

think you all either think that speculation has an impact on prices, 

obviously, or clearly, or in the case of Mr. Caruso, a begrudging 

perhaps. But nonetheless, that has been the subject of this hearing 

today and——

Senator MURKOWSKI. Mr. Chairman, can I——

Senator LEVIN. Please. Senator Murkowski. 

Senator MURKOWSKI. Before we wrap up, I am trying to get a 

better handle in my mind on how we define what a speculator is. 

You have a speculator that can affect prices and then you have a 

speculator that can manipulate prices. Tell me how we determine 

the difference, because I think it was you, Mr. Gheit, or maybe it 

was Dr. Krapels mentioned when we were talking about the pension funds and if you hold these for 20 years, is it speculation? 

Well, yes it is, but for a different purpose than one whose intent 

is to manipulate the markets. And I think this is where so many 

of my colleagues get so upset and pound the table and say, we need 

to do something about it, when we are actually manipulating the 

market. How do we define or make that distinction? 

Mr. GHEIT. It is a very gray area. The speculation and manipulation go hand in hand. You are not going to get an oil trader coming 

on television saying that he thinks oil prices will go down. Why? 

They are intimate. Everybody is in it now. It is like if you can’t 

beat them, join them. And it is almost a self-fulfilling prophecy. 

When somebody says oil prices will be $100 before the year end, 

everybody is pushing for oil prices to cross the $100 mark. 

Senator MURKOWSKI. So are there any good speculators? 

Mr. KRAPELS. There are many good speculators, and I think you 

have asked a pivotal question, Senator. I don’t think you need to 

answer it. I think the one weakness of the report on Amaranth is 

that it is titled ‘‘Excessive Speculation.’’ Now, there is a clear case 

for excessive speculation in the case of Amaranth, but it is so much 

on the margin of common practice that I think the solution to the 

problem that we are talking about, excessive volatility, tremendous 

hyper-sensitivity to prices, could be substantially addressed with 

58

higher margin requirements and much more information disclosure. If people knew what was going on, we wouldn’t have the conspiracy theories that we have running around today. So a lot can 

be fixed just with those two elements of the law—of the proposals. 

Senator LEVIN. Let me give the definition from the CFTC, and 

I happen to agree with what you have said about difficulties of defining, but this is what the effort is by the CFTC. A speculator does 

not produce or use the commodity, but risks his or her own capital 

trading futures in that commodity in the hopes of making a profit 

on price changes. So I think the key to it is someone who isn’t producing or using a commodity, but it is somebody who is buying and 

selling a piece of paper with no intent to use or produce it, is 

that——

Mr. KRAPELS. But millions of our citizens do it, so——

Senator LEVIN. Of course. No. 

Mr. VERLEGER. There is no difference, really, between my purchase of General Motors stock, because I don’t intend to use or 

make General Motors products——

Senator LEVIN. But you do intend to keep it, the stock, presumably, unless you are——

Mr. VERLEGER. But I also have a passive investment through a 

fund in futures and they hold oil. Now, some of them hold oil in 

the ground and some just buy futures and they just hold claims on 

oil. It is a perfectly legitimate academic, or financial definition. 

They buy the oil and they just hold the position and then it matures, they sell the position because they have to and they take another long position. They stay steadily there. It is an investment. 

It is serving a very useful purpose because it promotes investment, 

and it doesn’t cause this volatility. 

Senator LEVIN. Let me ask a couple other of you about a couple 

other suggestions here of Mr. Gheit. Current margin requirements, 

you commented on that. Setting limits on the number of oil contracts by each account is another one of the suggestions at the end 

of your testimony, Mr. Gheit. Dr. Krapels. 

Mr. KRAPELS. I absolutely agree. I think looking at not just the 

prompt month but the out months, as well, where Amaranth did 

a lot of its mischief. I think looking at the positions of individual 

traders as the CFTC does today, applying that to ICE and monitoring it and enforcing rules is part of what——

Senator LEVIN. OK, and Dr. Verleger? 

Mr. VERLEGER. Absolutely. 

Senator LEVIN. All right. So we have a third suggestion. Now, establishing a minimum holding period. Mr. Gheit suggested a minimum. This gets to the question of the teachers’ pension funds or 

something. They intend to hold that for a while. 

Mr. VERLEGER. They hold it. They roll the positions forward——

Senator LEVIN. But the fund that they are investing in doesn’t 

intend to hold it for a particular period of time. They could buy and 

sell tomorrow or the next day constantly. But does that have as 

much appeal to either of you as it does to Mr. Gheit? 

Mr. VERLEGER. The Goldman Sachs and the Dow Jones and 

these other funds actually continue holding it. Based on the number of dollars, they hold that number of contracts and they keep 

on holding it. The holding period, when I heard Mr. Gheit say it 

59

the first time, I said, that is a good idea. The problem is that somebody who is speculating could take other offsetting positions. I 

think that is a regulation that is probably impossible to enforce. 

Senator LEVIN. OK. Dr. Krapels. 

Mr. KRAPELS. I agree. 

Senator LEVIN. Now, preventing conflict of interest by financial 

institutions is another of Mr. Gheit’s suggestions. Give us an example, if you would, of——

Mr. GHEIT. Well, basically have the dozen or so largest investment banks in the world, they are all involved heavily in oil trading. But they are also clearinghouses. They also make investments 

in their own account. So basically, they can see your cards, you 

don’t see theirs, so they can see the traffic, whether it is going 

north or south, and they can put their money either with or ahead 

of the people who are putting orders through and they can manipulate the price the way they want to see it. 

Senator LEVIN. With their own holdings? 

Mr. GHEIT. With their own holdings, because they have a position. They can basically move the market their way if they want, 

and then it is in momentum and all of a sudden you see everybody 

doing the same. Their program changes. They are all the same. 

But what I have noticed looking at what is happening, you read 

a statement in London and all of a sudden you see the reaction 

here in New York. It is almost fanning the flames. And again, a 

self-fulfilling prophecy. You say oil prices—one large investment 

bank not long ago said although we still think oil prices are still 

going to go higher, but we advise some of you might wish to take 

money off the table. Guess what? Oil prices dropped by $4 in 1 day. 

There was no change in supply and demand. The following day, oil 

prices regained the entire amount. 

Senator LEVIN. OK. Dr. Krapels. 

Mr. KRAPELS. No, I don’t like that idea. 

Senator LEVIN. OK. 

Mr. VERLEGER. I don’t like it. I think it is impractical——

Senator LEVIN. On the conflict of interest issue? 

Mr. VERLEGER. Conflict of interest, yes. It is—not given the 

structure of our financial markets today. 

Senator LEVIN. Can’t do it, OK. The other one, stiff penalties on 

violators——

Mr. KRAPELS. Yes. 

Senator LEVIN. I will leave that one go. 

Thank you all. You have been a terrific panel. We appreciate it 

all. This has been a long hearing and we will stand adjourned. 

[Whereupon, at 1 p.m., the Subcommittees were adjourned.] 

(61)

A P P E N D I X 

OPENING STATEMENT OF SENATOR JEFF BINGAMAN 

I want to begin by thanking the witnesses, as well as Senators Levin and Dorgan 

for chairing today’s joint subcommittee hearing. Today’s session promises lively discussion on a topic we have been debating in Congress for a number of years now: 

whether increased speculation in financial energy markets is contributing to recent, 

record-setting oil prices. 

Certainly, there is a broad recognition that—in the long-term—rising demand in 

developing economies such as China and India pose a challenge. Political uncertainties in oil producing regions of the world provide another source of grave concern. 

But in addition to these factors, there have been a number of important developments in financial energy markets in recent years. These trends include a dramatic 

increase in the volume of trading in oil derivative markets, and the participation 

of new classes of traders in those markets. 

According to a Government Accountability Office (GAO) report issued in October 

of this year, the average daily contract volume for crude oil traded on the New York 

Mercantile Exchange (NYMEX) increased by 90 percent between 2001 and 2006. Additionally, GAO noted that the average daily number of noncommercial participants 

in crude oil markets—including hedge funds and large institutional investors—more 

than doubled from 2003 to 2006. 

Finally, there has also been an increasing amount of trading occurring outside of 

futures exchanges—characterized by former Federal Reserve Chairman Allen 

Greenspan (in testimony last year before the Senate Foreign Relations Committee) 

as ‘‘a major upsurge in over-the-counter trading of oil futures and other commodity 

derivatives.’’ 

Taken together, it seems to me that just as the demand for physical barrels of 

oil has grown with the global economy, there is an increasing demand for oil purely 

as a financial asset. 

Untangling whether and how these dual sources of demand may be operating in 

concert—and potentially impacting oil prices--is certainly a complicated task. To my 

mind, it is a task made more difficult to the extent policymakers are confronted with 

a lack of reliable or comprehensive data across these markets. 

As it relates to the fundamentals of the physical market, this includes a notable 

lack of reliable information with respect to global oil reserves. As for trading in oil 

and other energy-related derivatives, I remain troubled by the lack of transparency 

related to the over-the-counter markets. 

It seems to me that markets operate best on the basis of complete and reliable 

information. In the absence of such information, I would suggest that the probability 

increases for prevailing market prices to become untethered from their fundamentals. 

Today, we have a distinguished panel with us, and I think this hearing offers us 

an opportunity to more fully consider a number of these complicated issues. So 

again, I thank Senator Levin and Senator Dorgan, and look forward to the testimony of our witnesses. 

OPENING STATEMENT OF SENATOR KEN SALAZAR 

Thank you Chairman Dorgan and Chairman Levin as well as Ranking Members 

Murkowski and Coleman for holding today’s joint hearing on crude oil markets. Today’s hearing should shed light on the economic and market forces that determine 

the price of oil. Global demand for this resource grows stronger daily. Ensuring a 

rational and open crude oil market is a matter of national and economic security. 

62

The Enron scandal provided us with an object lesson in the manipulation of electronic commodity exchanges, and I am sure that each member of our two Committees takes that lesson to heart. 

As oil nearly hit $100 a barrel recently, some analysts suggested that speculation 

in the crude oil market played a role in this price surge. Energy derivatives have 

become extremely popular as a financial tool, and have attracted numerous noncommercial entities into the crude oil market. Today we seek your views on whether 

these changes have made the market more vulnerable to manipulation. 

Because of strong leadership from this Congress, our country is on the verge of 

a clean energy revolution. Our nation is extremely rich in renewable energy resources and I am hopeful that we will one day achieve true energy independence. 

However, as we continue to rely on foreign oil in our transportation sector, it is 

imperative for us to understand the constraints we face in the marketplace. For this 

reason, I am pleased that this hearing was organized and I look forward to hearing 

the insight that our witnesses will share with us here today. 

Thank you.

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