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IMPLICATIONS OF A WEAKER DOLLAR FOR 

OIL PRICES AND THE U.S. ECONOMY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JULY 24, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–131 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

DON CAZAYOUX, Louisiana 

TRAVIS CHILDERS, Mississippi 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 24, 2008 ..................................................................................................... 1 

Appendix: 

July 24, 2008 ..................................................................................................... 35 

WITNESSES 

THURSDAY, JULY 24, 2008 

Bergsten, C. Fred, Director, Peterson Institute for International Economics .... 6 

Kasputys, Joseph E., Chairman and CEO, Global Insight, on behalf of the 

Committee for Economic Development ............................................................... 9 

Murphy, Robert P., Economist, Institute for Energy Research ........................... 13 

Williams, Walter J., Economist, ShadowStats.com ............................................... 12 

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 36 

Bergsten, C. Fred ............................................................................................. 38 

Kasputys, Joseph E. ......................................................................................... 51 

Murphy, Robert P. ............................................................................................ 60 

Williams, Walter J. ........................................................................................... 69 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Letter from Republican members of the committee requesting this hearing .................................................................................................................. 74 

Barrett, Hon. J. Gresham: 

Written responses to questions submitted to Joseph Kasputys ................... 77 

Written responses to questions submitted to Robert Murphy ...................... 81 

McCarthy, Hon. Kevin: 

Letter to Hon. Jack Kingston from Guy F. Caruso, Administrator, Energy 

Information Administration, dated July 2, 2008 ........................................ 86 

(1) 

IMPLICATIONS OF A WEAKER DOLLAR FOR 

OIL PRICES AND THE U.S. ECONOMY 

Thursday, July 24, 2008 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 2:03 p.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Maloney, Velazquez, 

Sherman, Scott, Green, Cleaver, Perlmutter, Donnelly, Speier; 

Bachus, Paul, Jones, Shays, Capito, Barrett, McCarthy of California, and Heller. 

The CHAIRMAN. The hearing will come to order. 

It is a busy time. On June 24th, just before we broke for the July 

4th recess, I received a letter from many of my Republican colleagues headed by the ranking member of the Monetary Policy 

Subcommittee, Mr. Paul, and the ranking member of the full committee, Mr. Bachus, asking for a hearing because, ‘‘Neither the 

Federal Reserve Bank nor the Treasury Department have been 

willing to take responsibility for the dollar’s slide over the past several years, while American consumers have been forced to pay continuing higher prices for gasoline, etc. With this in mind, we once 

again urge you to consider our request to hold a Financial Services 

Committee hearing to examine the dollar’s weakness and its effect 

on the price of oil.’’ 

I am not familiar with any prior requests, so I don’t know how 

they could once again do it, but as soon as I received this, I did 

agree to hold a hearing. We then had a fairly short window. So it 

has been a busy time for us, as people know, with the bill for us 

yesterday. This was the best time to do it. Thursday afternoon isn’t 

always the ideal, and I apologize for that, but given when I got this 

and what the schedule was, this is the best we could do, and I was 

glad to respond. I will put the letter, without objection, into the 

record. 

We will now have our opening statements. In the interest of 

time, I am going to waive mine. 

I have made it clear that this is a hearing which the Republican 

colleagues asked us to call, and I was glad to accommodate that. 

They are right; this is a very important subject. The price of energy 

and the interaction of the value of the dollar with the price of energy is probably as important a subject as we have. Even people 

who may not be fully familiar citizens with the interactivity they 

have would think it is very important once they focus on it. 

2 

So with that, I am going to recognize the gentleman from Texas 

for his opening statement. 

Dr. PAUL. Thank you, Mr. Chairman. I appreciate that very 

much, and I appreciate you holding these hearings at our request. 

I think these are very important hearings and a very important 

subject as well. 

First, I would ask unanimous consent to submit a written statement into the record. Thank you. 

I think what these hearings are dealing with is the essence of inflation. Everybody knows there is inflation out there, and nobody 

likes it. Everybody wants to take care of it, but they don’t talk a 

whole lot about where it comes from. But if you do a survey of 

economists, whether they are conservatives or liberals or 

monetarists or Keynesians or whatever, almost all economists recognize that inflation is related to a monetary phenomenon. And 

they seem to agree with that, but then they don’t dwell on the 

monetary phenomenon; they dwell on the prices. 

And today, of course, people aren’t very happy with the price of 

oil and energy, and they talk about obscene profits and not enough 

drilling and too much demand in China. And these factors may 

well play an important role, but supply and demand of the oil is 

one thing, but nobody really talks about the supply and demand of 

the dollar. And if the dollar goes down in value, that is going to 

push prices up. And we don’t talk about that a whole lot. 

A lot of times people, when they think about this issue, they talk 

about an economy when it gets heated, that they have to turn it 

off. A heated economy is bad, so they tighten the money and raise 

the interest rates to turn off the heated economy. But in reality, 

if you have a sound, healthy economic system, and it is vibrant and 

heated, actually that is very good. There is a lot of growth. And 

what happens when you have a lot of growth is that prices go 

down. 

So it always seems so foolish to me when people talk about a 

heated economy, and they look at the prices and say, well, to get 

the prices down, we have to penalize the economy and turn it off 

and turn off the spigot. And that, of course, isn’t the way it works 

if you have a sound dollar. 

That is something that I have been talking about for a long time, 

and I am so glad that we are able to pursue that a little bit and 

relate higher prices to the monetary phenomenon. And if this is the 

case, if everybody agrees that it has something to do with monetary 

policy, and we don’t like the consequences which are higher prices, 

in many ways it is semantical, because 99 percent of the people, 

you talk about inflation, they think the CPI is going up. But those 

of us who concentrate on the monetary system say, well, inflation 

comes from the increase of the supply of money, artificially low interest rates, now investment and artificial financial bubbles that 

need to be corrected, bringing up a recession. And I think we have 

a chance today to talk about that issue and see the relationship between money and prices, and that just drilling isn’t going to be the 

answer to a problem which is basically monetary. 

So once again, I want to thank the chairman for holding this 

hearing. And I welcome the panel. 

The CHAIRMAN. The gentleman from California. 

3 

Mr. SHERMAN. Thank you, Mr. Chairman. 

World oil is priced in dollars. But the fact is that if the dollar was at 80 cents to the euro instead of $1.55, we would be paying 

a lot less at the pump. The fall of the value of the dollar has made 

imports more expensive, but it has also begun to revitalize our 

manufacturing sector and led to more manufacturing exports. 

The fact is we can’t really control the value of the dollar. We do 

some jawboning. Every other country does everything possible to 

lower the value of its currency; we push in the other direction, 

which means either they are all idiots, or we are idiots. I will bet 

on the latter. 

The one thing we could do to influence the value of the dollar is 

to raise interest rates. Other than causing a recession, I don’t know 

why we wouldn’t do that. 

The fact is that trying to affect the value of the dollar cannot be 

done easily or effectively. The value of the dollar stems from our 

trade policy. The theory of free trade has the vast majority of economics professors backing it. It is an elegant theory. There are 

facts that contradict that theory. Those facts, therefore, must be ignored. 

For example, we were told that the trade deficit was the fault of 

the U.S. budget deficit. We had a budget surplus under Clinton; 

the trade deficit grew. The fact must be ignored. Tourists come into 

this country from Japan to my City of Los Angeles to buy Japanese 

goods and fly back. Under the theory of open trade, that can’t exist. 

It must be ignored. Now Europeans are doing the same thing on 

the east coast. All these facts must be ignored. The trade deficit piles up. Even if it is only a $700 billion trade deficit versus an $800 billion deficit, there is a trade debt as our 

dollars accumulate overseas. What we learned in the housing crisis 

is that things that can’t go on forever don’t; and the willingness of 

the rest of the world to buy U.S. dollars forever will end, perhaps 

in a disruptive way. 

What we need is a completely different trade policy, a policy that 

is based on facts, a policy that reflects—I mean, we sign these wonderful agreements with—arbitration provisions with China. One of 

their arbitrators voted for the American company. He is now in jail, 

a fact that must be ignored as we continue to subscribe to, let alone 

enter, new trade agreements. But the trade agreements are so 

beautiful on paper that facts like the imprisonment of a Chinese 

arbitrator must be ignored. 

The reality is that America is a society with a rule of law. And 

so, if you change the laws, change the regulations, you open our 

market. Other societies are not, but that fact must be ignored. 

The CHAIRMAN. The gentleman from Nevada. 

Mr. HELLER. Thank you, Mr. Chairman. 

In deference to times and votes coming up here pretty soon, I 

will postpone. I am more interested in the testimony. Thank you. 

The CHAIRMAN. I thank the gentleman. 

The gentlewoman from West Virginia. 

Mrs. CAPITO. There is pressure now. 

The CHAIRMAN. There always is. 

Mrs. CAPITO. I want to thank the chairman for holding this hearing. It highlights an issue, I think, of interest all across this counVerDate Aug 31 2005 14:49 Oct 30, 2008 Jkt 044904 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\44904.TXT TERRIE
4 

try. I would like to say that I have a constituent who writes me 

quite frequently on this exact issue, and I am pleased to see that 

we are going to be fleshing out his concerns and getting good information. So I appreciate the chairman for moving forward with this 

hearing. 

Thank you. I would like to submit my full statement. 

The CHAIRMAN. Without objection. 

The gentleman from Georgia. 

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

This is indeed a timely hearing, and I want to thank the chairman and ranking member for holding it, and I am certainly looking 

forward to the information that this panel will give. 

First, I believe we learned the hard way that our lack of being 

proactive as far as investing in renewable and alternative forms of 

energy as well as increased conservation programs, and it is finally, finally catching up with us. We are behind the ball. 

I have talked often about the example of Brazil in moving forward and having the foresight to see, and I share with the panel 

my own visit in Brazil and being able to get down there and seeing 

firsthand and spending a week or so of what they have been doing 

over the last few years. There is much that we can learn. 

Our country has for far too long conducted itself on the notion 

that oil is a finite resource. You know, nowhere is this impact on 

oil affecting us, not only consumers at the pump, but you just look 

at the airline industry itself and what they are going through, and 

they don’t have the luxury right now of moving to a basically renewable fuel as we do with our automobiles that, if we move quickly, can take some of that downward pressure off some of these industries that don’t have that choice at this moment. But I believe 

that this current energy crisis is one where we will have to finally 

learn our lesson and change our ways. The price of oil continues 

to increase, and experts expect the trend is set to continue for the 

next coming year or two. 

Second, oil prices have jumped nearly sevenfold since 2002, in 

part by a broader commodities rallies sparked by the demand from 

emerging economies such as India and China. If we keep going at 

our rate, our energy needs in the next 10 years will increase pretty 

close to 22 percent. China’s would increase pretty close to 180 percent. And then you have India and some of the other developing 

nations. This is a very urgent, very critical issue. 

And, third, and what we are addressing today in this panel discussion, the falling dollar, the weakening dollar and the high price 

of oil. It is true the American dollar’s fall is a detriment to access 

to foreign oil. The dollar is worth less, and so oil-producing countries are requiring more money to purchase the same barrel of oil. 

And we know the exchange that is used is our money, it is all on 

the dollar. 

A couple of examples: It takes close to $1.60 to purchase a euro, 

and the Canadian dollar is now worth more than the U.S. dollar, 

whereas, for more than 3 decades, the Canadian loonie was worth 

quite a bit less than our own dollar. 

So is the immediate cause of rising oil prices the weak dollar? 

That is the fundamental question we have to answer, and I look 

forward to that. I am interested in hearing to what extent our disVerDate Aug 31 2005 14:49 Oct 30, 2008 Jkt 044904 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\44904.TXT TERRIE
5 

tinguished witnesses believe that our dollar is contributing to our 

oil price and supply woes. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman, for calling today’s hearing, which was requested by the gentleman from Texas, Mr. Paul, 

and 16 other Republican members of the committee. 

Mr. Chairman, at a time when the cost of gasoline is the biggest 

pocketbook issue for most Americans, it is important that we look 

at all the factors behind oil prices. Let me stop right there and say 

that I represent Bibb County, Alabama, where the average takehome pay is $285 a week. I have constituents who are paying $90 

a week to put gas in their tanks, and they can’t continue to do that. 

It is the biggest source of financial stress in my district. It is having a really devastating impact. I have constituents who tell me 

they are having to change their eating habits; they are having to 

substitute beans for meat. So this is absolutely a tremendous 

stress. 

One of the factors is the impact of the weaker dollar and what 

effect it has had on the price of oil and indeed all commodities. 

Here they are hit with the gas prices, and then food is going up. 

So that is hitting them. 

One recent study by the IMF suggested that if the value of the 

dollar had remained steady against other currencies from 2002 

through the end of last year, the price of a barrel of oil would be 

about 25 percent less than it is today. 

But make no mistake about it, our fundamental problem is with 

supply and demand. We are not producing enough American-made 

energy to meet our needs, so foreign oil producers are holding us 

over a barrel. And when I talk about energy, I am not talking 

about just oil, fossil fuels; I am talking about any kind of energy 

production. We need it all. We need solar, we need wind, we need 

nuclear. We need everything. 

Federal Reserve Chairman Ben Bernanke made a statement before our committee last week that deserved more attention than it 

got. He said that a 1 percent increase in oil production could lower 

prices by 10 percent. I thought that would be headline news the 

next day, but I didn’t see any paper report that. 

In a survey I just did in my district, there was a strong opinion 

that with gas now at $4 a gallon, the United States must do more 

to develop the abundant energy resources we have here at home. 

As I said, that includes our oil and natural gas reserves offshore 

and in Alaska. It involves nuclear, coal, wind, solar, as well as renewable fuel. And energy production is just one leg of the stool. 

Conservation ought to be another. We should talk about both of 

them and new technologies for the future. Hydrogen may be 20 

years away or something, but we need that. By diversifying now 

through responsible exploration or licensing new nuclear power 

plants, just to name two examples, we ensure that Americans have 

renewable, affordable energy over the long run. 

Mr. Chairman, in closing, high gas and energy costs are a burden 

for all of us, for our families, and for our schools. It is impacting 

local governments, businesses, and manufacturers. And they slow 

our economy. Congress should be devoting its full attention to the 

6 

issue, and to the extent today’s hearing draws attention to that 

fact, it will have served a very useful purpose. 

Thank you again, Mr. Chairman, for holding this hearing. I look 

forward to the testimonies of our distinguished gentlemen. 

The CHAIRMAN. Let me make a procedural explanation in fairness to the witnesses and to the members who have asked me to 

call this hearing. We are about to have a vote on one amendment 

to the pending bill. That will last 15 minutes. And there will then 

be debate on the motion to recommit, which takes 12 to 13 minutes, and then a 15-minute motion to recommit. 

I am prepared to stay here through the last amendment vote, so 

I will keep the committee in session. I would urge members, in consideration of witnesses, to go and vote right away on that first vote. 

If you then come back, we will have a half hour before you have 

to go back again. Otherwise, we lose about 40 minutes. If that is 

acceptable, we will begin with the statements. 

We will start with Mr. Bergsten. 

STATEMENT OF C. FRED BERGSTEN, DIRECTOR, PETERSON 

INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. BERGSTEN. Mr. Chairman, let me start by congratulating you 

and this committee for the housing bill that passed the House yesterday. You have done an enormous service for the country. I want 

to congratulate you and indicate great support for that. 

I also want to indicate how that bill addressing the country’s economic and financial problems is the perfect context in which to discuss today’s issue, the exchange rate of the dollar, oil prices and 

the like, because they are so central to the economic and financial 

outlook. As I will indicate in my comments, what happens to the 

dollar could have a major, indeed decisive, impact on where the 

economy goes and the scope for policy to respond to the economic 

difficulties that we face. So I want to go through a quick analysis, 

as requested, of the dollar’s impact on the economy, what it implies 

for policy, and a few suggestions for the committee and the Congress. 

First, just so we are starting from the same place, is the dollar 

weak? I would say, no. The dollar is at about the level that it was 

in 1980, again in 1995, and we still have a very large trade deficit, 

as Congressman Sherman indicated. The dollar went way up from 

1995 to 2002. It has come back down over the last 6 years. It is 

just about where it started in 1995, which is about where it was 

in 1980. So we have had lots of ups and downs. The dollar is certainly weaker, but it is not weak. 

What about its effects? The good news, and Mr. Sherman already 

mentioned that, is that the weaker dollar has already contributed 

to a very substantial improvement in the U.S. trade balance and 

thus our overall economy, and it is for sure going to lead to much 

more improvement. Every fall of 1 percent in the trade-weighted 

average of the dollar tends to strengthen our trade balance by $20 

billion to $25 billion after a lag of 2 to 3 years. Our net exports 

of goods and services in real terms, as included in the GDP account, have already strengthened by about $150 billion over the 

last 18 months, and we can expect a like improvement of another 

$150 billion or so in real GDP terms over the next 18 months or 

7 

so, for a total gain from the weaker dollar and continued growth 

abroad of about $300 billion in our economy. 

In fact, that sharp reduction in the external deficit has provided 

all of the U.S. economic growth in the 4th quarter of last year and 

the 1st quarter of this year, the latest quarters for which we have 

data. There was no increase in domestic demand during that halfyear period, but net exports have been growing at an annual rate 

of about a percentage point of GDP. Hence, they have kept us out 

of recession at least to date. 

This likely trade gain of about $300 billion in real terms translates into the creation of more than 2 million jobs for the U.S. economy. Moreover, these mainly export jobs pay 15 to 20 percent more 

on average than the national wage. 

Given the fact that domestic demand has been flat and aggregate 

unemployment rising, these trade gains are extremely important. 

What it says is that the lower dollar and the globalization of the 

U.S. economy are providing a major boost to our economy just 

when we need it. That is the good news. 

The bad news is that a weaker dollar does, as several Members 

have already indicated, mean higher prices in the United States. 

Every decline of 10 percent in the average exchange rate of the dollar tends to produce a subsequent increase in the Consumer Price 

Index of about 1 percentage point. So the dollar, having fallen by 

about 25 percent over the last 6 years, we can expect something 

like a rise of 2 percent in the price level in the United States. 

However, it is important to realize that a one-shot fall in the dollar leads to a rise in the level of prices but not to a higher rate 

of inflation. The inflation rate would increase permanently only if 

the dollar continued to decline, just as the trade balance would 

record further gains only if the currency were to keep falling to 

lower levels. 

Now, as Mr. Paul and others have mentioned, concern has been 

expressed that the weaker dollar has been an important contributor to the sharp rise in the price of oil. Chart 2 in my handout 

indicates the relationship, and I would come to a simple conclusion. 

Historically, there has been very little correlation between the dollar and world oil prices. When the dollar declined by 30 percent 

back in the mid-1980’s, the oil price collapsed to less than $10 a 

barrel. Back when we had an upwards spike in oil prices in the 

early 1990’s, around the time of the Iraqi invasion of Kuwait, that 

spike in oil prices correlated with a flat or rising dollar. Oil prices 

and the dollar rose together in the late 1990’s. 

Now, during this last period, the global price of oil, as already 

mentioned, has risen about sevenfold, while the dollar has fallen by 

only about 25 percent. This is a far higher ratio of oil price rise to 

dollar fall than has existed over any previous, let alone extended, 

period. Moreover, the price of oil has risen sharply in all currencies, including the euro and other strong currencies, not just the 

dollar. Other commodities, even those that don’t trade on exchanges, have risen as much as or even more than oil. And even 

for the short run over the last 6 weeks or so, while the dollar has 

stabilized, the oil price continued to escalate sharply. If you want 

to look at the last few days, the oil prices plunged without any concomitant rise in the dollar. 

8 

So it is very hard to find any systematic correlation. I didn’t 

bother you in my paper with regression analyses. We have tried to 

run regressions that throw in every possible time period, every 

specification. You just don’t find the correlation. 

Other factors in the exchange rate, which I summarized in my 

statement, I think explain very persuasively the change in the 

price of oil. 

The CHAIRMAN. Mr. Bergsten, they changed the order of votes. I 

thought the first vote was one that I could easily miss. It is now 

one that I cannot miss. We may have to wait about 45 minutes. I 

hope you can accommodate us. I apologize, there is no way to tell. 

We are going to take a break. 

Mr. BERGSTEN. I just have 2 more minutes in my statement 

when I come to what I think is the key point. 

The CHAIRMAN. I apologize. I thought you were finished. It is 

dangerous to pause around here. 

Mr. SHERMAN. Mr. Chairman, will we come back while they debate the motion to recommit? 

The CHAIRMAN. We can vote on this one, which is 15 minutes; 

we can vote on the second one, which is 15 minutes, or we vote 

right away. There will then be about 40 minutes before they get 

back to voting. So that is what we will do. 

So please finish, Mr. Bergsten. 

Mr. BERGSTEN. Finally, and I think critically for this committee, 

the most uncertain impact of a weaker dollar relates to the foreign 

financing of the U.S. external deficits. Even with the trade improvements that I mentioned, we are still running annual shortfalls that will total at least $500 billion a year. These shortfalls require us to attract foreign financing of a like amount to balance our 

international books. 

Now, the lower dollar makes U.S. assets cheaper, and that ought 

to increase foreign interest in investing here. On the other hand, 

fears of further dollar declines could deter investors and, in fact, 

lead them to seek higher returns on their U.S. investments to offset that risk. The central question is, thus, foreign expectations of 

the future exchange rate of the dollar. This, in turn, poses the central challenge of the dollar for U.S. economic policy. 

Fears of further falls in the exchange rate could lead to a flight 

from dollar assets, by Americans as well as foreigners, incidentally. 

The consequent sharp decline of the dollar if there were such a 

flight could force the Federal Reserve to raise policy rates to fight 

the incipient rise in inflation pressure right in the face of financial 

fragility and a soft economy. 

As you well know, and I know you discussed it with Chairman 

Bernanke last week, the monetary authorities already face an 

acute policy dilemma; on the one hand a sluggish economy, on the 

other hand rising inflation. 

The CHAIRMAN. We have a vote, so you need to move quickly. 

Mr. BERGSTEN. So the conclusion is if the dollar were to fall out 

of bed, it would put policy in this country, particularly the Fed, in 

an impossible dilemma of having to raise interest rates to fight the 

inflationary effects of the lower dollar. Therefore, one last sentence, 

we may need a new policy instrument. I believe in that circumstance, we would have to consider joint intervention in the forVerDate Aug 31 2005 14:49 Oct 30, 2008 Jkt 044904 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\44904.TXT TERRIE
9 

eign exchange markets to keep the dollar from falling sharply without distorting monetary policy as it attempted to fight financial fragility and continued sluggishness in the economy. 

[The prepared statement of Mr. Bergsten can be found on page 

38 of the appendix.] 

The CHAIRMAN. We are going to now go back and vote. I again 

apologize. As I say, they changed the order. We will go and vote. 

We will get at the end of that one vote. Members who want to can 

then take the second vote. We will then have another 40 minutes, 

and I think that is the best we can do. So we are in a brief recess 

that I hope won’t be more than 15 minutes. 

[Recess] 

The CHAIRMAN. I now recognize Joseph Kasputys, who is the 

chairman and CEO of Global Insight, the offices of which are about 

a mile from my apartment. 

STATEMENT OF JOSEPH E. KASPUTYS, CHAIRMAN AND CEO, 

GLOBAL INSIGHT, ON BEHALF OF THE COMMITTEE FOR 

ECONOMIC DEVELOPMENT 

Mr. KASPUTYS. Thank you for pointing that out, Mr. Chairman. 

I should also say that I am here representing the Committee for 

Economic Development, of which I am the co-chairman, and I 

would like to address the questions that the committee has called 

this hearing about. 

I would really like to point out our views on both oil and the dollar, but then go beyond that and point to our views on the role of 

the dollar in attracting foreign investment and the need for that 

foreign investment in the long term under the current policies that 

we find the United States following. 

We all know the U.S. economy is facing some very difficult 

times—the subprime housing price collapse and the resulting consequences for construction, financial institutions, financial markets, 

and households. At the same time, we have strong demand and capacity constraints, lifting the price of oil close to $150 a barrel, and 

it remains high despite some very recent downward adjustments. 

This has a big adverse impact on consumers, airlines, the automotive industry, and other industries as well. We have seen other 

commodities and food follow the same path, putting the policymakers in the United States in the difficult position of having to 

fight inflation, deal with an economic slowdown, and restore the 

credibility of financial markets all at the same time. Some of these 

problems have certainly spilled over to Europe; Asia has been 

largely spared, although not completely untouched. 

One could say that the U.S. economic difficulties we are currently experiencing, such as the subprime crisis, excessive housing 

prices collapsing, and the loss of confidence in U.S. financial institutions abroad, has contributed to a weaker dollar, and this in turn 

has contributed to higher oil prices. I would agree that there is 

some of that in the oil prices, but only to a minor extent. 

We believe that the major factor in determining oil prices is not 

the current level of the dollar, but the strong demand around the 

world, notably of Asia, a very tight supply/demand balance between 

the 88 million barrels or so a day that is required to meet growing 

demand versus low additions to supply due to a long-term lack of 

10 

investment, natural disasters, and political problems, which often 

can be disruptive to oil supply. 

I would note that from 2005 to today, the oil price in dollars has 

increased by about 233 percent; the oil price in euros has increased 

by about 175 percent. So we can’t say that the increase in oil prices 

is all due to the weakness of the dollar when you look at figures 

like that. 

One could also note that the Middle East oil exporters that have 

pegged their currencies for various reasons to the dollar want to 

maintain the real purchasing power of that dollar particularly so 

they can afford the imports that they buy from nondollar-based 

economies. In this regard, if you look at the Saudi currency over 

this same period, it has only depreciated by about 9 percent on a 

trade-weighted basis. The same thing can be said of the UAE. So 

it is not the depreciation of their trade-weighted currencies that is 

driving the oil prices. 

As Mr. Bergsten has pointed out, the weak dollar did indeed help 

exports in 2007 and 2008. Almost all U.S. growth is now linked to 

exports. Our current account balance, good news, has dropped from 

about 6.6 percent of GDP in 2005 until recently to about 5 percent 

of GDP. 

Is this really good news? Well, yes, it is moving in the right di- rection. But we still need to attract about $1.5 billion a day to finance our current account deficit versus $2 billion a day when the 

deficit was at its peak. It is still too high. The United States is continually adding to the problem in its net international investment 

position, which is unfavorable, and continuing to deteriorate. 

Now, with oil prices in 2008, it is likely we will face an increase 

in the oil bill, which will more than offset the good effects of the 

weak dollar on our exports. We are estimating that it is about a 

$90 billion swing there with a $260 billion increase in the oil bill, 

more than offsetting a $166 billion improvement in other parts of 

the current account. 

So the current account deficit will grow again relative to the 

GDP, and we believe this has negative implications for the dollar, 

and, if continued indefinitely, could result in very undesirable consequences for the economy. 

In September of last year, the Committee for Economic Development released a study entitled ‘‘Reducing the Risks from Global 

Imbalances.’’ The report we produced argued that the large global 

imbalances are unsustainable and, if not corrected, significantly 

raise the risks of financial and economic instability and the adoption of protectionist trade policies. This study noted, however, that 

market mechanisms were likely to reduce the imbalances, but this 

adjustment should be facilitated by sensible and self-interested 

policies by the major nations involved. The study outlined actions 

by the United States and other involved countries that would help 

the process of global adjustment and a reduction of imbalances. 

These measures would be most effective if adopted by all the countries contributing significantly to the imbalances. 

The immediate problems of the worldwide credit crunch and economic slowdown have drawn attention away from longer-term concerns about global imbalance and related economic pressures. We 

really think that we need to look longer term. The Federal budget 

11 

deficit and our generally low national savings rate materially contribute to a persistent current account deficit. The growth in Federal entitlement programs the way they are currently structured is 

only going to increase and aggravate this further. And as the 

United States recovers, which will probably be in the end of 2009, 

we think the current account deficit will begin to grow again. 

So, we think there is a serious long-term structural problem 

where the United States is going to need to attract more foreign 

investment into the United States. And I am concerned with the 

degree to which we have been depending on nations that we trade 

with to recycle their dollars into low-yielding Treasurys, and now 

we see about $3 trillion in surplus in the hands of countries, and 

about $1 trillion of that has been placed in sovereign wealth funds. 

These sovereign wealth funds are beginning to be managed by professional money managers. They are going to be looking for higher 

yields. They may not be willing to accept the low yields of Treasury 

bills. 

So what to do? We think, of course, the credibility of financial 

markets needs to be restored. And many things that started in this 

committee, enacted by the Congress, the stimulus that has been 

enacted, have all been good things, but more needs to be done on 

a long-term basis. 

The CHAIRMAN. We need you to wrap up in about a minute. 

Mr. KASPUTYS. Thank you. 

Along with measures being taken to support the U.S. economy 

currently, we have to address the global imbalances. 

We do think that oil prices will ease as world growth slows and 

new capacity is developed. However, the upward pressure on oil 

prices is more likely to be sustained longer than in previous cycles 

due to the very tight current oil supply and demand imbalance. 

Working on energy security and reducing energy dependence is 

really a win-win, which would help reduce the current account deficit and help the United States in many other ways. 

The CED calls for more coordinated international actions to reduce imbalances. We think that in the United States, we need to 

deal with persistent high Federal budget deficits, and we need to 

take measures to raise private savings, even though near-term actions are needed to stabilize the financial situation and do come at 

a cost. 

The CHAIRMAN. We have to take about 15 seconds. I don’t mean 

to be rude, but I can’t manufacture minutes. You have, I hope, 

some general conception of the time constraints, and you have to 

accommodate to them. 

Mr. KASPUTYS. One last sentence: The United States has a key 

role to play in a program to reduce imbalances by putting its own 

house in order, predominantly including action to reduce the Federal budget deficit that exists now and under current policies will 

only grow; and then the United States can provide leadership with 

other countries to get them to cooperate in a coordinated program 

that will reduce our vulnerability to the high current account deficit and dependence on foreign investment. 

Thank you. 

[The prepared statement of Mr. Kasputys can be found on page 

51 of the appendix.] 

12 

Ms. VELAZQUEZ. [presiding] Thank you. 

Our next witness is Mr. Walter J. Williams, economist, 

ShadowStats.com. 

STATEMENT OF WALTER J. WILLIAMS, ECONOMIST, 

SHADOWSTATS.COM 

Mr. WILLIAMS. Chairman Frank, Ranking Member Bachus, and 

members of the committee, thank you for the opportunity to discuss the implications of a weaker dollar for oil prices and the domestic economy. 

A weaker U.S. dollar helps to spike oil prices and otherwise generally fuels domestic inflation, reducing the purchasing power of 

consumers’ paychecks and the real value of their assets. The underlying factors that have led to recent turmoil in the currency markets remain in play. While significant further weakness in the dollar would place additional upside pressure on oil prices and domestic inflation, it also could encourage oil producers to denominate oil 

prices in a currency or currencies other than the U.S. dollar, which 

would exacerbate U.S. inflationary pressures. Separately, further 

weakness in the dollar could threaten domestic financial market liquidity, complicating the systemic challenges already being addressed by the Federal Reserve. 

On the plus side for the economy, a weaker dollar tends to help 

narrow the trade deficit. Yet the positive effects are seen primarily 

in commodity-like goods. Where quality and features are important 

to the goods and services traded, the impact is quite muted. 

From the standpoint of consumer inflation, a number of factors 

influence prices, including the value of the dollar. A weaker dollar 

means that those living with dollar-denominated incomes and assets are losing purchasing power and real value against the nondollar-denominated world. Over the long term, that lost global purchasing power tends to be reflected in domestic inflation and a parallel loss in domestic purchasing power. 

For example, since March 1985, the dollar has lost 50 percent of 

its purchasing power against the major Western currencies, while 

the dollar has lost 51 percent of its domestic purchasing power to 

inflation. There are different ways of measuring the dollar’s value. 

An historically high negative correlation between movements in 

the dollar and oil prices suggest that the dollar weakness adds 

some upside pressure to oil prices. With oil denominated in dollars, 

dollar weakness provides an effective discount to nondollar-based 

economies due to the relative strength of the local currency. While 

dollar oil prices had nearly doubled for the year which ended June 

30th, oil prices were up only 70 percent in terms of the yen and 

the euro. 

In response, market forces tend to balance the effective discounts 

with upside pressure on the oil prices and dollars. Additionally, it 

is in the direct interest of oil producers to see upside pressure on 

dollar oil prices as an offset to global purchasing power being lost 

in weakening dollar-denominated revenues. 

As to the domestic financial markets, where the U.S. trade deficit 

has pumped excess dollars into the global markets, a significant 

dollar overhang has developed particularly with foreign central 

banks. The investment of these holdings in the United States has 

13 

kept the domestic credit and equity markets relatively flush with 

liquidity. Perennial weakness in the U.S. currency, however, discourages such investment, and intensified dollar selling is a risk in 

the months ahead. Such selling could trigger dumping of the dollar 

and dollar-denominated assets. The same could result from efforts 

to mitigate the impact of higher oil prices with an offsetting decline 

in the dollar. Unless otherwise compensated for by the Federal Reserve, such action would drain liquidity from and correspondingly 

roil the U.S. financial markets. 

The relative value of a nation’s currency is a measure not only 

of its trade position, but also of global capital flows that mirror how 

the rest of the world views that nation’s economic strength, financial-system integrity, and political stability. While the U.S. dollar’s 

exchange-rate value has experienced high volatility over time, it 

generally has trended sharply lower during the last 4 decades, having hit historic lows in recent months against currencies such as 

the Japanese yen and the Swiss franc. The current circumstance 

results from extended periods of deliberate debasement or neglect 

of the U.S. currency by various Administrations and Federal Reserve Chairmen. 

Contrary to popular conventional wisdom, the dollar does matter, 

and so does the budget deficit. The dollar issues are coming to a 

head. The deficits issues are related, but are still smoldering in the 

background. 

Underlying fundamentals that drive the real relevant value of 

the U.S. dollar against the currencies of its major trading partners 

could not be much more negative. The key factors or surrogates for 

global market concerns include the relevant U.S. condition on trade 

balance, economic activity, inflation, fiscal discipline, interest rates 

and political systemic stability. Only interest rates and related 

monetary policies are quickly addressable and present. Changes 

there could run counter to the Federal Reserve’s needs and its current efforts to promote systemic financial stability and could be 

somewhat counterproductive in what I contend is currently a recessionary environment. 

Neglecting U.S. dollar weakness and providing nothing more 

than unsupported jawboning of a strong dollar policy begets further 

selling pressure on the dollar, promising further upside pressure on 

oil prices, further depreciation of U.S. consumers’ purchasing 

power, and increased risk of a torrent of dollar dumping and resulting turmoil in the U.S. financial markets. 

Thank you. 

[The prepared statement of Mr. Williams can be found on page 

69 of the appendix.] 

Ms. VELAZQUEZ. Thank you, Mr. Williams. 

Our next witness is Mr. Robert Murphy, economist, Institute for 

Energy Research. Welcome. 

STATEMENT OF ROBERT P. MURPHY, ECONOMIST, INSTITUTE 

FOR ENERGY RESEARCH 

Mr. MURPHY. I thank the Chair. I understand we are in a time 

constraint here, so I will just briefly summarize my written testimony. I am just going to talk about what the Institute for Energy 

14 

Research believes to be the causes of record oil prices and then 

offer some possible remedies for that. 

I am an economist. You ask, why are oil prices so high? I am 

going to say it is because of supply and demand. On the demand 

side you have, as everyone has been alluding to, in the developing 

countries, demand for oil has been growing very rapidly from 2003 

to 2007. For example, in China, petroleum consumption has increased about 8 percent per year over that period. And I want to 

stress that a lot of people misunderstand that, and they say, well, 

8 percent a year is high, but, you know, oil has been going up a 

lot more than that. But the fact is China’s consumption has been 

increasing 8 percent on average from 2003 to 2007 while oil prices 

were going through the ceiling. 

The way to compare and say how much has the demand itself 

shifted in terms of its effect on the price, you would want to say, 

well, if oil had stayed at $30 a barrel, which it was in 2003, how 

much more would China’s consumption have grown? So that 8 percent figure, some people misunderstand the significance of that. 

On the supply side from 2005 to 2007, world output was roughly 

flat. What happened was as non-OPEC production went up slightly 

in that period, OPEC production actually went down to almost perfectly offset it. But from the second quarter of 2007 to the present, 

OPEC has actually been increasing. So the last quarter we have actually had the highest-ever world output of oil, but demand just 

keeps increasing, so that is what has put upward pressure on oil 

prices. 

The last component of this explanation which is relevant to today’s testimony is the role of the dollar. So from June of 2007 to 

June of 2008, oil prices increased about 104 percent, but at the 

same time, if you look at the euro price—or, excuse me, the dollar 

price to a euro, that has increased about 16 percent, so that in a 

sense we can say, why did oil basically double in the last year? 

Well, at least 15 percent of that is solely attributable to the decline 

of the dollar against other currencies. 

I just would remind people that oil is a fungible commodity traded on a world market. So if the dollar falls against other currencies, you might not see the price of a haircut go up right away, 

but you will see the price of oil go up, other things being equal, because foreign countries can sell oil to other buyers. So if the dollar 

falls, the dollar price of oil is going to go up. 

If those are the causes, then the question is, what are the remedies? Now, just a caveat; here is an economist advising policymakers of their options. These aren’t recommendations per se. 

There are various drawbacks to these things, environmental issues, 

concerns about budget deficits, what have you. But if the question 

is what can Congress do to bring down oil prices, here are some 

examples. 

In terms of conventional resources, we have 37 billion barrels of 

crude that are off limits by the government’s own estimates, offshore and onshore Federal lands. So if Congress would remove the 

moratorium on those, then that is barrels of oil right there that 

could be developed and bring down oil prices. Also, if Congress legalized oil shale development, there are some 800 billion barrels of 

resources available according to government estimates. That is 3 

15 

times the amount of reserves that Saudi Arabia has, so there are 

plenty of U.S. oil supplies. The question is just, is the government 

going to allow American companies to develop them? 

Finally, what can the government do if it wants to raise the dollar’s exchange value in the foreign exchanges? Of course, the Federal Reserve could raise the target rate, but also Congress could 

lower income tax rates. That increases the after-tax return to U.S. 

assets, and so investors around the world would tend to flock into 

those assets. For example, during the first Reagan Administration, 

after those tax cuts went through, the dollar soared on the international exchanges. 

Thank you. 

[The prepared statement of Mr. Murphy can be found on page 60 

of the appendix.] 

Ms. VELAZQUEZ. Thank you, Mr. Murphy. 

Mr. Kasputys, if I may, I would like to address my first question 

to you. In this Administration, 7.5 years in office, the United States 

has run up record domestic budget deficits to pay $800 billion for 

wars in Iraq and Afghanistan and a simultaneous $1.7 trillion tax 

cut. How have these domestic spending initiatives contributed to 

the weak dollar and the resulting increase in oil prices? 

Mr. KASPUTYS. Well, I think in terms of how the weak dollar has 

contributed to the oil prices, as I said in my statement, I really believe the weak dollar has only had a minor impact on oil prices, 

and we have seen oil prices increase in euro terms by a substantial 

amount, notwithstanding the weakness or the strength of the dollar. So there is no question in my mind but that the strong demand 

throughout the world, particularly in developing countries, as has 

been pointed out by other witnesses, with supply being very slow 

to come on line and subject to many disruptions, has had a great 

deal to do with the rise in oil prices. I think this is on a path of 

being corrected. 

To address your question, though, in terms of how have the continual very large budget deficits affected the dollar, I believe they 

have affected it adversely. The budget deficit, combined with a relatively low private savings rate, means that we are also running 

a very large current account deficit. We are consuming a lot more 

than we are producing. If we are going to consume more than we 

produce, we have to buy it overseas. If we buy it overseas, we have 

to pay the bill. More and more dollars are winding up in the hands 

of other countries, and it contributes to a general weakening of the 

dollar. 

Ms. VELAZQUEZ. Thank you. 

Mr. Bergsten, many economists estimate that nearly 40 percent 

of the increased price American consumers are paying for oil is attributable to the weak dollar. Clearly, this leaves a significant 

amount of room for other factors that have also contributed to the 

price increase. Can you comment on how much the continued instability in the Middle East and the uncertainty of U.S.-Iranian relations have contributed to the increasing oil prices? 

Mr. BERGSTEN. I very much doubt the premise of the question 

that anything like 40 percent of the rise in the oil price is due to 

the lower dollar. I indicated in my statement that the relationships 

just don’t support that at all. Mr. Murphy suggested 15 percent 

16 

over the last year. If you take his methodology and look over the 

last 6 years, the dollar has come down 25 percent. The oil price has 

gone up 600 percent. So that means you could attribute maybe 3 

or 4 percent of the total to the dollar. 

As far as the security premium due to Iran and other geopolitical factors are concerned, estimates range all over the lot from $10 to 

$50 a barrel in the price. That would be about 10 percent to considerably more than that. There clearly is a geopolitical premium, a 

security risk in the oil price. I don’t think any economic or political 

science methodology exists that can quantify it, but it is not insignificant. 

As with all these other explanations, the question is what to do 

about it. And if anybody has a good idea for what to do about the 

Iranian nuclear problem that would take it off the agenda, I would 

certainly like to hear it, and it would help, among other things, in 

tempering the oil price. 

Ms. VELAZQUEZ. Thank you. 

Mr. Williams, would you like to comment? 

Mr. WILLIAMS. Yes. Relationships and these factors change over 

time. The effect of the falling dollar on oil prices is a factor, among 

many others. The supply factors are dominant—supply and demand factors are dominant over time. But what we have seen in 

the last year has been increasingly unstable financial markets. 

Most recently you have had problems with the banking system, actions taken by the Fed to stabilize that circumstance, and those actions have intensified concerns in the currency markets that have 

led to having selling pressure on the dollar. It has made foreign investors very uncomfortable, and because of that discomfort, because 

of the extreme volatility, I think you have seen also an intensified 

relationship between the movement in the dollar and oil. 

Ms. VELAZQUEZ. Thank you, Mr. Williams. 

Mr. Paul. 

Dr. PAUL. Thank you, Madam Chairwoman. 

My question is directed toward Mr. Williams and Mr. Murphy. 

It has to do with talking a little bit more about the weak dollar. 

I think everybody is talking about a weak dollar having an effect, 

some say a lot, and some say less, on the prices. 

But my basic assumption is that—and I don’t think it is hard to 

argue that if you create a lot of new dollars, the value has to go 

down, unless some people argue, well, production is up, we might 

be able to, you know, stave off some price increases. But if the 

money supply goes up rapidly, and if we increase the money supply 

by 2 or 3 times immediately, the value of that money is going to 

go down, and prices will go up. 

Of course, the subject we are dealing with today is, does the 

money supply increase? Has the money supply been increasing? 

You know, in 1971, there was some restraint on the Federal Reserve to create money out of thin air; not much restraint, but there 

was some. 

Tell me a little bit about what is happening not only with oil, but 

commodities, because in one sense we are talking about oil, but we 

are really talking about the value of the dollar related to commodities. What has happened with the money supply since 1971, and 

how has that affected our prices? Is this significant or not? And, 

17 

you know, how should we measure this? There was a time that we 

measured this by M3, the total money supply. 

The Fed creates money to help the politicians cover up their 

debt. They monetize debt. And then we have fractional-reserve 

banking. And then when all that happens, we used to measure it, 

and it was called M3. But we don’t even have this. And some people would still like that to have that number and think about the 

relationship, all this money, prices today specifically dealing with 

the price of oil. 

Could you expand a little bit on that, on this pressure we put on 

the Fed to monetize debt and fractional-reserve banking, what has 

happened to the money supply? Is M3 important? What is this relationship? 

Mr. WILLIAMS. Sure. What has happened over time, and indeed 

with the general monetary theory, the definition of inflation is basically an increase in money. If you look at the traditional equation 

on it, it has a level of money times its velocity—times velocity, 

which is the number of times the money turns over in the broad 

economy, equals the nominal GDP before inflation adjustment, 

which is effectively a constant dollar measure, a physical measure 

of the economy plus the measure of inflation, so that the inflation, 

if you reworked the formula, is pretty much a function of the 

growth of the money supply and velocity. 

Unfortunately, it is very difficult to come up with meaningful 

measures that fit into the theory. I believe the theory is correct. I 

think that has been demonstrated over time. But I will contend 

that you do not have a measure of the GDP and the GDP implicit 

price deflator or even a measure of the money supply that actually 

fully reflects or accounts for everything that is happening in the 

world. It is very difficult to move from theory to the real world. 

In terms of M3, though, that has been the broadest measure over 

time. The Fed stopped publishing it a couple of years ago. I have 

continued to track it, estimate it, largely using Federal Reserve 

numbers. What we are seeing right now is an M3 as the broadest 

measure, which I believe is the best predictor of inflation, is up as 

of June, year to year, 15.8 percent, very close to 16 percent, and 

that is off its peak of 17.4 percent back in April, but shy of the current period. The last time you saw anything close to that was back 

in June of 1971 when M3 growth on a year-over-year basis hit 16.4 

percent. That was 2 months before President Nixon closed the gold 

window and imposed wage and price controls. 

Now, if you want to predict inflation using the money supply, it 

is difficult to do it from a traditional theoretical standpoint. Over 

the last 25 years, I have worked in terms of coming up with practical ways of predicting inflation interest rates and economic activity using a variety of indicators that have leading relationships 

with what I am trying to predict. I found over time that with the 

money supply, the broadest pressure you can use would generally 

give you the best result in terms of what is going to happen to inflation. And what we are seeing with M3 right now suggests that 

where the official CPI is being reported year over year at about 5.0 

percent could be in double digits. 

Ms. VELAZQUEZ. Time has expired. 

Mr. Sherman. 

18 

Mr. SHERMAN. Yes. First a couple of questions for the record that 

I would like you to respond to in writing. One is, how do we 

achieve a sudden one-time-only decline in the value of the dollar 

without having a fear of further declines? 

The second question is for Mr. Murphy, and that is, you suggest 

that by reducing taxes on investment, that will cause the dollar to 

strengthen. I am assuming that you are guessing that decline in 

taxing on investment would be matched in an increase in taxes on 

labor or some sort of magical harmless cuts in expenditure; or alternatively, are you saying that a cut in taxes on investment would 

have a strengthening effect on the dollar that would massively outweigh the weakening effect of an increase in the Federal deficit? 

Now the questions to deal with orally. I have a question for 

which I am hoping each panelist can provide me a one-word answer. As the ranking member pointed out in his opening statement, 

I asked Mr. Bernanke when he was here last week about the price 

elasticity of oil, and he put forward the idea that a 1 percent decline in demand or a 1 percent increase in supply would result in 

a 10 percent change in the price. I would ask each of you to just 

give me your best number. I know it is an unfair question. I know 

there are lots of caveats. But all things remaining equal, a 1 percent increase in supply or decrease in demand would have an effect 

on supply of what percent? 

Mr. BERGSTEN. The 10 percent, I think, is okay, but over an extended period of time, it is very low, that response, that price elasticity is very low in the short run. And anything like a 10 percent 

change would have to take place over an extended period of time. 

Mr. KASPUTYS. I am not sure I can give you a one-word answer 

other than I agree with what Mr. Bergsten said. If we had a 1 percent increase in supply, right away it would be very significant because it would take out a lot of the fear of a real shortage by— 

Mr. SHERMAN. Would a 1 percent decline in demand have the 

same effect? I mean, supply and demand rules would say yes, but 

you may be— 

Mr. KASPUTYS. No, because we can see the supply. We are not 

sure when the demand is going to emerge. You can have China 

come back in very quickly based on policies. 

Mr. SHERMAN. So you would need to see a decline in demand 

that was structural and unlikely to be changed back? 

Mr. KASPUTYS. I agree. Yes. 

Mr. SHERMAN. Just as an increase in supply would have to be a 

new, producing oil well, not just a sudden sell from the SPRO. 

Mr. KASPUTYS. A structural change. 

Mr. SHERMAN. Structural long-term change is not— 

Mr. KASPUTYS. It is really net spare capacity. What you want to 

look at is net spare capacity worldwide. 

Mr. SHERMAN. Okay. Next. 

Mr. WILLIAMS. Well, you have had 10 percent swings both to the 

upside and downside, more than that in the last month or so, and 

that is really a significant shift in production. 

Mr. SHERMAN. That is just wild speculation. 

Mr. WILLIAMS. I know; 1 percent relative gain in supply versus 

demand certainly is a positive. I can’t put a hard number on it. Ten 

percent might be fine, but, again, it is a very volatile number. 

19 

Mr. MURPHY. Yes, I would go with most of what they said. Right 

now, a 1 percent increase would roughly double or more than double world spare capacity. So, yes, that would have a tremendous effect, 10.378 percent. 

Mr. SHERMAN. 10.378. I like that precision. And we are all talking here about a world price. We are talking about world demand 

and world supply. A change of supply or demand in just one country would—oh, might have a much smaller effect on the world. 

I would also point out that—is my time expired? 

Ms. VELAZQUEZ. Almost. 

Mr. SHERMAN. I would also point out that we consume 25 percent 

of the world’s oil, and we produce roughly 5 percent, so a decline 

in our consumption would have a much more dramatic impact than 

an increase in our production. That is to say, a 1 percent decline 

in our usage of 21 million barrels per day would have a much bigger impact than a 1 percent increase in our 5 million barrels per 

day. 

Do I have time for one more question? 

Ms. VELAZQUEZ. No. 

Mr. SHERMAN. No, I don’t. 

Ms. VELAZQUEZ. Your time has expired. 

Mr. Shays. 

Mr. SHAYS. I thank the gentlelady for conducting this hearing. 

And, gentlemen, thank you for being here. 

I went through an epiphany, frankly, after Hurricane Katrina, 

realizing there were so many wells in the coastal area, the refineries, the fact that 11 States allow gas to come up to my State of 

Connecticut. And I hear a debate in my own State about, we are 

not going to have a line come through the State of Connecticut because it is going to help New York. Thank God there are people 

who allow energy to come to us domestically. 

But let me just say this as well in terms of internationally. We 

have Canada that is drilling right off its coast, Newfoundland, all 

along its coast, and I am told that at least 400,000 homes are heated by natural gas that comes from Canada. One, is that correct? 

And, two, tell me the negative impact of their mining and drilling 

off their coast on the Atlantic seaboard. Mr. Williams or Mr. Murphy? 

Mr. WILLIAMS. I am not familiar with the imports of natural gas 

from Canada, so I really can’t give you an answer. 

Mr. SHAYS. Mr. Murphy, can you jump in there? 

Mr. MURPHY. I can’t definitively confirm that, but those numbers 

do sound plausible. And to my knowledge, there have been no adverse impacts environmental from that. 

Mr. BERGSTEN. Can I just add that Canada is the largest energy 

supplier to the United States, not Saudi Arabia. 

Mr. SHAYS. But, you know, when I look at the map, there is just 

this line. It is the border. And there is the sense that the field may 

go all the way down past New York. And it just seems to me—what 

I wrestled with, I understood why we didn’t want to go after our 

reserves when we continue to waste so much energy. So I took the 

view that until we started to conserve, until we started to say we 

are going to do renewable, solar, wind, geothermal, biomass, I am 

not mining these reserves. But I am at a sense where we have it 

20 

now, and we are starting to do that, and it seems to me that the 

way we are going to deal with this problem is to do all of the above, 

nuclear power and off the coast and so on. Yes, sir. 

Mr. KASPUTYS. I first got involved with energy in the late 1960’s 

and early 1970’s. At that time, people were convinced there was no 

further natural gas to be found in the lower 48 States. Since then 

we have found a great deal. And I think there is more to be found, 

both oil and gas, and we should look for it. We should look for substitutes. We should look for alternatives. Let us hope that Mexico 

becomes better at exploiting their oil resources, because that would 

be a good source for the United States. 

Mr. SHAYS. Thank you. 

But the bottom line is you had England and Norway say, we can 

mine the oil and natural gas in the North Sea. It had a huge impact on its economy, on its balance of trades and so on. So as an 

environmentalist, obviously I am concerned. But we are getting the 

oil from other places and the natural gas where they are delivering 

it. We are saying to Saudi Arabia, you need to produce more, and 

yet we are saying, no, no, no, no. And it just strikes me as getting 

to the point of absurdity. 

The bottom line—did you want to say something, Mr. Williams? 

Mr. WILLIAMS. Generally, along the lines that you are discussing, 

I have looked at the situation in the Gulf. You mentioned Hurricane Katrina. If you had a Katrina-sized storm go across the oilproducing fields there and hit the refinery area, you would see a 

doubling in gasoline prices almost overnight. 

Mr. SHAYS. Right. 

Mr. WILLIAMS. You need to diversify the fields and refinery facilities domestically. 

Mr. SHAYS. You are making a point I just want to emphasize. 

You are saying if we are going to get it from only one part of the 

United States, we are taking a huge risk. So you are not just saying diversify from oil to nuclear power or natural gas or coal or 

whatever, you are saying, don’t get all of it from one area. 

Mr. WILLIAMS. Yes. 

Mr. SHAYS. Thank you. I yield back. 

Ms. VELAZQUEZ. Yes. Your time has expired. 

The committee will recess. We have a vote on the Floor. It will 

take approximately 10 or 15 minutes, and we will resume right 

after. 

[Recess] 

Mr. GREEN. [presiding] Please come to order. The hearing will resume. As you can see, I have grown a beard since I started this 

hearing this morning. And for edification purposes, the witnesses 

are not required to remain in their seats the entirety of the time 

that we are in recess. 

Mr. BERGSTEN. Now you tell us. 

Mr. GREEN. I know it is a bit late, but if we have one more recess, perhaps you will get to take advantage of it. 

Friends, thank you for your patience. Let me start by asking you 

about the Strategic Petroleum Reserve and a release of oil from the 

Reserve. Let’s start with our first witness. Can you give me some 

indication as to how this will impact the price of oil? And if it is 

a significant impact, I am going to assume that it may have some 

21 

positive impact on the dollar. I ask that you be as terse as possible 

because I have a few more questions. 

Mr. BERGSTEN. It has been a mistake for the Administration to 

continue adding to the SPRO as the oil price soared. Selling from 

the SPRO would be very constructive in helping bring oil prices 

down. 

Mr. GREEN. Thank you, sir. 

Mr. KASPUTYS. I think if we started to sell from the SPRO, we 

would have a short-term favorable impact on oil prices, but they 

would quickly return to market levels. 

Mr. WILLIAMS. I agree that it would help on the downside for the 

shorter term. The problem is that the Reserves are designed for 

some kind of a catastrophic event. We are still looking at somewhat 

normal market forces here, and you always have the potential of 

a catastrophic event where, if you drain those reserves, it would 

make the impact all the worse. 

Mr. MURPHY. Yes. I would just echo those remarks. It certainly 

increases the supply, and the market price goes down. There are 

only 2 to 3 months’ net imports in there, and if something happens 

in the Middle East, you might want to have the supply for that reason. 

Mr. GREEN. What could we do in addition to the release of that 

oil to have a continued impact on the price of oil by helping with 

the demand side? 

Mr. MURPHY. Do you want me to just focus on the demand side? 

Mr. GREEN. Well, assuming that we release the oil from the 

SPRO, what, in addition to that, should we do? 

Mr. MURPHY. My personal view would be that you would allow 

for energy companies to explore offshore and onshore Federal areas 

that currently are leased. 

Mr. GREEN. If we do this, the exploration does not have an immediate impact. Let us assume for a moment that it will have an impact, notwithstanding the fact that we import far more than we can 

generate by drilling. What will we do to have an immediate impact 

on the price? Because this is a question that the people I meet in 

my district ask me: What are we going to do about oil prices now? 

We know that we can release from the SPRO, and that will have 

an impact right away, hopefully. What else can we do right now? 

Mr. MURPHY. Well, I just would challenge the premise of that, 

that what happens is—so it is true that if you allow for offshore 

drilling, that physically won’t hit the market for 7 to 10 years, but 

what would happen then is producers right now with excess capacity, knowing there is going to be more competition in the future, 

would increase production. And we saw when President Bush lifted 

the more—executive side of the moratorium, that week alone prices 

fell almost $16. There were other things going on in the news, but 

I think that certainly had an impact. 

Another example, Saudi Arabia, in May, refused to increase— 

Mr. GREEN. Before I go to another person, and I appreciate your 

comment, let me just add one more thing. If you say that this is— 

and many of you have said this—this is demand-driven by virtue 

of China and other countries desiring more, that demand does not 

seem to be subsiding for oil. And if this continues to be oil-based, 

and the demand continues to escalate, are you confident that what 

22 

you are saying about the speculative aspect of this causing the 

prices to decline? 

Mr. MURPHY. What I am saying, though, is not purely speculative. Like I said, Saudi Arabia did in May refuse to increase; when 

President Bush asked them a month later, they reversed themselves. And I think partly why they did that is the political climate 

here changed, and they realized it is much more likely that there 

are going to be a million barrels or what have you extra down the 

road. 

Mr. GREEN. Ten years down the road? 

Mr. MURPHY. Yes. So pump more now. 

Mr. GREEN. Let us go to Mr. Williams. 

Mr. WILLIAMS. I don’t see much that can be done to give you a 

quick fix on the gasoline price. Indeed, you need to increase domestic production, you need to develop alternate energy sources. Over 

time, that will help. But over the short term, outside of the Strategic Oil Reserves, I don’t see anything. 

Mr. GREEN. We will hear from our next witness. That is Mr. 

Kasputys. 

Mr. KASPUTYS. I don’t really think there is a quick fix that we 

can do. We are all somewhat stunned when we see oil going up 

very close to $150 and not knowing where it might stop. As I said 

in my remarks, I think it is generated principally by a supply and 

demand balance problem. The things that we can do are all longerterm things, like encouraging conservation. We might selectively 

put on certain taxes. I know it is very controversial. But I think 

seeing gasoline at $4 is not altogether bad, provided we can take 

actions to alleviate the impact on low-income people. And we can 

continue to work on conservation and alternate energy and fully 

developing the resources that we have. They are all largely longterm fixes. 

Mr. BERGSTEN. I am more optimistic than my colleagues. I think 

there are at least a couple of things you can do in the short run. 

One is SPRO sales. It would depend on how much and for how prolonged a period of time, but if you were prepared to announce an 

ongoing program, even if modest sales but continuing over several 

months, I think you could break some of the speculative psychology 

that is always in these markets. I am not charging speculators but 

saying that in any of these financial markets, when there is a 

bandwagon trend, the axiom in the markets is ‘‘the trend is your 

friend.’’ When the price is going up, people buy and push it up further. And there is always a speculative froth. Prices came down in 

the last few days; maybe some of that has now been terminated. 

But I think you could break some of that with ongoing substantial 

sales out of the SPRO. 

The other thing that you can do in the short run, and it was done 

a bit after Hurricane Katrina, is to relax some of the environmental regulations. Some of the environmental regulations that are 

promulgated by EPA limit the scope for U.S. refineries to convert 

certain types of crude oil into refined product. That is one reason 

the refinery shortage has been an important part of this whole 

problem. It is the reason also why we couldn’t import more. So environmental regulations, if you want a short-run answer, look at 

that, too. 

23 

Mr. GREEN. All right. We will now hear from Mr. McCarthy for 

5 minutes. 

Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. 

A question for Mr. Murphy. I think it was last week when Federal Reserve Chairman Bernanke was here for his testimony; I believe it was my colleague from California, Mr. Sherman, who asked 

him a question, and the Federal Reserve Chairman stated that a 

1 percent increase in supply could lower prices by as much as 10 

percent. Given when I listened to your testimony, talking about 

supply and demand, demand rise in China, and India and the Middle East, it is going so rapidly, do you agree with Mr. Bernanke 

that relatively small increases in supply would have a significant 

impact on hypersensitive markets? 

Mr. MURPHY. Yes, I would agree. Everyone realizes that the oil 

market is very price-inelastic, meaning even as prices have gone 

way up, people haven’t cut back consumption very much. So it 

works in the opposite direction that if you increase the available 

product even what seems to be a small amount, that could have a 

dramatic effect in the short run. 

Mr. MCCARTHY OF CALIFORNIA. Would you also then agree that 

a small drop in supply—the pipeline problem in Nigeria, a strike 

in Brazil, a statement by someone in the Middle East—has the 

same but opposite effect? 

Mr. MURPHY. Right. Spare capacity right now is about 1.5 million 

barrels, so anything like that could really drive up the price of oil. 

Mr. MCCARTHY OF CALIFORNIA. I appreciate that. 

And following up from what the Federal Reserve Chairman said, 

his estimate of 1 percent would increase—in supply would lower 

prices by 10 percent. If I take the information based upon the Energy Information Administration, the recent worldwide daily production is about 865,000 barrels would be 1 percent. I rather talk 

about 1 million barrels. It is easier for me. I am from Bakersfield, 

so I have to read my numbers a little bit. 

But I had an interesting weekend last weekend. I flew out with 

a delegation. We went to Golden, Colorado, and we toured the National Renewable Energy Laboratory there, solar and wind, and 

drove some of the cars as well, the hybrids. Then we went up to 

Alaska, went to ANWR. And I went and toured throughout there, 

went into the pipelines, seeing that in 1989, we put 2.2 million barrels a day down there. Now we are only doing 700,000 barrels 

down there. But I went over to ANWR where we are talking about 

using 1/100 percent of the 19 million acres, just 2,000 acres. And 

they say they could do a million barrels a day underneath there if 

we were able to start drilling there. 

And what is interesting to me—and I was talking to another 

Congressman, Congressman Jack Kingston, and he recently asked 

the Energy Information Administration for an estimate on what 

the impact of prices would be if we had an additional 1 million barrels produced a day of productive capacity. That is right there in 

ANWR right next to where we are currently producing. In the response to Mr. Kingston’s question, the Energy Information Administration estimates that if we were to bring another 1 million barrels of oil each day online, prices could be expected to drop by as 

much as $20 a barrel. Let me state that again: 1 million barrels 

24 

of additional oil produced a day in ANWR, which we could do, 

would drop prices by $20 a barrel or about 50 cents a gallon. 

Mr. Chairman, I ask unanimous consent to submit the Energy 

Information letter to be included in the record. 

Mr. GREEN. Without objection, yes. 

Mr. MCCARTHY OF CALIFORNIA. But the one thing in listening to 

all this, supply and demand. And touring the renewables in Golden, Colorado, I have in my district the windmills, the 4th largest. 

We put the windmills up where the wind blows. I also have the 

Mojave Desert where we have solar. We put the solar panels up 

where the sun shines. 

Isn’t it rational to drill for oil where the oil is? And the one thing 

I have found in this process with technology of how far we have 

advanced, when I went to one of the platforms which they drilled 

in the 1970’s—we flew over one that is called Alpine, a fresher, a 

newer one, that, as you flew over it, there are no roads to this platform. They only built a little landing strip. So instead of taking 64 

acres, they took 6 acres. Instead of drilling down and having to do 

it numerous times, they go down and they go out 8 miles. 

One of the most interesting facts on the pipeline, how it went 

from 2 million barrels a day to 700,000, if we do nothing, we use 

15 percent of the oil per year. So it only gets worse. Demand continues to rise, and supply goes down if you don’t look for exploration. So from this weekend, I had a real eye-opening experience, 

and listening to what the Federal Reserve Chairman said, 1 percent supply, 10 percent reduction; listening to what the Energy Administration said, that if we did 1 million barrels, which we could 

do with ANWR, we would lower the price by $20 a barrel, 50 cents 

a gallon. 

I really think, Mr. Chairman, now is the time to do it, and the 

American people desire it and request that we are able to have a 

vote on this on the Floor of the Congress. I think this is the direction we should go. We can’t wait around much longer. I think it is 

kind of all of the above we can do, from the wind in Golden Colorado, putting it out to where the wind blows, to where the sun 

shines, to where the oil is. Having a complex all-of-the-above board, 

I think, would really put America to American energy policy. And 

I yield back. 

Mr. GREEN. The gentleman yields back. 

We will now hear from the subcommittee chairwoman, Mrs. 

Maloney. 

Mrs. MALONEY. I thank my friend for yielding. 

Dr. Bergsten, you have talked about how the U.S. dollar needs 

to continue to fall to restore balance with our trading partners. For 

years now we have imported far more than we export, which has 

led to sharp job losses in manufacturing. And since manufacturing 

employment peaked in 1998, we have lost over 4 million manufacturing jobs. Shouldn’t we focus our economic policy on making our 

goods competitive in the international market? 

Mr. BERGSTEN. We absolutely should, but I suggest in my statement today that the best way to do that is to make sure that the 

dollar is at a competitive level. The dollar has come down by about 

25 percent on average over the last 6 years. We are now in the 

midst of an improvement of about $300 billion in our trade account, 

25 

and as I indicated in my statement, that is creating about 2 million 

jobs in the U.S. economy, most of them in manufacturing. So we 

are actually in the process right now of recouping a substantial 

number of those jobs that were lost. Part of that job loss was the 

overvalued dollar and a big increase in the trade deficit. With the 

dollar having come back down not quite as far as it should, but 

most of the way, we are in the midst of a trade-led resumption of 

manufacturing jobs. 

I made the point in my statement that the entirety of U.S. output growth over the last 6 months has come from improvements in 

our trade balance. As you look out to next year, 2009, the OECD 

has predicted that almost all U.S. economic growth in terms of output and job creation is going to be export expansion and further reduction in our trade deficit. So we are right now in the process that 

you talked about, and, to me, that is by far the most encouraging 

component of the economy. 

Mrs. MALONEY. It is now clear to many of us that for the past 

decade our economic growth has been bubble-driven, first with the 

stock bubble in the late 1990’s and then with the housing bubble 

in the 2000’s. At the same time, we have doubled a large trade deficit and lost millions of manufacturing jobs. Do you think it is possible that the reason that our economy over the last decade became 

so dependent on bubble-driven consumer spending and debt was 

because of our trade imbalances? 

Mr. BERGSTEN. I think there is a two-way relationship between 

the trade imbalance and the domestic bubble problems. On the one 

hand, the big trade deficit means we have to borrow huge amounts 

of money from abroad. That moves us into debt, but in the short 

run, it keeps our interest rates lower than they would otherwise be. 

That added to the propensity of the economy to have bubbles, particularly the interest-related bubble that we are now experiencing 

in housing. 

How much that effect is, is hard to say. Some people argue that 

the capital inflow from abroad kept U.S. interest rates 25 basis 

points lower. Some would say it is higher, 50 to 75 basis points. 

It wasn’t the major factor in low interest rates and the housing 

bubble, but it was certainly a factor. 

On the other hand, a more powerful relationship was the very 

rapid increase in U.S. consumer demand over this period, which 

sucked in a lot of imports. Another factor was the big Federal 

budget deficit, which put pressure on the economy, led to excess demand, more than we could produce at home, and added to the 

budget deficit. That in turn has now brought the dollar back down. 

But I want to again emphasize, because you started by talking 

about the doubling of the trade deficit, it actually more than doubled over the period 1995 to 2006, but it is now coming down very 

sharply. In real terms, it has come down about 2 percent of GDP. 

It will probably come down another couple of percent over the next 

year or so. 

The reduction in dollar terms is not as great because of the higher oil prices. There is a tricky technical difference between the 

trade deficit in nominal dollar terms and the trade deficit in real 

volume terms. I won’t go into that unless you want me to. But in 

the terms that count for output and job creation, we are in the 

26 

midst of an export boom, and that is the only thing literally keeping the economy out of recession over this last year. 

Mrs. MALONEY. Finally, my time is running out. The dollar has 

been falling relative to other major currencies such as the euro, but 

not as much relative to the Chinese yuan. Now, the United States 

continues to have a large trade deficit with China as we import 

stuff from China far more than we export. And what do you think 

is the proper relationship of the yuan to the dollar, and how do you 

think we can get there? 

Mr. BERGSTEN. We published a new study on that at my institute 

just yesterday. The conclusion of that is that the Chinese currency 

needs to rise by at least 30 percent against the dollar to bring their 

surplus down to even a reasonable level. It still would be pretty 

high. It is now over 11 percent of their GDP. It needs to come down 

a lot. The Chinese could permit that to happen quite easily. 

The reason that the Chinese currency has been so weak is flat 

out manipulation of the exchange rate by the Chinese authorities. 

They have been intervening massively in the currency markets, to 

the tune of $50 billion per month, and that has depressed the price 

of their currency. It has kept the dollar overvalued against the Chinese renminbi. By simply backing away from their intervention 

policy, the Chinese could permit their currency to rise to an appropriate level, which would be considerably higher than it is now. 

Mrs. MALONEY. My time has expired. Thank you, Mr. Chairman. 

Mr. GREEN. Thank you. 

Mr. Cleaver will be recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

This will be to any of you who would choose to respond. 

There is talk about a hope for a release of oil from the Strategic 

Petroleum Reserve. In 1991, I think, was the last time gasoline 

prices dropped 30-something percent. We had a different price from 

the beginning, however. I spoke with an economist yesterday who 

said that if we did, in fact, go into the Reserve, and prices did not 

drop, that it would be devastating to the dollar and to the U.S. 

economy. Do you agree or disagree? Anyone can answer. 

Mr. BERGSTEN. I don’t think it would be devastating. I am pretty 

confident, as were others on the panel earlier, that sales from the 

SPRO would bring some relief to oil prices. Keep in mind that the 

Administration has been continuing to buy for the Reserve despite 

the passage of legislation to halt the build-up of SPRO reserves. 

The Administration, at least until very recently, has continued to 

buy under contracts that had existed before the legislation that had 

to be honored. 

If you went from buying to selling, you would get a double effect. 

You would stop the upward pressure from the buying, and you 

would generate downward pressure from the selling. So it wouldn’t 

be like going from zero to minus one. It would be going from plus 

one to minus one. 

I looked at the numbers. In the week which ended June 27th, 

which happened to be the last week I had numbers for, there were 

140,000 barrels per day added to the SPRO, just less than a month 

ago. On the ratios we were talking about before, a million barrels 

a day leads to a drop of $20 in the oil price. That alone would be 

27 

a couple of dollars on the oil price right there. So if you added to 

that some sales, I think you would get a lot of bang for your buck. 

Mr. KASPUTYS. If I might, my view of sales from the SPRO would 

indeed have a short-term impact on oil prices, but it would be transitory. We wouldn’t really have permanently fixed anything. 

Mr. CLEAVER. No. I understand that. 

Mr. KASPUTYS. So prices would go back to where the market 

wanted them once those sales were over. We would certainly have 

a break in psychology, with short-term impact, but you are not 

really addressing any fundamental problem by doing that. 

Mr. BERGSTEN. Can I just challenge that in the sense that I don’t 

think it is inconsistent with what Joe said. Sales from the SPRO, 

even if done on, say, a 3-month basis, I mean, you could—the Administration could announce a program of sales of so much per day 

for a 3-month program. It is not just a one-shot, short-term thing, 

which happened in the case of Iraq in 1991 and again after 

Katrina. There were some sales out of the SPRO after Katrina, but 

they were very small, only for a couple of days. You could do much 

more than that for 2 months, 3 months, even 6 months, and calibrate the amount. It would not run down the total to a level that 

would obviate the strategic purpose. But as Joe just said, I think 

it could break some of the market psychology, which, at least until 

very recently, has been that everything goes up. And there is a lot 

of speculative froth in that. There is a lot of ‘‘trend is your friend’’ 

thinking, a lot of market momentum activity the traders always respond to. 

So if your sales could kind of turn the tide even for the short run, 

I think it could have some significant lasting impact. It is certainly 

a measure to consider. And keep in mind, as I said, you are moving 

from purchases to sales. You get a double impact. 

Mr. KASPUTYS. I don’t disagree with what you said, but if I could 

just respond to that. At the end of the period of 3 or 6 months of 

sales from the SPRO, at that point you have a smaller SPRO, so 

you have a greater degree of vulnerability, and that can figure into 

the psychology of the pricing of the oil markets as well. 

Mr. CLEAVER. Well, Japan has the second largest reserve. What 

if they dropped it at the same time? 

Mr. BERGSTEN. Yes. If we were going to do it, we should try to 

mobilize not only Japan, but others in the International Energy 

Agency. I presume you are aware that in the OECD there is an 

IEA, an International Energy Agency, set up after the oil shocks 

in the 1970’s to coordinate the consuming nations’ efforts to 

counter the OPEC cartel. 

Under that IEA arrangement, each country takes on a commitment to build its own SPR. So all of the member countries in the 

IEA, like Japan, all the Europeans and others, have strategic reserves. If we want to maximize the impact on the world price, what 

we should obviously do is go to all of them and see if they would 

join us in sales from our respective SPRs. That would then multiply the effect we are talking about just from sales from our own 

national SPR. That would be particularly powerful in psychological 

terms because it would mean that all of the oil-importing countries 

were acting together. 

Mr. CLEAVER. It is still short term. 

28 

Mr. BERGSTEN. It still would have a short-term effect. But again, 

I would argue then you would have an even more powerful psychological effect that could turn the market momentum. 

Mr. CLEAVER. Mr. Williams. 

Mr. WILLIAMS. Congressman, I believe your question was, what 

if the market didn’t respond? 

Mr. CLEAVER. Yes. 

Mr. WILLIAMS. And indeed, where you would expect the market 

to respond, albeit short term regardless of however you play it out, 

that would be devastating to market psychology because that is the 

one area I think that people increasingly are looking at as something the government could do to provide some immediate relief. 

And if it didn’t, it would have a sharply negative effect on the markets. I would expect that it would provide some relief. But answering your question, if it didn’t, yes, I think that would be negative 

for the markets. 

Mr. CLEAVER. That was the proposition of the economists. 

Mr. Murphy. 

Mr. MURPHY. And it is ironic that they are arguing with each 

other, and I am going to disagree with him now. 

Just to very quickly answer your question, yes, it is conceivable. 

Suppose they go ahead and say, we are going to sell more, and 

then war breaks out with Iran the same day, obviously, gas prices 

are probably going to go through the roof. And so, in a sense, you 

could say, oh, we sold from the SPR, and it didn’t make gas prices 

go down. But I think the people in the market, the traders would 

know what was guiding their decisions, and so they would understand what offsetting factor there was. So, no, I don’t think it 

would be devastating if that were to happen, because people would 

realize what was the offsetting factor. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. GREEN. The Chair now recognizes Ms. Speier for 5 minutes. 

Ms. SPEIER. Thank you, Mr. Chairman. 

This would be a question for all the panelists. 

You have heard a lot of questioning in the last couple of hours 

about what we can do to try and bring the cost of gasoline down. 

Mr. McCarthy, who has since left, my colleague from California, 

was talking about the importance of drilling in ANWR because it 

could have a 50-cent-per-gallon impact. 

I have a different idea that I would like to explore with you, and 

that is good old conservation. There is a movement of which I am 

a part right now to reduce the national speed limit from 65 or 70 

miles an hour to 60 miles an hour. And when we did that back in 

the 1970’s, and there were studies done by the National Science 

Foundation and by the Department of Energy, for every mile over 

60, there was a decrease in efficiency by about 1 percent. And it 

was estimated that, presuming you were going 70 miles an hour 

and now you are going to drop down to 60 miles an hour, that you 

could see a savings per gallon of gas of about 45 cents a gallon, presuming gas is now at 4.50 a gallon; something that would be immediate, something that would have a double effect, I think, because 

not only would you be using less gas, but you are reducing the demand and increasing the supply. 

29 

Now, you are the economists. I would like to hear your response 

to that. 

Mr. KASPUTYS. Well, can I say that the impact of conservation 

on energy consumption has actually been phenomenal over the last 

30 years. We are far less dependent per unit of GDP on energy 

than we were at the time of the Arab oil embargo of October of 

1973, which was a huge wake-up call. And since that time, lots of 

conservation initiatives have been undertaken, and they have made 

a material difference. And if we had not done those, we would be 

in much worse shape than we are today; probably we would be 

looking at $250 to $300 oil if you could buy it at all. So I think 

there is still tremendous potential in conservation in many forms. 

That specific one could have an impact. It depends on how much 

regulation we want to put up with. But, generally, yes, conservation is something that is still under exploited. 

Mr. BERGSTEN. You have my vote unambiguously. And you might 

have added that you will save some lives, too. 

Ms. SPEIER. Well, the study by the National Science Foundation 

suggests 2,000 to 4,000 lives a year are saved. 

Mr. MURPHY. My reaction would just be that, yes, there are all 

sorts of measures people could take. Also, educating the public as 

to inflating their tires properly, and things like that. 

My only concern would be to educate people and let them make 

those tradeoffs themselves, because of course, the downside is you 

are driving longer; you don’t get to your destination. So there is a 

trade-off. And the Institute for Energy Research typically would 

like consumers to be able to make those decisions once they have 

the information. 

Ms. SPEIER. Well, aren’t we paying for a trade-off now that Bear 

Stearns has gone sideways? I mean, we create all these opportunities for less regulation, and when we do, oftentimes, we are paying 

for it down the road in very Draconian ways. That is rhetorical. 

Mr. WILLIAMS. It would have the effect that you are hoping for 

in terms of reducing gasoline prices. The issue I think is, other 

than that, I mean, I was around when the last— 

Ms. SPEIER. So was I; I was waiting in those lines just like you 

were, probably. 

Mr. WILLIAMS. We do have—and I can remember that, generally, 

it was not too popular with the populous. And in fact, when the 

system began to unwind and go back to the over-55 speeds, the 

general reaction I saw was that—gut reaction, anecdotal evidence— 

people who drove a lot were generally quite pleased to see that. So 

I think the issues are more indeed in terms of what you want the 

government imposing upon the individual. In terms of having the 

effect that you would like, yes, you would have that effect. 

Ms. SPEIER. Let me just suggest that even the American Trucking Association now supports this proposition, which was not the 

case back in the mid-1970’s. But it is affecting all of their bottom 

lines. And UPS, for one, not only is requiring all their drivers to 

drive 55 miles an hour, but they can only make right turns now. 

No longer can they make left turns because they have been able 

to document that doing so costs a lot of money in terms of gasoline 

consumption. 

30 

Mr. BERGSTEN. UPS and the Postal Service are doing the same 

thing—no left turns. 

The people who object to your proposal on the grounds that it 

adds regulation to the economy, and recall the gas lines of the 

1970’s and link that to regulation, I think miss a simple point. 

There were overregulation problems that led to the gas lines; but 

they were overregulation problems on the supply side. They were 

price controls on energy, oil, and natural gas that we had in this 

country which distorted our markets badly and deterred output. 

And then we tried to regulate the distribution of gasoline and other 

products when the oil crises hit. Those were regulations, as I say, 

on the supply side of the market, and they had the predictable negative effects on supply. 

You are trying to limit demand through a regulatory device, and 

that is very different. And I would think that a combination of 

market incentives, which we have already got with the higher 

price, plus improved CAFE standards, the kind of thing you are 

talking about, are all very desirable in this context. 

Ms. SPEIER. Mr. Chairman, thank you. 

Mr. GREEN. Thank you. I will allow the answer. You were about 

to answer, sir? 

Mr. KASPUTYS. I would like to make one other comment. 

In my company, I have about 130 people that do nothing but 

study the automotive market. And the current price of oil and gasoline is roiling the automotive market. It is changing consumer behavior very rapidly. You are absolutely right to be focusing on the 

automobile. There is much more that can be done, and to some degree, it is really encouraging to see how quickly consumer tastes 

are changing to force some change that we have tried to get 

through legislation and through regulation for a long time. But I 

think maybe the consumer is really going to demand it this time, 

and I think you are absolutely in the right place to look. 

Mr. CLEAVER. Will the gentlewoman yield? 

I am not opposed to what you were saying. Yesterday, I just 

read—I can’t remember the exact statistic. 

Mr. GREEN. Mr. Cleaver, the time has expired for the lady, but 

if you have a unanimous consent request for an additional 1 

minute; I think Mr. Sherman is going to have a unanimous consent 

request. So perhaps we will have a second round, and that way we 

will get to your concerns, Mr. Cleaver, and perhaps the lady might 

have additional concerns as well. 

So at this time, without objection, we will have a second round. 

And let’s limit it to maybe 3 minutes as opposed to 5 minutes. 

Mr. SHERMAN. I will try to talk quickly. 

First, I want to commend Chairman Frank for holding these 

hearings at the request of roughly a dozen Republicans, none of 

whom are here at the present time. 

I want to comment that the things we can do to lower oil prices 

have different time horizons. If we can do something on the psychology, that takes effect at a frenetic pace. If we deal with the 

SPR, that puts oil on the market within days. If we deal with conservation, some of that takes place within days, as people decide 

in my district to use public transit even though it is inconvenient; 

sometimes months; sometimes years, as they adjust their behavior. 

31 

But in terms of production, there we are talking either years or 

decades between when you take an action and when oil is actually 

on the market, with the exception of the Saudis, who have some 

oil fields ready to go. I am not saying they could turn on the spigot 

in a week, but they certainly could in a month. 

I would like to shift to the issue of speculation being part of the 

cost. And this could be either motivated by either evil speculators 

or by people afraid of Middle East political developments, however 

you want to characterize it. It occurs to me that somebody sold an 

oil future for August 2008 oil 4 years ago. They probably priced 

that at $50, $60 a barrel, if my memory serves me. 

There is a lot of buying and selling of oil futures that don’t have 

a physical effect that I can ascertain. That is to say, today a certain 

number of barrels will be produced, physically, and taken to refineries. Today a certain number of barrels will be demanded, physically, not by speculators who don’t actually burn in their tank. 

So I figure that the most important thing for me is, how much 

oil is going to the refinery in my area and at what price? And how 

much is being demanded by people in my area? And if that price 

is too high, then the supply and demand in my area at least will 

push the price down. 

I may be a little vague in formulating the question here, but how 

is it that speculators can affect not the price of some futures commodity, which is a security, but rather can affect the price of oil, 

which you would think would be set by physical supply and demand, how much oil is there available to burn today, and how 

much do they demand it? And I want to put aside for a moment 

the one group of folks that I know can affect the price, and that 

is anyone who can afford the physical product, and that is the 

Saudis by not opening their spigot. 

Can anybody explain to me why today’s physical supply and 

physical demand is not where to look in terms of the price I will 

be paying at the pump? 

Mr. MURPHY. If I may, sir, you are right. The mechanism 

through which speculation in theory could affect the spot price— 

Mr. SHERMAN. If I can interrupt you, there was speculation in 

silver where somebody just hoarded the silver, and it was in their 

warehouse. But with the exception of Saudis undeveloped oil fields, 

I don’t know anybody who is hoarding oil except, I guess, our SPR. 

Mr. GREEN. The gentleman’s time has expired. However, we will 

hear the answers. 

Mr. MURPHY. I will be very brief. You are right. In theory, what 

will happen is the speculators, by buying futures contracts, push 

up the futures price. That would give people an incentive to buy 

at the low spot, store it, and then sell it. But what we have seen 

over the last year is that inventories have actually been declining, 

and so that is why the CFTC and others have said that they don’t 

think excessive speculation is what is driving the recent spike in 

oil prices. 

Mr. SHERMAN. Does anyone else have an answer? 

Mr. GREEN. We will allow you to answer. 

Mr. BERGSTEN. I think it depends a little bit on what you call 

speculation. One person’s speculation may be another person’s investment. You mentioned a couple of categories. There is a third 

32 

category. People who are worried about inflation, who are worried 

about stability of prices, and that produces what is often called a 

flight to commodities as an investment alternative to traditional 

currency-based investments or financial assets. That flight to commodities, which I think we have seen some signs of over the last 

year or two, can add something to the price, even if those people 

don’t take physical delivery. They may buy spot. That is adding to 

the demand for the market on that given day. And at least most 

of the energy experts that I have talked to and whose views I respect would add that as a modest but nevertheless noticeable element in the overall picture. 

Mr. GREEN. I want to thank the witnesses for being so generous 

with their time. 

We have two additional members who would like to ask questions. 

Mr. Cleaver, do you yield? 

Mr. CLEAVER. I will yield, Mr. Chairman. 

Mr. GREEN. Then we will go back to Mrs. Speier for an additional 

3 minutes. 

Ms. SPEIER. Thank you, Mr. Chairman. 

In this speculation market, many of us received from one of the 

carriers, maybe all the airline carriers sent this out to their e-mail 

list, basically saying: Send a letter to Congress. Tell them to deal 

with the commodities market and create some semblance of sanity 

there. 

One of the points in the letter suggested that a barrel of oil 

trades 23 times before it gets to the end user. And, understandably, 

the airlines are concerned about the cost of jet fuel. So they believe 

that there is too much speculation going on, that it is being driven 

by Wall Street, and that there needs to be some strictures put in 

place so that the cost of jet fuel is not artificially raised beyond the 

pocketbooks of the airline industry. 

Do you have any comments on that? 

Mr. WILLIAMS. It is, to a certain extent, still supply and demand. 

The airlines themselves are speculators in this field. They cover 

their exposures by buying futures contracts on oil or on jet fuel. 

But one factor that has come in here, and it actually comes back 

to the original concept of the hearing, is that we have seen an extraordinary period of time in the last several months where the 

markets have been unstable. The financial system has been a little 

bit on the edge. The Federal Reserve has been working to maintain 

stability of the banking system. And as all these different actions 

have been taking place and all the stories keep floating around, 

people have gotten very nervous about what might be happening. 

You have seen some flight from the dollar. People don’t want to 

necessarily be in dollar assets, or they are afraid that maybe there 

is going to be inflation, and the actions that are being taken to 

prop up the system are inflationary. So that because of these factors and because of the weakness in the dollar that you don’t necessarily want to be holding the currency-related assets, that there 

has been some movement in the commodities as a way of protecting 

your wealth, of protecting your assets. 

I will contend that it is very difficult to tell the difference between a speculator who is, using the term very loosely, who is in 

33 

there buying contracts because he is hoping to protect his wealth, 

and an airline that is in there speculating, buying contracts to protect its costs. So it is a difficult issue to address. 

There is some effect there, but again, the dollar, the weakness 

of the system, global concerns about the financial stability in the 

United States, have been more factors behind driving the oil prices 

higher than any pure speculation per se. 

Mr. KASPUTYS. I think, if I may, the use of futures contracts, 

which can be bought, sold, traded, is a very important tool to consumers of energy in industrial and corporate organizations, airlines, and even in the energy industry. I am all for transparency, 

but I would not be for regulating it or limiting it. I think futures 

contracts are an important tool. It is a useful tool. Yes, it will, at 

inflection points, tend to accelerate the rate of change, but it can 

go down just as rapidly as it goes up. 

Mr. BERGSTEN. I would add one other point on that. It really goes 

to Mr. Sherman’s question, what is speculation? One reason economists tend to think that speculation in the narrow sense does not 

have much market effect is it is very temporary. People will buy 

today, sell tomorrow. 

But there is an alternative interpretation, which is that commodities and oil, in particular, have now become an asset class for investors, that 5 years ago, maybe even 3 years ago, there was really 

no asset class included in the normal portfolio of investments, 

which was oil or commodities more broadly. 

Now, for some of the reasons we have stated—Mr. Williams just 

did, I did earlier—people may now believe they should put some 

modest percent, 5 percent, even 10 percent of their total investment portfolio into ‘‘real assets,’’ meaning commodities: some energy, some gold, some other commodities. 

To the extent that is a permanent change, from 0 to 10 percent, 

as part of investment portfolios kind of normalized across the financial community, that would be a permanent increase in demand 

for that kind of asset and could therefore have a more lasting effect. 

Mr. GREEN. Thank you for your responses. 

The Chair will note that some members may have additional 

questions for the panel which they would like to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to the witnesses and to 

place their responses in the record. 

Before adjourning, on behalf of the chairman, the ranking member, and all of the members of the committee, we want to thank 

you for your patience today and for your indulgence. 

Again, the hearing is now adjourned. 

[Whereupon, at 4:42 p.m., the hearing was adjourned.] 

(35) 

A P P E N D I X 

July 24, 2008 

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