Energy Hearing on Energy Speculation

Posted on by Jesse Lee

The Energy Subcommittee on Oversight and Investigations is currently holding a hearing, “Energy Speculation: Is Greater Regulation Necessary to Stop Price Manipulation? — Part II.” See the witness list (pdf) >>

Watch the hearing live via committee webcast.

Subcommittee Chairman Bart Stupak gives opening remarks:

Chairman Stupak: “What’s going on here? Have speculators hijacked trading on the future exchanges? We’re told we should be grateful to speculators for providing liquidity that allows the futures markets to operate. But this data suggests the oil futures market is drowning in liquidity. Today we hope to learn whether this wave of speculation has separated prices from the very supply and demand fundamentals that are supposed to balance the market. The Commodity Futures Trading Commission tells us the speculators are simply following the price signals set by physical consumers and producers. But given this imbalance, you have to wonder whether the regulator is missing the forest for the trees.”

Rep. Jay Inslee (WA-01) gives opening remarks:

Rep. Inslee: “We went to Vice President Cheney years ago, and I pled with him to take action on the original Enron scandal because it was obvious that there was a problem in these markets. It was obvious somebody was gaming the system, and the speculation had a price result. And I showed Vice President Cheney a piece of paper, showing that 32 percent of the generating capacity of the United States was turned off when there were brownouts in California… And he looked at me and he said, ‘You know what your problem is, you just don’t understand economics.’ Well, I think it turned out that we did understand economics, and we do understand liquidity, and we do understand excessive speculation, and we now understand what happens when we remove the protections of the consumers by creating this Enron loophole, and we’re experiencing the results of that today.”

Fadel Gheit, Managing Director and Senior Oil Analyst at Oppenheimer & Co. Inc., gives testimony:

Gheit: “I’ve been in this business almost 30 years. I talk regularly to the CEOs of oil companies from the largest of them all to very small, independent oil and gas companies. They all come to the same conclusion: that oil prices do not reflect market fundamentals. In my view, we can produce oil profitably at less than half of the current price levels. There were no unexpected changes in the industry fundamentals in the last 12 months, when oil prices were $65 dollars. Now, oil prices are double that today, and are likely to go higher, because again the speculation will continue, the same tightness in the market will continue.”

Michael Masters, Managing Member and Portfolio Manager for Masters Capital Management, L.L.C., gives testimony:

Masters: “In closing, it is important to realize that Wall Street is very good at inventing and promoting novel investment strategies. Unfortunately, they are not good at foreseeing the long-term consequences of the instruments that they create. The recent subprime debacle, which has now grown into a worldwide financial crisis, shows us where unbridled financial innovation can lead.”

Subcommittee Chairman Bart Stupak questions the witnesses:

Stupak: “Is there an actual or apparent conflict of interest in an investment bank taking up the price of commodities through its research arm while speculating on it at the same time?”
Gheit: “Absolutely. Unequivocally and absolutely. It becomes self-fulfilling prophecy. When the largest trader predicts the price of a commodity, guess what’s going to happen to the price? It’s going to follow the leader.”
Stupak: “Well let me ask you this, then. The Securities and Exchange Commission prohibits insider trading by requiring disclosure when investments exceed 5% in a stock. However, there’s nothing comparable for commodities. What would be the best way for Congress to address this matter? Should all investment banks and other non-commercial interests have to make public their holdings in oil futures or inventories?”
Gheit: “Absolutely. Disclosure is the best thing. As somebody said, they operate well in the dark. When you shed a light on them there is no place for them to hide. There’s a lot of conflicts of interests, they create this financial industry that nobody really knows how it works except they themselves. This is the black box, if you will…”

Subcommittee Chairman Bart Stupak questions the witnesses for a second round:

Masters: “I think that to a certain extent, with what we’re talking about here with speculation, the right terminology really isn’t a ‘bubble’ — it’s really more like a tumor. And it grows and grows and grows, and this case it’s hurtful as it expands. So the time to act is before it gets any worse. So when you discover a tumor, you take it out immediately. So I think that if we were to continue to let this go on further and further that there could be more unforeseen consequences on the economy.”
Stupak: “Mr. Gheit, did you want to comment on that? You don’t think it would have much impact if we, 30 days brought down these prices 30 to 50% if we passed comprehensive legislation to have the CFTC close these… loopholes?”
Gheit: “There are obviously winners and losers. Losers are going to be the winners of the past five years, winners would be the consumers that are paying for gasoline up their nose, the farmers. These are the people that are hurting, and hurting pretty badly. If oil prices are cut and half that is not the end of the world, actually it will make most industries — the airlines will have a lot more opportunities, the manufacturers and everybody, so I think there are going to be these benefits that clearly outweigh the costs. And for the pension funds and all the people that invested very heavily, still as Mr. Master it’s still a small percentage of total portfolio… we should do it as soon as possible.”

Full Committee Chairman John Dingell questions representatives of the airline, trucking, and other industries on whether they support initiatives on the table to fight over-speculation:

Chairman Dingell: “How important is it, gentlemen, for the Congress and the government to get its arms around the problem of excessive speculation in the energy markets? And you, Mr. Steenland, would this be a matter of high priority for the airline industry at this time?”
Doug Steenland, Northwest Airlines CEO: “Very high. And if you just think back to what our panelists said this morning, while they had differences of opinion, I think they ranged from, you know, $30 to $70 per barrel as to what they thought the impact would be of the series of recommendations that are on the table.”
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