Testimony of Congressman Bart Stupak
U.S. House of Representatives
House Agriculture Committee
"To review legislation amending the
Commodity Exchange Act"
July 9, 2008
The price of crude oil has doubled over the past year, oil is now $73.90 more than it was at this time last year. This spike has caused gasoline
prices to increase $1.14 a gallon more than last year’s highs, a national
average of $4.10 per gallon. Diesel prices are up $1.82 per gallon compared to last year, up to $4.65 per gallon.
As a result, industries across the country are hurting. Airlines are eliminating service to 100 cities, laying off thousands of workers, and projecting up to $13 billion in losses this year due to jet fuel price increases that cannot be passed on to consumers.
Truck drivers are going out of business, and many more are just parking their trucks because they actually end up losing money after paying so much for diesel. Farmers face increased costs in all stages of their operations, from planting and harvesting to transporting their product to market. As a result, high energy prices have caused significant increases in the cost of food.
There is no way to justify the doubling of oil prices based on supply and demand.
In October 2007, the Government Accountability Office (GAO) released its report on the ability of the Commodities Futures Trading
Commission (CFTC) to properly monitor energy markets to prevent manipulation. The GAO found that the volume of trading in energy commodities has skyrocketed, specifically after the Enron Loophole was enacted in 2000. The GAO also found that while trading has doubled since 2002, the number of CFTC staff monitoring these markets has declined.
And the numbers back this up. Between September 30, 2003 and May 6, 2008, traders holding crude oil contracts jumped from 714,000 contracts traded to more than 3 million contracts. This is a 425 percent increase in trading of oil futures in less than five years.
Since 2003, commodity index speculation has increased 1,900 percent, from an estimated $13 billion to $260 billion. Lehman Brothers recently estimated that the crude oil price goes up about 1.5 percent for every $100 million in commodity index investments.
By the Lehman Brothers estimate, the 1,900 percent increase in commodity index speculation has inflated the price of crude oil by approximately $37 a barrel. Other experts estimate it could be even more.
On June 23, 2008, the Oversight and Investigations Subcommittee that I Chair held a hearing on the effect speculators have on energy prices. Fadel Gheit, Managing Director and Senior Oil Analyst at Oppenheimer & Co. Inc. testified that: “I firmly believe that the current record oil
price in excess of $135 per barrel is inflated. I believe, based on supply and demand fundamentals, crude oil prices should not be above $60
In 2000, physical hedgers- businesses like airlines that need to hedge to ensure a stable price for fuel in future months- accounted for 63% of the oil futures market. Speculators accounted for 37%. By April 2008, physical hedgers only controlled 29% of the market. What we now know is that approximately 71% of the market has been taken over by swap dealers and speculators, a considerable majority of whom have no physical stake in the market. Over the past eight years, there has been a dramatic shift as physical hedgers continually represent a smaller and smaller portion of the market.
The New York Mercantile Exchange (NYMEX) has granted 117
hedging exemptions since 2006 for West Texas Intermediate crude contracts, many of which are for swap dealers without physical hedging positions.
This excessive speculation is a significant factor in the price Americans
are paying for gasoline, diesel and all energy products. Even the
executives of the major U.S. oil companies recognize this.
On April 1, 2008, in testimony for the Select Committee on Global
Warming, Mr. John Lowe, Executive Vice President of ConocoPhillips
said, “It is likely that the large inflow of capital into the commodity
funds is temporarily exaggerating upward oil price movements.”
At the same hearing, Mr. Peter Robertson, Vice Chairman of Chevron
noted a “flight to commodities” adding that an economist was quoted in the Wall Street Journal saying: “Crude futures prices have decoupled from the forces controlling the underlying physical flows of the
In the testimony of Mr. Robert A. Malone, Chairman and President of
BP America, he pointed to a “growing interest among financial investors
in oil and other commodities.”
And at a May 21, 2008, Senate Judiciary Committee hearing, Shell
President John Hofmeister agreed that the price of crude oil has been
inflated, saying that the proper range for oil prices should be “somewhere between $35 and $65 a barrel.”
In May 2008, the International Monetary Fund (IMF), compared crude oil, over the past 30 years, to the price of gold. Gold prices are not dependent on supply and demand, and have been viewed as a highly speculative commodity. The IMF analysis shows that crude oil prices track increases in gold prices.
What this means is that oil has been transformed from an energy source into a financial asset, like gold, where much of the buying and selling is driven by speculators instead of producers and consumers. Oil has morphed from a commodity into a financial asset, traded for its speculative value instead of its energy value.
Even the Saudi Oil Minister has argued that high oil prices are due to excessive speculation in the markets.
As former Secretary of Labor Robert Reich noted on National Public Radio a few weeks ago, the problem is the government's failure to curb excessive speculation.
The Commodities Exchange Act recognizes the dangers of excessive
speculation. Section 4a of the Act states, “Excessive speculation in any
commodity under contracts of sale of such commodity for future delivery made on or subject to the rules of contract markets or
derivatives transaction execution facilities causing sudden or
unreasonable fluctuations or unwarranted changes in the price of
such commodity, is an undue and unnecessary burden on interstate
commerce.” (emphasis added) As a result, Section 4a provides the CFTC with the authority to set position limits or take other actions
necessary to curb excessive speculation.
However, there are significant loopholes that exempt energy trading
from these protections against excessive speculation: the Enron
Loophole, the Foreign Boards of Trade Loophole, the Swaps Loophole,
and the Bona Fide Hedging Exemption. While the recently passed Farm
bill addressed the Enron Loophole for electronic trading facilities here in
the United States, a significant portion of the energy trading continues to
be exempt from any CFTC action to curb excessive speculation.
My bill, the 2008 Prevent the Unfair Manipulation of Prices Act (H.R.
6330), would end these exemptions, to ensure that excessive speculation
is not driving these markets beyond supply and demand fundamentals.
The 2008 PUMP Act, the most comprehensive energy speculation bill in
Congress, would address:
? Bilateral Trades: These trades are made between two individuals
and are not negotiated on a trading market. Because the Farm Bill
only closed the Enron Loophole for trades on electronic exchanges,
these bilateral trades remain in the dark.
The PUMP Act would require that these bilateral trades are also
subject to CFTC oversight.
? Foreign Boards of Trade: Petroleum contracts offered through the
InterContinental Exchange (ICE) on ICE Futures are cleared on a
foreign board of trade in London. On average, more than 60 percent
of traders on ICE Futures are located in the United States. They’re
trading West Texas Crude, with a delivery point in the United States.
That’s a foreign board of trade in name only.
Recently, ICE Futures agreed to provide the CFTC with trader
information and to set position limits for their traders. However, this
step is not enough. ICE still has a revised “No Action” letter, meaning
that beyond information sharing and position limits, CFTC still won’t
have any authority to enforce US laws.
In addition, NYMEX is in the process of offering US traders access to
the exchange in Dubai, raising similar questions for that market.
To clarify CFTC’s jurisdiction over these “foreign” boards of trade,
the 2008 PUMP Act would give the CFTC authority over these
exchanges if they are using computer terminals in the United States,
or they are trading energy commodities that provide for a delivery
point in the United States.
? Swaps Loophole: Swaps are currently excluded from requirements for position limits to prevent excessive speculation. Today, eighty-
five percent of the futures purchases tied to commodity index
speculation come through swap dealers.
Because there are no requirements for position limits, these swaps
have grown exponentially, driving crude oil prices higher. By
eliminating this exemption, swaps would be subject to position limits
to prevent excessive speculation.
? Bona Fide Hedging Exemption: The Commodity Exchange Act allows exemptions from position limits for businesses “to hedge their
legitimate anticipated business needs.”
However, in 1991, CFTC authorized the first “bona fide hedging”
exemption to a swap dealer (J. Aron and Company, which is owned
by Goldman Sachs) with no physical commodity exposure, and
therefore, no legitimate anticipated business need.
Since 1991, 15 different investment banks have taken advantage of
this exemption, even though they do not have a legitimate anticipated
The 2008 PUMP Act would clarify that “legitimate anticipated business needs” does not mean energy speculators.
? Strong aggregate position limits: Once all of these loopholes are closed, we can then take effective steps to curb excessive speculation.
My bill would require the CFTC to set aggregate position limits on
energy contracts for a trader over all markets. Especially with the
growing number of markets, speculators can currently comply with
exchange specific position limits on several exchanges, while still
holding an excessive number of total contracts in the aggregate.