Energy
Before I get into speculation, because we want to address speculation, but because my friends on your side keep saying it is only an 8-percent increase in oil company profits. I agree, it might be 8 percent from 2006 to 2007, but when you…
Before I get into speculation, because we want to address speculation, but because my friends on your side keep saying it is only an 8-percent increase in oil company profits. I agree, it might be 8 percent from 2006 to 2007, but when you make $118 billion, the most ever of any corporation, to top it the next year is pretty darn hard.
But 8 percent on $118 billion is $123 billion, where 5 years ago they were at $30 billion. They doubled it in 2003 and went to $60 billion. That is a 50 percent increase. Then you go to $82 billion, and I am no math major, but that is about a 25 percent increase. And then from $82 billion to $109 billion, that is a 20 percent or 21 percent increase. And then $118 billion, I guess they had a bad year, they only made $8 billion more than the previous record year. That might be 8 percent.
But look at these numbers, they are staggering. They are absolutely staggering. That is why we think on this side of the aisle you have to have a short-term policy and a long-term policy, and how to lower those excess profits from the $118 billion, or the $36 billion we have seen already in the first quarter of 2008, there is just no way to justify the doubling of prices based on supply and demand. Oil company profits are excessive, and we think speculation is part of the reason.
Cut the investment malarkey argument. This is profits. This is after you deduct your investments. I don't care if it is on geothermal or wind or solar, after you do all of these and pay your executive a
$400 million pension, they still make $123 billion. I'm sorry, but I just can't find any sympathy in my heart with those numbers.
Of all of the corporations in the history of the world, these are the biggest after all of their investments.
What I'm saying is why don't you invest more. What I'm saying in my role as chairman of the Oversight Investigations Subcommittee, and for 3 years holding hearings in this area, let's end the excessive speculation in the market that runs up the basic price of crude that results in these record profits because corporations, not only do they have a responsibility to their shareholders, they also have a responsibility to this country to be a corporate citizen.
Because high energy costs kill our economy. Every aspect of our economy is being strangled while they make record profits and pay obscene pensions to their CEOs.
So I believe one of the ways we can in the short term bring down these prices is take out the excessive speculation.
If you take a look at it, the Government Accountability Office released its report on the ability of the Commodities Futures Trading Commission to properly monitor the energy markets, to monitor what they are making here. What they said, the GAO said they found that the volume of trading in energy commodities has skyrocketed, exploded, especially after 2002 when we enacted the Enron loophole.
The GAO also found that while trading has doubled since 2002, notice that's when the profits start doubling, in 2002, the number of staff to actually monitor what is going on in the markets has declined.
If you take a look at this chart here, if you will, this is the evolution of speculation, trading on west Texas intermediate crude, average open interest on NYMEX long and short positions.
Between September 2003 and May 2008, traders holding crude oil contracts jumped from 714 to more than 3 million contracts. That is a 425 percent increase in trading oil futures.
Since 2003, the commodity index speculation has increased 1900 percent. It used to be a $13 billion market, now, today, it's a $260 billion market. By Lehman Brothers estimate, that 1,900 percent increase in commodity index speculation has inflated the price of crude oil by $37. Other experts say it could be even more.
So on June 23, as chairman of Oversight Investigations of the Energy and Commerce Committee, I held my sixth hearing on gas prices over the past 2 years, Fadel Gheit, the managing director and senior oil analyst at Oppenheimer & Company testified, and I quote, he said ``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 should not be above $60 a barrel.
We are at over $136 per barrel today. It should be no more than 60, says Mr. Gheit. In 2002, here is what is happening. Over here on the yellow side, these are the commercial hedgers. These are the airline industries, these are trucking companies, these are the Big Oil users. They want to hedge.
The blue area, pink area or blue area here, purple area, that's the nonhedgers. They have no interest in hedging; they are just in to play the market. Sixty-three percent in 2000 were legitimate hedgers, 22-- about 37 percent--were not. Come fast track April 2008, the legitimate hedgers are down to 30 percent, the swap dealers and the noncommercials, if you will, are 70 percent of the market.
So what's happened? By April 2008 the physical hedgers only controlled 29 percent of the market, those who really do need the supply. What we now know is that approximately 71 percent of the market is taken over by swap dealers and speculators, a considerable majority who have no physical interest in the market. Over the past 8 years, there has been a dramatic shift of physical hedgers continuing to represent a smaller and smaller portion of the market.
NYMEX, we have talked about the that tonight, New York Mercantile Exchange, has granted 117 hedging exemptions since 2006 for the West Texas intermediate crude oil contracts, many of which are for swap dealers without any physical hedging position. This excessive speculation is a significant factor in the price Americans are paying for gasoline, diesel and home heating oil. Even the executives of major oil companies recognize this.
At a May 21, 2008, Senate judiciary hearing, Shell Oil 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 of 2008, the IMF, the International Monetary Fund, compared the price of crude oil over the past 30 years, crude oil for the past 30 years, to the price of gold. Gold prices are not dependent upon supply and demand and have been viewed as a highly speculative commodity. The IMF's analysis shows us that crude oil prices track increases in gold prices. The big spike right here, that's the oil embargo.
Look what happened as soon as you had the oil embargo in the late 1970s there, mid 1970s there, gold shot way up. Look at the track, look at the last 5 years of gold how they go hand in hand one over the other. What this really 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, 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 market. Former Secretary of Labor Robert Reich noted on National Public Radio a few weeks ago, the problem is government's failure to curb excessive speculation.
Now, the Commodities Future Trading Commission has the authority to set position limits and to take other action necessary to curb excessive speculation. Unfortunately, they have not done it. There are significant loopholes that exempt trading from these protections against excessive speculation. You have the Enron loophole, you have the Foreign Boards of Trade, no action letters, issued by the Commodities Future Trading Commission.
You have the swaps loophole, you have the bona fide hedging exemption. While the recently passed farm bill that both Democrats and Republicans voted for and overrode President Bush's veto addressed the Enron loophole for electronic trading, only for natural gas, a significant portion of the energy continues to be exempt from any commodities future trade action to curb excessive speculation.
As I said earlier, for 3 years I have looked at excessive speculation in the energy markets. In my latest bill to prevent the unfair manipulation of prices, the PUMP Act, H.R. 6330, would end or take away all these exemptions, to ensure that excessive speculation is not driving these markets beyond the fundamentals of supply and demand.
We would crack down. The PUMP Act is the most comprehensive energy bill, and we would crack down on energy speculation through a bilateral trade, we would address that. We would take the Foreign Boards of Trade, and we would clarify the CFTC's jurisdiction over these Foreign Boards of Trade. The PUMP Act would give the CFTC the authority over the exchanges, if they are using computers here in the United States, or they are trading energy commodities that provide for delivery point in the United States.
The swaps loophole that we talked about over here, that would be closed, you see, 32 percent right now, right now our swap dealers would close that loophole because there is no requirement for position limits. These swaps have grown exponentially, driving up the price of crude. By limiting this exemption, swaps would be subject to position limits to prevent excessive legislation.
Bona fide hedging exemption, those who really need to have supply of oil, we would make sure that they are, we would limit businesses to hedge their legitimate anticipated business needs.
I have trouble with the Harvard University needing a legitimate hedging exemption, which they certainly enjoy right now. What does Harvard University need to hedge on oil? The PUMP Act would also clarify that legitimate anticipated business needs does not mean energy speculators. Strong aggregate position, you have the NYMEX, you have the Intercontinental Exchange and now you have the Dubai exchange coming on. If you are going to have a limit, position, limit the position, it should apply to all three of the, the aggregate of all three, not just one or two.
So if you see, if we would close these loopholes and set strong aggregate position limits, the Commodities Future Trading Commission would be better able to monitor trades to prevent market manipulation and help eliminate unreasonable inflation of energy prices caused by excessive speculation to help out the American people.
If you don't believe excessive speculation is causing a problem, look at today's business news, especially in the New York Times, they are talking about home heating oil. And at our June 23 hearing that we held, Oversight Investigation, we had the home heating oil companies there. On that day home heating oil was $3.98 a gallon.
Three days later, 3 days later I introduced the PUMP Act in the Senate with Senator Cantwell. Home heating oil then jumped to $4.60 a gallon. If you want to lock in, or if you want to hedge, you want to hedge your home heating costs for this winter, it's $5.60 a gallon, a 20 percent increase in about 4 or 5 days. That's excessive speculation gone wild.
Our PUMP Act has 60 cosponsors, bipartisan piece of legislation, endorsed by agriculture, airline, labor, industry groups, trucking industry. So I urge my colleagues in this House, and I have enjoyed this discussion here tonight, to take seriously a look at excessive speculation.
When they testified on June 23 in our committee, I know Mr. Barton was there and some others in this room tonight, Mr. Masters, Professor Greenberger, Fadel Gheit and others all indicated that if we would pass the PUMP Act the way it is right now, the most comprehensive legislation on excessive speculation, we could lower the cost of oil, of a barrel of oil coming into this country, by 50 percent, they said, within the next 30 days.
I believe it might be 30 to 50 percent, but the point being, in the short-term, as we started this discussion, we could do something right now. I would take the excess of speculation, all markets, all commodities, be liquidated, although they will need some speculation.
But when the physical hedgers are 2-1 being outbid by the swap dealers and the noncommercial people, the floor traders that manage money, the nonreportables, then we have a market that has been turned upside down, and we have turned supply and demand into really a financial asset and not really looking at the needs of the American people, or the U.S. economy.
Thank you.
On that point, there is some skepticism on the majority side that somehow we're going to drill our way out of this or that somehow we'll just increase supplies, because if you take a look at it right now, according to government statistics, 82 percent of the Outer Continental Shelf is available for drilling for gas. Seventy-nine percent of the Outer Continental Shelf is available for oil exploration and is leased. The last time was in 2006. We went along with it. We voted to extend in 2006, not even 2 years ago, more of the Outer Continental Shelf for oil and gas exploration.
What happened between 2006 and 2008? Profits kept going up. Costs kept going up. We didn't see a tangible result.
So, when you have 82 percent of the Outer Continental Shelf already available for leasing for natural gas and when you have 79 percent of the Outer Continental Shelf available for oil already available for leasing and as we had just relaxed the standards in 2006 and you do it 2 years later to get the last--what?--18 percent, 21 percent, how is that going to change the costs we're paying at the pump? How is that going to come down? We don't see the investment of these record profits into getting that oil up.
In fact, we're saying use it or lose it. You have record profits. You have more of the Outer Continental Shelf than ever in the Nation's history available for exploration, and you're not doing it. So use it or lose it. So that's why we look at speculation as, maybe, one way to bring it down.
I thank Mr. Barton for his willingness to work with us on speculation legislation. At my June 23rd hearing on excessive speculation in the market, he was actively engaged in that, and he asked a number of good questions. I agree that we might not agree on 100 percent of the PUMP Act, but I think there is enough common ground there, and I've enjoyed the discussions we've had in recent weeks on the PUMP Act. Hopefully, we can do something. I've really enjoyed the discussion here tonight.
I thank Mr. Altmire and others for having this discussion because I think it has been a good discussion. We've had some disagreements, yes, but I think it's all fair in what we're trying to do and in how we view things, and we are looking at the short term, what we need in the short term and in the long term, and I think there is more agreement than disagreement between the two sides.