Market vies with culprit hunt in oil-price hearing

May 5, 2006
As market experts explained oil price movements, lawmakers in a House committee hunted for culprits.

Nick Snow
Washington Correspondent

WASHINGTON, DC, May 5 -- Reduced supplies and growing demand are the primary forces behind high crude oil prices, two market experts told a US House committee May 4. But several members of the Energy and Commerce Committee seemed more intent on finding possible culprits, from futures speculators to major oil companies, who they believe might be manipulating prices.

The hearing quickly took on partisan tones in more than an hour of opening statements from 17 committee members. Republicans generally questioned decisions during the 1990s that restricted access to potential US oil supplies.

Democrats primarily criticized past Republican resistance to alternative fuel and conservation programs. They also suggested that US foreign policy over the last 5 years helped raise oil and gas prices.

The two main witnesses—Guy F. Caruso, who leads the US Energy Information Administration, and Cambridge Energy Research Associates Pres. Daniel Yergin—said the relationship between supply and demand was the primary reason the price of crude oil recently exceeded $70/bbl.

They said the price is high also because of concern over political instability in oil-producing countries, worldwide refining capacity that doesn't match supplies, and US production and refining capacities still not fully recovered from last year's hurricanes.

"All of the capacities from the upstream sources to the downstream distribution systems are stretched very thin," Caruso said.

Missing production
Yergin said he does not believe there is a world oil shortage; rather, markets are tight with about 2 million b/d of production missing as a result of civil unrest in several producing countries and the 2005 Gulf Coast hurricanes.

"The prime risks are not the resources underground, but what's happening above ground," he said. "What seems to be a rebirth of resource nationalization popular in the 1970s is riding on the crest of today's high energy prices."

Two later witnesses—Robert Levin, senior vice-president for research at the New York Mercantile Exchange, and Orice Williams, financial markets and community investment team director at the Government Accountability Office—tried to address committee members' suggestions that energy commodity trading needs more regulation.

Committee Chairman Joe Barton (R-Tex.) tried to create an impartial mood as the hearing opened, but it didn't last long.

"At $70/bbl, crude oil is double the price it was in 1995 when then-President [Bill] Clinton vetoed drilling in [the Arctic National Wildlife Refuge]. There are no short-term fixes, but I can't help but wonder what the difference would have been if he hadn't," he said. "One oil field in Alaska is expected to produce 10 billion bbl, but we've drilled only one well in it. It defies understanding that we haven't done more there when we've proven we can produce oil in an environmentally safe manner."

Democrats on the committee quickly fired back. "The American people are not going to be impressed simply because the majority has held so many hearings. If we've needed them, why weren't they held as last year's comprehensive energy bill was debated and passed?" said Rep. Frank Pallone Jr. (NJ). "Instead, the majority passed and President [George W.] Bush signed a bill chock full of giveaways to the oil companies. It's time for this Congress to get serious and discuss ways to get this country off its oil addiction."

Rep. Bart Stupak (D-Mich.) said he has asked Republican House leaders to hold gasoline price hearings for 8 months and expressed displeasure that they were all held in a single week.

As the main sponsor of a Democrat-backed bill calling for Federal Trade Commission investigations of price-gouging allegations across the oil and gas production and distribution chain, Stupak noted that the House passed a similar measure developed by Rep. Heather Wilson (R-NM) on May 3. "I'm pleased that the Republican leadership has finally done something about this," Stupak said.

'Dramatic disparity'
Wilson said: "I recognize there are multiple disagreements over the cause of high oil prices. For the last 4 weeks, however, demand in the United States has been barely higher than a year ago, yet prices are 46% higher. So I'd like more explanation of why there's such a dramatic disparity because the average voter doesn't understand."

Rep. Jan Schakovsky (D-Ill.) said, "I and other Democrats have written President Bush and Vice-President [Dick] Cheney many times to bring energy executives in and have them help develop policies to bring prices down. Instead, they have lavished tax breaks on these companies."

US crude oil imports have increased 14% since Bush took office, and his proposed fiscal 2007 budget increases research into energy alternatives but cuts support for conservation and energy efficiency programs, she continued. "Consumer confidence about Congress and the president is tanking. Showing concern about high prices is not enough. Voters want action," Schakovsky said.

Rep. Ed Whitfield (R-Ky.) said: "The easiest thing is to blame oil companies and accuse them of price-gouging. But the situation is more complicated than that. We are the largest consumer of oil products in the world."

Noting that crude production declined during 2005 in Saudi Arabia, Iran, Iraq, Indonesia, and Venezuela, he added, "There are a lot of factors out there we can't control."

Rep. Eliot L. Engel (D-NY) said prices went up because major oil companies are greedy. "I think the president should call the heads of the five major oil companies into his office and bang heads together," he said. "It enrages me that the chairman of Mobil-Exxon [sic] gets a $400 million golden parachute to leave when consumers are struggling to pay to fill their cars' gas tanks. These companies are making obscene profits."

Policies, not politics
Rep. Tim Murphy (R-Pa.) said, "People blame the president, but frankly Congress hasn't done anything for 30 years. We haven't built a new oil refinery or nuclear power plant and refuse to drill in new areas in this country."

He said the US needs more production and refining capacity as well as more conservation. "We need to stop using politics to deal with these issues and start developing policies instead of using prices as an election issue," he maintained.

Rep. Gene Green (D-Tex.) was not as partisan as most of the other Democrats. "Unfortunately, oil prices are at the mercy of leaders in politically unstable areas. Traders respond to every hint of possible drops in exports. If Venezuela and Iran decide to shut off exports, we're going to wish we had ANWR and be glad the president stopped purchases for the Strategic Petroleum Reserve," he said.

Rep. Marsha Blackburn (R-Tenn.) criticized Democrats who voted against a refinery permitting bill developed by Rep. Charles F. Bass (R-NH) when it reached the House floor on May 3 (OGJ Online, May 3, 2006). "A vote against it was a vote to preserve the bureaucracy," she said.

Barton, who strongly endorsed the Bass bill, later said he planned to bring the measure back when it would not require a two-thirds vote to pass and could be enacted with a simple majority.

Rep. Jay Inslee (D-Wash.) said Bush administration decisions have compounded consumers' oil-product price misery. "Two years ago, a few doors down the hall, I heard Paul Wolfowitz say that the war in Iraq would be financed by oil revenues. They've done a heck of a job," he said.

"I just left a meeting with several oil marketers from my home state. Normally, the small business community doesn't embrace new regulation. But these people told me that there's enormous capital rushing into the crude oil pricing system that needs to be watched," Inslee said.

Other committee members suggested commodity markets need closer attention. Stupak said over-the-counter trading particularly needs to be regulated. "The vast majority of energy derivatives trading that takes place does not violate any laws. However, when oil price speculators try to manipulate prices, Congress needs to act," he said.

But when Stupak asked Yergin if he thought energy speculators need to be regulated, the CERA official replied: "I think the leading speculator is the president of Iran. He has made a series of statements that people may be taking too seriously. I have trouble differentiating between speculators and a general, pervasive fear about possible market disruption from Iran's trying to develop a nuclear program."

Trading concerns
Barton also showed interest in possible oil-price impacts from speculative commodity trading. "There's a difference between an airline in the futures market trying to lock in the cost of fuel or a producer trying to make certain there will be a certain price, and someone who comes in strictly to make some money. I wonder if it would be worthwhile for the government to raise the margin necessary to speculate on oil prices," he mused.

When told by Levin that NYMEX member margins for crude oil are $3,500/1,000-bbl contract and for gasoline, $6,000/1,000-bbl contract, Barton said: "If I go to the New York Stock Exchange to buy equities, I have to put up at least 50% of the price. Your exchange requires only 3.5-4%."

Levin said NYMEX bases margins on assessed market risks, using parameters such as a commodity's implied volatility.

"We people who are elected have our own volatility test," Barton said. "It's called an election, and right now the volatility in the retail marketplace for gasoline prices is worth an inquiry about how these margin requirements are set. I think a case could be made that if they were set higher, the volatility in the market would go down, and prices would go down."

But Levin insisted that the current margin requirements apparently have protected the NYMEX's financial integrity. "We have found that implied volatility is an effective boundary of where prices will move," he said. "Every participant is protected by a financial overseer such as an international bank. In addition, despite volatility, we've had very good financial performance as a market."

Williams said the GAO is continuing an investigation of players in the energy futures market and oversight by the Commodity Futures Trading Commission.

"We are reviewing CFTC and NYMEX's surveillance programs and potential contributions from other programs, as well as over-the-counter settlement prices and practices," she said. The report is scheduled to be issued later this year.

Contact Nick Snow at [email protected].