Washington, D.C. – Congressman Chris Van Hollen (D-MD) today testified before the house Committee on Agriculture on the Energy Markets Anti-Manipulation and Integrity Restoration Act (H.R. 6341). The following is his testimony.
“First of all, I’d like to commend Chairman Peterson, Ranking Member Goodlatte, Subcommittee Chairman Etheridge and the rest of the Committee for the substantial amount of work that has already been done on this issue. I’d also like to recognize Rep. Bart Stupak (D-MI) for his longstanding interest in this area, Rep. John Larson (D-CT) for his diligent attention to this matter, Rep. Jim Matheson (D-UT) for the personal perspective he brings to this discussion, and of course, Rep. Rosa DeLauro (D-CT) with whom I have introduced the Energy Markets Anti-Manipulation and Integrity Restoration Act (H.R. 6341) which I will be discussing today.
“At the outset, I think it’s useful to remember why futures markets exist in the first place. According to the Commodity Futures Trading Commission (CFTC), “the futures markets…serve the important function of providing a means for price discovery and offsetting price risk.” So long as the price discovered by the futures markets accurately reflects the forces of supply and demand, producers and consumers of commodities can go to the futures markets and hedge with confidence in order to offset their price risk. But when excessive speculation unhinges the futures markets from supply and demand fundamentals, hedgers begin to lose confidence in the price discovery function of futures markets, and the distorted futures price transmitted to the spot market winds up overcharging consumers for the energy they rely on every day.
“Let me say at the outset that I do not believe excessive speculation is the sole cause of the recent surge in energy prices. Without question, other factors — such as increasing worldwide demand in countries like India and China, supply disruptions in Nigeria, and the devaluation of the dollar — have all played a role.
“However, a growing chorus of congressional testimony and market commentary from a wide range of credible and authoritative sources has concluded that the run-up in today’s price of oil cannot be explained by the forces of supply and demand alone. Among those sources are the Senate Permanent Subcommittee on Investigations, the International Monetary Fund and the Japanese Ministry of Economy, Trade and Industry (METI). Respected media outlets from the Washington Post to Fortune Magazine have voiced similar concerns. And stakeholders including large institutional investors, hedge fund managers, oil company executives, financial analysts, economists, consumer advocates and academic experts increasingly point to a meaningful speculation premium in today’s price of oil. A May 2008 market report from the respected institutional financial consulting firm Greenwich Associates summed it up this way: ‘The entry of new financial or speculative investors into global commodities markets is fueling the dramatic run-up in prices.’
“Some experts — like Oppenheimer Managing Director and Senior Oil Analyst Fadel Gheit — put today’s speculation premium in the oil markets in excess of 50%, arguing that true market fundamentals imply a price of approximately $65 a barrel. Since it is difficult to quantify the role of market speculation with mathematic precision, it is hard to know the exact magnitude of today’s speculation premium. But I do not believe that it is zero. And that is why I believe we must act.
“The Energy Markets Anti-Manipulation and Integrity Restoration Act (H.R. 6341) that I have offered with my colleague Rosa DeLauro and others proposes what we believe represents the three most important steps Congress can take to eliminate the possibility of any outright manipulation occurring in unregulated markets and to wring excessive speculation out of today’s energy marketplace.
“First, H.R. 6341 would build upon the reform this committee began in the most recent Farm Bill by adding energy commodities to the definition of an exempt commodity under the Commodities Exchange Act (CEA), effectively treating energy commodities the same way we treat agricultural commodities under current law. Taking this step would close the door even more firmly on the so-called “Enron Loophole” by requiring that energy futures contracts trade on Designated Commercial Markets (DCMs) or Designated Transaction Execution Facilities (DTEFs), unless the CFTC provides a specific exemption.
“Second, to ensure that swaps are not used to circumvent the regulation and CFTC oversight intended by adding energy commodities to the CEA’s definition of an exempt commodity, H.R. 6341 would also add energy commodities to the definition of excluded swap transactions under the Commodities Exchange Act.
Finally, H.R. 6341 would close what has come to be known as the London-Dubai loophole by amending the Commodities Exchange Act to forbid an exchange from being deemed an unregulated foreign entity if its trading affiliate or trading infrastructure is in the United States, and it offers a U.S. contract that significantly affects price discovery.
“In that regard, I think most of our constituents would probably assume that a market like the Intercontinental Exchange (ICE Futures Europe) operating inside the United States and facilitating an estimated 30% of the trade in our U.S. West Texas Intermediate (WTI) futures contracts would be fully subject to CFTC oversight and U.S. law. But as all of us in this room understand, that is currently not the case. When it comes to the integrity and transparency of energy markets operating inside the United States, we simply cannot outsource the responsibility for policing those markets to foreign governments or regulatory authorities.
“Like members of this committee, I have a long term concern about the escalating worldwide demand for energy and the impact that it will have on the price of oil and fuels derived from oil going forward. While this concern makes me an ardent advocate for accelerating the development and deployment of next generation energy alternatives, it also causes me to conclude that we must make every effort to ensure that we do not exacerbate the current challenge for our constituents by layering an additional speculation premium on top of it. Moreover, in light of the dramatically increased speculative inflows into the energy futures markets, and the unprecedented re-composition of these markets’ hedger-speculator participation ratios over the past ten years coinciding with a staggering 1000% jump in the price of a barrel of oil over the same period of time, I believe the burden is on those who would argue for maintaining the status quo to convincingly establish against the available evidence that excessive speculation is not having an impact on today’s energy prices. Furthermore, proponents of maintaining current law must definitively demonstrate that the exceptions we have thus far permitted to persist in the Commodities Exchange Act do in fact support — rather than undermine — the primary functions of price discovery and offsetting price risk necessary for a healthy energy futures marketplace.
“I appreciate the opportunity to testify today, and I stand ready to work with members of the committee to fashion language that achieves our common goals on this important public policy issue.”