“I want to begin by thanking the witnesses for joining us today. Today’s hearing will be about an issue we have been debating in Congress for a number of years now: how increased speculation in financial energy markets is contributing to recent, record-setting oil prices.
“Certainly, there is a broad recognition that the fundamentals of supply and demand explain much of the current oil price. We see increased oil demand, especially in developing economies such as China and India. We’ve seen OPEC oil production policies successfully manage U.S. and global oil inventory levels, keeping global commercial stocks low. This adds to market tightness and upward price pressure.
“At the same time, we see frequent, small-scale oil supply interruptions, which in the last week have included the sabotage of energy infrastructure in Iraq, Ecuador and Nigeria all OPEC members. We also have a misguided policy of filling the Strategic Petroleum Reserve, which removes more oil from the marketplace than these small-scale disruptions. Clearly, these fundamental factors are all important. As we heard last month from Guy Caruso, the Administrator of the Energy Information Administration, these market fundamentals could explain as much as $90 of the current price of a barrel of oil.
“In addition to these factors, there have been a number of important developments in financial markets in recent years. These trends include a dramatic increase in the volume of trading in oil derivative markets, and the participation of new classes of traders in those markets. These trends are exacerbated by the historic weakness of the dollar, which encourages non-commerical investors to seek commodity investments to protect against inflation risks.
“According to a GAO report issued last fall, the average daily contract volume for crude oil traded on the New York Mercantile Exchange (NYMEX) increased by 90 percent between 2001 and 2006. Additionally, GAO noted the average daily number of noncommercial participants in crude oil markets including hedge funds and large institutional investors more than doubled from 2003 to 2006.
“Taken together, it seems that just as the demand for physical barrels of oil has grown with the global economy, there is an increasing demand for oil purely as a financial asset.
“Untangling whether and how these dual sources of demand may be operating in concert and potentially impacting oil prices is complicated. But certainly, I think it’s accurate to say that there is a growing suspicion on the part of many Americans that, in the very least, Wall Street’s geopolitical judgments may be serving to increase current pricing trends.
“To my mind, unraveling these issues is made more difficult to the extent we are confronted with a lack of reliable or comprehensive data across these markets.
“As it relates to the fundamentals of the physical market, this includes a notable lack of reliable information with respect to global oil reserves. As for trading in oil and other energy-related derivatives, I remain troubled by the lack of transparency related to certain corners of the financial markets.
“It seems to me that markets operate best on the basis of complete and reliable information. In the absence of such information, the probability increases for prevailing market prices to become untethered from their fundamentals. In addition, I think it is also important for us to better understand the degree to which energy commodities, in a purely financial sense, have become an attractive investment given the state of the overall U.S. economy.
“Today, we have a very distinguished panel with us, and I look forward to hearing from the witnesses on these complicated issues.”
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