WASHINGTON – U.S. Senator Pete Domenici, ranking member of the Senate Energy and Natural Resources Committee, today questioned the accuracy of a report purporting to show that market speculation has played a major role in the price of oil.
At an Energy Subcommittee hearing, Domenici noted that a report claiming that speculators have played a major role in driving up the price of oil was prepared by a portfolio manager who is heavily invested in airline stocks. The report, prepared by Michael Masters, has been discredited by experts as diverse as Gary Cohn, managing director of Goldman Sachs, and Philip Verleger, a former economist with the Carter Administration.
“I have yet to see any credible reports that speculators are manipulating the markets to drive prices up in a substantial way. In fact, I would note that now that prices have come down, the rhetoric from Democrats seems to have quieted, too, except for this hearing. It is obvious to me—and most experts—that the rise in prices we have seen this summer is a direct result of a global supply and demand imbalance, and the way to correct it is by addressing that fundamental problem,” Domenici said.
Below is the full text of Senator Domenici’s prepared statement at the hearing:
Thank you, Senator Dorgan, and a warm welcome to our witnesses. I will keep my comments brief so we can hear your testimony.
As we continue to look for evidence of speculation in the crude oil markets, I am reminded of an observation once made by the journalist Henry Louis Mencken. “For every complex problem,” he wrote, “there is a solution that is simple, neat, and wrong.”
With regard to the serious energy challenges that we face, I believe speculation has become that “simple, neat, and wrong” solution. More than 40 hearings have been held on speculation this year. Dozens of reports have been written, released, and reviewed. Throughout, those who argue that speculators first drove up the price of oil – only to drive it right back down – have been unable to find definitive proof to validate their claims.
By contrast, our nation’s leading energy experts have come to Capitol Hill, time and again, to tell us that there is no single solution – no magic bullet – that can immediately reduce the cost of energy. In fact, when asked about speculation, many of our witnesses have responded that it likely has a small or negligible impact on oil prices. When asked to explain recent volatility, they have instead pointed to a far more fundamental force: supply and demand.
Both of the reports we are here to examine today confirm the importance of supply and demand. The first, the CFTC’s staff report on swap dealers and index traders, represents an unprecedented effort to measure what is happening in our commodity markets.
The data that was analyzed – information from 550 clients in more than 30 markets – revealed very little evidence of speculation, and certainly not enough to significantly affect the price of oil. As it turns out, noncommercial traders accounted for a small portion of the market, and as oil increased from $96 to $140 per barrel, fewer and fewer were holding net long positions.
The second report, from Mr. Masters, concludes that speculation is a significant influence on the price of oil. The accuracy of this claim has already been called into question, most notably by the man who generated the data used to construct it. I disagree with the conclusions of this report, and have concerns about the timing of its release. But I do give credit for one thing – even as it emphasizes speculation, this report is careful to acknowledge that supply and demand factors have played a prominent role in the movement of oil prices.
Dr. Verleger describes the report as follows:
“ ‘The Accidental Hunt Brothers – Act 2’ by Michael W. Masters and Adam K. White is the worst example of junk economic analysis published in a very long time. The authors demonstrate nothing in the article. It is devoid of any intelligent content. One can make a stronger case for a rooster’s crow causing the sun to rise. Their report is an utter and complete perversion of what we teach in economics.”
So what do we have to show for our efforts? The answer remains, not much. Congressional inquiries into speculation have required a massive commitment of time and resources, from this committee and from many others. I worry that the allure of an easy solution has distracted us from the hard work and tough decisions that are truly required. After all, while this is our third hearing on speculation in the past 10 months, we have not held a hearing on the Outer Continental Shelf in more than three years.
I was here during our last energy crisis, and I understand the desire to take action to reduce high gasoline prices. From experience, however, I can attest that the “obvious” answer often does more harm than good. It took us years to unwind some of the ill-advised policies that were put in place during the 1970s. I hope that will serve as a lesson learned, not repeated, in this debate.
In closing, I would like to echo some of the comments that Senator Murkowski made just a few minutes ago. It is increasingly clear that our energy crisis cannot be resolved simply by taking action against speculators. We must account for other factors, particularly supply and demand, as we seek to develop a comprehensive energy policy that stands the test of time.
To be sure, speculation has probably been a small part of the large swings in oil prices that we have seen this year. Like almost all Republicans in the Senate, I support legislation to increase the transparency of our commodity markets and to ensure that the CFTC can properly regulate them.
I look forward to learning more about the recommendations made by the CFTC staff, and to codifying them into law as necessary. But I also urge my colleagues to broaden their focus, and their thinking, with regard to the energy challenges we face. Otherwise, we will continue to pursue what is proving to be a “simple, neat, and wrong” solution, and our nation will continue to suffer.