The Senate Energy and Natural Resources Committee largely resisted that temptation this week during a refreshingly wonky discussion with four top energy experts who discussed national and global factors influencing crude oil and gasoline prices.
The question of speculation kept coming up. And while a handful of senators made it clear that they think speculation deserves most of the blame for high prices, they at least let the witnesses explain their own views.
Some snippets from that conversation on futures markets:
Daniel Yergin, chairman of IHS Cambridge Energy Research
Associates: "If we didn't have these kind of markets in a
situation we'd be looking at today, airlines would be taking
their planes out of the skies and be putting them...parking them
in the deserts because they were not able to hedge their
financial risks. And that's what those markets do. Obviously,
the markets have to be regulated, they have to be understood
very closely, but that's...when you have a big traded commodity,
people need to manage their risk in order to stay in business."
Paul Horsnell, head of commodities research for Barclays
Capital: "I cover more the physical oil markets, but the
trend we've noticed, particularly over the last couple of years,
has been a very large movement of oil trading out of London and
into Switzerland. It's much harder to get full visibility on an
oil market where the balance has shifted away from more
regulated centers and into other areas."
Senator Maria Cantwell, Democrat-Washington: "I certainly
believe in market fundamentals myself, and certainly believe in
making sure that market fundamentals are policed. But I can
remember a time on this committee that we talked and talked and
talked and talked about what was wrong with electricity when
Enron was manipulating the market. And there were a lot of
people that thought it was 3,000 things other than manipulation,
until we proved that it was manipulation, and then everybody
was, like, oh, it's a manipulation. ... At what point does it
really become a problem? Because it's quite clear the
Commodities Exchange Act made it very clear that the commodities
future market were created for two basic purposes. One, to
provide a revenue for producers and consumers of physical
commodities to hedge their risk, and two, to establish a fair
price on supply-and-demand fundamentals."
Yergin: "I'd rather see these markets in the United
States regulated with the kind of scrutiny they have than
occurring somewhere elsewhere where they're not under scrutiny.
And so part of the issue is it is a global marketplace."
Senator Ron Wyden, Democrat-Oregon: "It looks to me like
four years ago, the non-commercial trader, the person who's, in
effect, called a speculator, these traders held less than half
of the futures contracts for crude oil. So a number of years ago
we were talking about, you know, people who held these futures.
They were trucking companies, they were airlines, these kind of
people who weren't, you know, traders. Now, today, according to
the chairman of the Commodity Futures Trading Commission, these
traders now account for 85 percent of the crude oil futures
market."
Yergin: "Well, I think, yes, it's been a significant
change. I don't think, based upon our understanding today, that
it is the driving force that can accentuate things. I was
thinking that when there was a crisis with Iran in 1979 and '80,
there were no futures markets and the price also went up very
sharply. So it's part of the mix and a very visible part."
Frank Verrastro, director of energy and national security for
the Center for Strategic and International Studies: "There's
been a change in the market. I don't want to characterize it as
necessarily good or bad. There are new players. It's part of
what we're calling the kind of--the new fundamentals, which used
to be just supply, demand, and inventory. There's a lot
more--it's a lot more complex market."
Horsnell: "We're reasonably happy with the supply-demand
explanations as to where prices are and why they behave. There's
not a big residual left over to be explained by something else."
Yergin: "Oil prices, gasoline prices are both up 20
percent since the U.N. issued its report about Iran's nuclear
program. So I would not call it a speculative premium, I'd call
it a risk premium or a security premium. But there is a premium
that reflects this increased tension and anxiety in the market."
Verrastro: "I think that there is a premium in the market
over and above finding development costs. I wouldn't attribute
it all to speculation."
Horsnell: "If there was a large speculative premium, then
prices would then be higher than a market price, which should
mean that we'd be seeing large surpluses building up. People in
the physical market will be asking for discounts because they
want to play the proper physical price, not the inflated
speculative price. What we actually see is in the international
physical market today, in Brent, people paying large premiums to
get their deliveries accelerated. It's quite the reverse. There
is no global surplus building up. Instead, we have limited spare
capacity. We've had eight straight quarters of global draws. We
finally have a balanced market at this price. So I just think
that it's incorrect to think in terms of speculative premium."
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