Hearing of the Joint Economic Committee - Is the Skyrocketing Price of Oil a Bubble or a New Reality for the U.S. Economy?
Statement
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Thank you very much, Mr. Chairman. Thank you for holding this hearing. Thank you to our witnesses. I was home this weekend in Minnesota, and probably half the people -- when they brought up an issue, it was about gas prices. I think out on the prairie lands and in the Mid-West where people have longer ways to drive, there's not as much public transportation, it hits people harder. There are a lot of people not going up to their cabins, not going up to the lake and other places just because they simply can't afford to fill their car up with gas.
And I would agree with what's been said in the long-term, that the long-term solution is a combination of things. We are right next store to North Dakota. We know there's some more domestic drilling we can do, but the bottom line is we just have three percent of the nation's oil reserves and that we're going to have to look for other alternatives. And we're very excited about biofuels in the Mid-West. We know we need to go beyond corn ethanol to cellulosic prairie grass, to switchgrass, to LG, to whatever else. And we actually believe that this can be done 'cause we've seen how it's revitalized the rural areas of our state.
But what I'm most curious about today is this topic of speculation. I think there's a lot of reasons you might have seen this immediate jacking up of prices and the short-term issue. Some of it, of course, is the demand that we've talked about with China. But the demand in the United States has gone down. Some of it is the weak dollar, and this idea that I think people have talked about with people pushing their money into commodities, not just oil, but also food and taking it out of things like hedge funds.
But even all of that, I believe, doesn't really account for this price differential. We had the CEOs of some of the major oil companies testify before Congress a few months ago and say that oil shouldn't be trading at over $100 a barrel, that it should be trading somewhere around $55-$60 a barrel.
So the question that I want you to think about as our witnesses is if that's true, does all of these things with just the people pushing their money in and the weak dollar account for that vast price differential?
We had a top ranked energy analyst who called the oil markets the world's largest gambling hall. He said it's open 24-7. It's totally unregulated. This is like a highway with no cops and no speed limit, and everybody's going 120 miles per hour.
So I'm not one to think this is all about speculation, but when you've seen this frenzy of unregulated market speculation and you think and you think about these people that are spending their hard- earned money on gas, if you think you can do something about it that doesn't hurt in the long-term, is going to make some difference in the short-term, you want to take action.
And obviously, the things that we've been looking at is building on the work that was done in the Farm Bill, which partially closed the Enron loophole to see if more needs to be done with the so-called London loophole with trying to do something about regulating some of the overseas offshore trading that's being done, to look at what we can do about the margin requirements, which we know are very low for oil when you compare them to other stocks and things like that, to look at the regulatory powers that we can give to these agencies.
We had a Joint Agriculture-Appropriations hearing on this with the acting chairman, and we kept asking, what other tools do you need? Clearly, they need more cops on the beat. There's been a huge reduction in their budget and their number of people looking at these markets. But the issue other than that is that I believe just looking at this as a former prosecutor that you want to have the tools. Maybe you won't use them, but if you've got a situation where you used to have the burden on those that you regulated and now you have the burden as the agency to try to prove things, that's harder to prove them.
So I think that looking at what tools that we can give to these agencies to better look at price gouging and better look at market manipulation is a good thing to do because any prosecutor will tell you that laws are good, but if you don't have cops on the beat that are looking for the violations and you don't have the prosecutors to get the work done, it's not really going to make a difference.
So the way I look at this -- it's not all about speculation, but I believe that this has been a major factor in some of the short-term jacking up of prices, and I'd like to hear what the three of you have to say about that and also about some of the ideas that we've been talking about to resolve it.
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SEN. AMY KLOBUCHAR (D-MN): Thank you very much, Mr. Chairman. Mr. Laitner, I was captivated by your testimony about the -- the positive position we could be in if we made some good policy decisions in terms of energy efficiency. And I -- I will say I think the country, the people itself have moved on beyond Jimmy Carter getting on with a sweater and looking glum on TV.
And I just see a real interest in this issue in our state, because they see it beyond an environmental issue, that as a way for them to save money and be -- if we give them the tools so that they can make those decisions, whether it's the types of cars or trucks that they purchase, if they have more of a choice so that they can make that decision or a little technology that they can put on their washer and dryer to figure out when to run it.
And I always think back -- and when Kennedy said he wanted to put a man on the moon, it was a question of resources, but it was also leadership. And out of that leadership came everything from the CT scan to infrared technology to those little chocolate space sticks that my family would take on camping trips in the 1970s. And I was reading your testimony where you talked about even these GPS monitors, how you could -- you could use the technology so people would know how to avoid congested routes, which I thought was fun, as I love going with those GPS monitors and having my husband be told, "Take a U-turn. Take a U-turn. You've gone the wrong way."
But anyway, I think that there is -- I think that there is all kinds of possibilities here. And my question is do you agree that if we could take some of these -- and we have limited budgets here. And a lot of us wanted to take some of these oil giveaways of $17 billion to Exxon and these other companies. By the way, congressman, I don't think that Britney Spears got $17 billion. But to take these -- these investments and these resources and put them into what you're talking about, into the hybrids and the electric cars and the investment that we could move this change quicker.
MR. LAITNER: Yes, Senator Klobuchar, a good question. I absolutely agree, and let me give you one of many examples. I could go on. Not too long ago, I took a trip to Stockholm, Sweden. But I did that by walking two blocks down from my office here in Washington, D.C. I had an absolutely fabulous meeting. It was a form of videoconferencing, and in your profession you may -- I recall that now increasingly are taking affidavits and witness testimony long distance by videoconferencing is happen to be a legal firm earning secondary income by allowing videoconferencing.
We had absolutely quality image, quality sound. I saved, I estimated, something like 3700 pounds of carbon dioxide emissions I didn't use because I was doing air travel to Stockholm, Sweden. One of the initiatives we're calling for is a greater understanding of both telecommunication or tele-working, tele- commuting, videoconferencing, which can lay the foundation for, I think, some substantial energy savings in the short term, to be sure.
But more generally, if we take a step back and understand the levels of efficiency, we are still no more efficient in terms of our electricity production than we were in 1960. Now, imagine had Intel introduced its microchip in 1971 and stayed at that same level of transistors per chip where we would be as an in the economy. We have some huge opportunities at all points in the production process, the refinement process, and the use process to encourage efficiency, if we'll take a step back.
But I think your point is critical in that leadership is absolutely required, which is why we tried to frame our 10 proposals addressing the transportation perspective initially, in a step by step sequence, so that we can inspire confidence in the market. We first announce what we're going to do, and then we reinforce that by taking actions. I think that will do a lot to stimulate and inspire the confidence that will reduce the tendency to the price levels we're seeing today.
SEN. KLOBUCHAR: Okay, thank you. Dr. Yergin, now you talked about the demand going down. Did you mean worldwide or just in our country for oil?
MR. YERGIN: Just I talk about U.S. gasoline demand. Also, you were seeing it in Europe. Obviously, if you look at China, if you look at India, they're in a very different curve in terms of their demand.
SEN. KLOBUCHAR: But how about worldwide demand then? Is that going up?
MR. YERGIN: Worldwide demand was growing at about a million and a half barrels a day. We think this year it'll grow by about 900,000 barrels a day. So the rate of growth is slowing, and that's significant. And of course, that's response to -- (crosstalk) --
SEN. KLOBUCHAR: And so I'm still going back to -- so the rate of growth is growing, but suddenly this year is the year we see these, you know, the gas prices going up, whatever 30 some percent in the, you know, the bio -- the diesel price is up 66 percent, crude oil up 98 percent. How much do you think that this migration of investment -- I would use the word speculative -- the migration of investment from sub primes and other things into this market has affected things?
MR. YERGIN: Well, I think it is very hard to quantify. I think it is part of it, and I think we particularly saw it start -- if you start looking back at July when the sub prime crisis, you certainly start to see in oil and other commodities those prices going up substantially, telling you there's a shift in investment.
So is it $20? Is it $30 of the price that reflects going -- the impact of the investment of market and a kind of growing pessimism? I mean, every -- you know, you see the Iranians make a statement about a -- a bellicose statement, and you see the price of oil go up $5 or $7. And they made an extra $85 million that week too.
SEN. KLOBUCHAR: Do you think those statements -- they make the statements, but do you think that investors sort of use that as an excuse to then jack up the prices more?
MR. YERGIN: I think -- well, I think -- I think it's people get nervous, and it's not only investors, but it may also be people, airlines or others, who have to worry about supplies, hedging it. So I think it kind of is a reinforcing -- a reinforcing process.
I think if we saw demand -- the other side of it is supply is also growing rather slowly this year, so the two things are coming together. And this pessimism, at some point I think these other factors of demand -- I think the kind of things that Skip is talking about and that have been described, Dr. Joutz in terms of the economy, those are the factors that are not yet being factored into the market. But that's when -- that's when the market will have its top and turn.
SEN. KLOBUCHAR: So part of this would be just -- I don't want to paraphrase what you're saying, but it's to -- you believe in using a cautious approach with speculation in terms of getting transparency and giving the agencies the tools and acknowledging that this might be part of the short-term problem.
MR. YERGIN: Yeah, I think that --
SEN. KLOBUCHAR: But the longer term of doing some of the things he's talking about could actually affect the price --
MR. YERGIN: Yeah.
SEN. KLOBUCHAR: -- because people will see that we're going another route.
MR. YERGIN: Yeah, yes. I mean, I will tell you, I think something that -- it's not in the power of this Congress, but it's -- if there was a way to do something about the Nigerian delta region, that would be a real contribution to the prices that Americans are -- are paying at the pump.
I think that -- Skip called it "the next great prize." The new book I'm writing, I was going to write one chapter on energy efficiency. I ended up writing three chapters, because there's so much going on. And he suggests in his testimony, we have so many tools today that we just did not have even 5 or 10 or 15 years ago. And what I see in this country, I can remember when energy efficiency was in that either or all category. Now what I can see, it's something that everybody across the spectrum says this can make a major contribution, and this is a major element in the solution.
SEN. KLOBUCHAR: Thank you very much.
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