Mr. Gerry Ramm
Senior Executive, Inland Oil Company
Ephrata, Washington
On behalf of the
Petroleum Marketers Association of America
Arlington, Virginia
Testimony before the
Committee on Commerce, Science and Transportation
United States Senate
Washington, DC
June 3, 2008
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Honorable Chairman Inouye and Ranking Member Stevens and distinguished members of
the committee, thank you for the invitation to testify before you today. I appreciate the
opportunity to provide some insight on the extreme volatility and record setting prices seen in
recent months on the energy commodity markets.
I am an officer on the Petroleum Marketers Association of America?s (PMAA) Executive
Committee. PMAA is a national federation of 46 state and regional associations representing
over 8,000 independent fuel marketers that collectively account for approximately half of the
gasoline and nearly all of the distillate fuel consumed by motor vehicles and heating
equipment in the United States. I also work for Inland Oil Company in Ephrata, Washington.
My Dad started Inland Oil Company in 1946 after he returned from duty in World War II.
Today we operate seven gas stations and convenience stores and we also supply fuel to
eight independent dealers. Also, supporting my testimony here today is the New England
Fuel Institute who represents over 1,000 heating fuel dealers in the New England area.
Last year, gasoline and heating oil retailers saw profit margins from fuel sales fall to their
lowest point in decades as oil prices surged. The retail motor fuels industry is one of the most
competitive industries in the marketplace, which is dominated by small, independent
businesses. Retail station owners offer the lowest price for motor fuels to remain competitive,
so that they generate enough customer traffic inside the store where station owners can
make a modest profit by offering drink and snack items. Because petroleum marketers and
station owners must pay for the inventory they sell, their lines of credit are approaching their
limit due to the high costs of gasoline, heating oil and diesel. This creates a credit crisis with
marketers? banks, which creates liquidity problems and may force petroleum marketers and
station owners to close up shop.
Excessive speculation on energy trading facilities is the fuel that is driving this runaway train
in crude oil prices. The rise in crude oil prices in recent weeks, which reached $135.09 on
May 22, 2008, has dragged with it every single refined petroleum product, especially heating
oil. According to the Department of Energy, the cost of crude accounts for roughly 73 percent
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of the pump price, up from 62 percent in January of 2008.1 Wholesale heating oil prices from
March 5, 2008 ? May 28, 2008 have risen from $2.97 to $3.81.2 The spike comes despite
warmer temperatures in the Northeast and the end of the heating oil season. Interestingly,
Colonial Group Inc. which provides wholesale/retail petroleum fuels announced May 7, 2008
that it had 150,000 barrels of surplus heating oil available for auction. That same day heating
oil futures set yet another record high with a 9.3 cent gain at $3.37 a gallon along with
temperatures averaging in the upper 70s in the Northeast. The data doesn?t add up.
Large purchases of crude oil futures contracts by speculators have created an additional
demand for oil which drives up the prices of oil for future delivery. This has the same effect
as the additional demand for contracts for delivery of a physical barrel today drives up the
price for oil on the spot market. According to the Department of Energy, the amount of
petroleum products shipped by the world's top oil exporters fell 2.5 percent last year, despite
a 57 percent increase in prices.
According to a 2006 Senate Permanent Subcommittee on Investigations bipartisan report by
Chairman Carl Levin (D-MI) and Ranking Member Norm Coleman (R-MN) entitled, The Role
of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat,
?Several analysts have estimated that speculative purchases of oil futures have added as
much as $20-25 per barrel to the current price of crude oil, thereby pushing up the price of oil
from $50 to approximately $70 per barrel.? Who would have thought that crude oil futures
would rise to over $130 a barrel?
Three weeks ago, Michael Masters, Managing Member and Portfolio Manager of Masters
Capital Management, LLC, a hedge fund, argued before the Senate Committee on Homeland
Security and Government Affairs that institutional investors are the cause of the recent run-up
in commodity prices. Institutional investors are buying up all the commodity contracts (going
long), especially energy commodities, and are not selling, thereby causing the demand for
contracts to increase and putting further pressure on commodity prices. Institutional
1
Energy Information Administration, ?Gasoline and Diesel Fuel Update,? April 2008
2
Energy Information Administration, ?U.S. No. 2 Heating Oil Wholesale/Resale Prices,? March 5 ? May 28, 2008
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investors allocate a portion of their portfolios into commodities since they are posting solid
returns rather than traditional investments like stocks and bonds.
Since commodities futures markets are much smaller than equity markets, billions invested
into commodity markets will have a far greater impact on commodity prices than billions of
dollars invested in equity markets. Masters stated that while some economists point to
China?s demand for crude oil as the cause for the recent rise in energy costs, he disclaims
that assumption. In fact, Masters? testimony highlights a Department of Energy report that
annual Chinese demand for petroleum has increased over the last five years by 920 million
barrels. Yet, over the same five-year period, index speculators? demand for petroleum
futures has increased by 848 million barrels, thus the increase in demand from institutional
investors is almost equal to the increase in demand from China! Wouldn?t this demand by
institutional investors have some effect on prices?
Also, many economists and financial analysts report that the weak dollar has put pressure on
crude oil prices. While the weak dollar explanation is partly true because crude oil is
denominated in dollars which reduces the price of oil exports for producers, leading them to
seek higher prices to make up for the loss, this does not justify crude oil?s move beyond $130
a barrel. On May 1, 2008, the front month NYMEX WTI crude oil contract closed just under
$113 per barrel. Three weeks later the same front month NYMEX WTI contract was trading
at over $132 per barrel. In that same period of time the dollar traded between $1.50 to $1.60
against the Euro. While the Euro strengthened against the dollar, it doesn?t justify that crude
oil should have increased $19. There were no significant supply disruptions during this time
period.
U.S. destined crude oil contracts could be trading DAILY at a rate that is multiple times the
rate of annual consumption, and U.S. destined heating oil contracts could be trading daily
multiple times the rate of annual consumption. Imagine the impact on the housing market if
every single house was bought and sold multiple times every day. An October 2007
Government Accountability Office report, Trends in Energy Derivatives Markets Raise
Questions about CFTC?s Oversight, determined that futures market speculation could have
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an upward effect on prices; however, it was hard to quantify the exact totals due to lack of
transparency and recordkeeping by the CFTC.
To be able to accurately ?add up? all of the numbers, you must have full market transparency.
This is perhaps the biggest barrier to obtaining an accurate percentage calculation of the per
barrel cost of non-commercial speculative investment in crude oil, natural gas and other
energy products. Much of the non-commercial (i.e. speculators that have no direct contact
with the physical commodity) involvement in the commodities markets is isolated to the over-
the-counter markets and foreign boards-of-trade, which, due to a series of legal and
administrative loopholes, are virtually opaque.
PMAA would like to thank Congress for passing the Farm Bill (H.R. 2419), specifically, Title
XIII, which will bring some transparency to over-the-counter markets. However, the Farm Bill
is only a first step.
What the Farm Bill language does not do is repeal a letter of ?no action? issued by the CFTC
to the London based International Petroleum Exchange (IPE) which was subsequently
purchased by the Intercontinental Exchange (ICE). The letter of no action was issued since
the IPE was regulated by the United Kingdom?s Financial Services Authority (FSA), which
theoretically exercised comparable oversight of the IPE as CFTC did to NYMEX. Recently,
however, whether or not the FSA exercises ?comparable oversight? was brought into question
by CFTC Commissioner Bart Chilton. Congress needs to investigate whether or not
oversight by foreign regulators is ?comparable.? Currently, FSA doesn?t monitor daily trading
to prevent manipulation, publish daily trading information, or impose and enforce position
limits that prevent excessive speculation.
ICE is the exchange most often utilized by those who exploit the Enron Loophole. ICE is a
publicly traded exchange whose shareholders are primarily investment funds. In recent years
ICE?s trading volume has exploded at the expense of the regulated NYMEX. According to
the Securities and Exchange Commission filings, traders on ICE made bets on oil with a total
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paper value of $8 trillion in 2007, up from $1.7 trillion in 2005.3 ICE purchased IPE and will
continue to claim exemptions on various contracts whether or not the Farm bill becomes law
since they effectively have a ?get out of jail free card.?
While PMAA applauds the recent CFTC announcement that it will expand information sharing
with the U.K.?s Financial Services Agency and ICE Futures Europe to obtain large trader
positions in the West Texas Intermediate crude oil contract, more needs to be done to
prevent and deter market manipulation on all foreign boards of trade.
Congress and the Administration might also consider:
1. Closing the Administrative Foreign Boards-of-Trade Loophole via review or elimination
of CFTC ?no action letters? to overseas energy trading platforms. PMAA supports any
legislative remedy that would ensure that all off-shore exchanges be subject to the same
level of oversight and regulation as domestic exchanges such as the NYMEX when those
exchanges allow U.S. access to their platforms, trade U.S. destined commodities, or are
owned and operated by U.S. based companies.
2. Raising margin requirements (or necessary collateral) for non-commercial entities or
so-called ?non-physical players,? i.e. commodities traders and investors that do not have the
ability to take physical possession of the commodity, or otherwise incurs risk (including price
risk) associated with the commodity either in connection with their business or that of a client.
In other words, anyone who does not meet the definition of ?eligible commercial entity? under
7 USC ?1a (11). Currently, margin requirements in futures trading are as low as three
percent for some contracts. To buy U.S. equities, margin requirements are a minimum of 50
percent.
3. Requiring non-commercial traders (e.g. financial institutions, insurance companies,
commodity pools) to have the ability to take physical delivery of at least some of the product.
(Rep. John Larson (D-CT) is considering such a proposal).
3
Herbst, Moira; Speculation -- but Not Manipulation: Financial News, Business Week, May 30, 2008.
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4. Banning from the market any participant that does not have the ability to take direct
physical possession of a commodity, is not trading in order to manage risk associated with
the commodity, or is not a risk management or hedging service (again, anyone that does not
meet the statutory definition of ?commercial entity? under 7 ?USC 1a(11).
5. Significantly increase funding for the CFTC. The FY 2009 President?s budget
recommendation is for $130 million. While this is an increase from previous years, CFTC
staff has declined by 12 percent since the commission was establish in 1976, yet total
contract volume has increased over 8,000 percent. Congress should appropriate sufficient
funding to keep up with the ever changing environment of energy derivatives markets.
We and our customers need our public officials, including those in Congress and on the
CFTC, to take a stand against excessive speculation that artificially inflates energy prices.
PMAA strongly supports the free exchange of commodity futures on open, well regulated and
transparent exchanges that are subject to the rule of laws and accountability. Many PMAA
members rely on these markets to hedge product for the benefit of their business planning
and their consumers. Reliable futures markets are crucial to the entire petroleum industry.
Let?s make sure that these markets are competitively driven by supply and demand.
Thank you again for allowing me the opportunity to testify before you today.
