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Congress Looks for a Culprit for Rising Oil Prices

June 25, 2008

Congress Looks for a Culprit for Rising Oil Prices

With Americans growing angrier by the day about high gasoline prices, nobody can accuse Congress of turning a deaf ear.

On Wednesday lawmakers will hold their 40th hearing so far this year on the cause of high oil prices. Filing bills on Capitol Hill to combat the problem is becoming a cottage industry, with clever names like the Prevent Unfair Manipulation of Prices Act, or PUMP Act, and the No Excuses Energy Act.

Until recently, lawmakers had focused on the traditional suspects: oil companies and the Organization of the Petroleum Exporting Countries. But increasingly, they are casting a suspicious eye on the role of investors, including speculators, in driving up prices.

As the ninth hearing of the month gets under way on Wednesday, one of the nation’s best-known energy experts, Daniel Yergin, is expected to tell Congress that the focus on speculation is largely misguided.

Mr. Yergin will join numerous other energy experts who have declared that the rise in oil prices can be explained by basic economic factors, such as the limited growth in supplies in recent years, a weakening dollar, a global surge in energy demand and a string of production disruptions in countries like Nigeria.

“When an issue is this hot, it would be so much easier if there was a single reason to blame,” Mr. Yergin said in an interview on Tuesday, previewing his testimony before Congress.

“The oil shock is real and is about the hottest political issue right now,” he said. “So Congress feels the pressure to do something but there is not much it can do to promote peace in Nigeria or to get the value of the dollar to go up.”

Mr. Yergin is the chairman of Cambridge Energy Research Associates, a consulting firm, and the Pulitzer Prize-winning author of “The Prize,” an authoritative history of the oil business. He will speak on Wednesday before the Joint Economic Committee, headed by Senator Charles E. Schumer, Democrat of New York.

Mr. Yergin said the market is relentlessly bidding up oil prices in response to deep-seated fears that the growth in demand will keep outpacing the growth in oil supplies in coming years.

“There is a shortage psychology in the financial markets and that is reflected in the price of oil,” Mr. Yergin said in the interview. “You are seeing a lot of people who have never invested in commodities who are now piling into the market. But calling it speculation is way too simplistic.”

What role financial institutions — pension funds, mutual funds, and hedge funds, among others — are playing in driving up the price of oil to nearly $140 a barrel remains a key question. Regulators in Washington have acknowledged that they do not have enough information on speculative trading in commodity markets. Even though the evidence is incomplete, speculators have nonetheless become prime targets for legislative action.

Gasoline prices now average $4.07 a gallon, up more than $1 a gallon in the past year, according to AAA, the automobile group. The price of oil — the main reason behind the run-up in gasoline prices — has doubled in the past year, settling Tuesday at $137 a barrel on the New York Mercantile Exchange, up 26 cents.

There is little doubt that investments in commodity markets have grown in recent years as investors sought assets offering better returns than stocks, bonds or currencies. Investors, faced with a weakening dollar, a slowing economy and rising inflation, found a hedge in crude oil.

Some analysts who testified before a House panel on Monday estimated that oil prices could fall to around $60 a barrel if speculators were driven out of the commodity market.

But others warned that assessing how much, if at all, investors have pushed up prices is an impossible task. Relatively little is known about oil investments in some lightly regulated markets, like the IntercontinentalExchange, an electronic exchange based in Atlanta that has gained prominence as an energy marketplace.

Facing mounting pressure to step up its oversight, the Commodity Futures Trading Commission, in Washington, said that it had recognized the need for better information. Its acting chairman, Walter L. Lukken, said his agency was seeking more trading data from exchanges in both the United States and abroad.

Senator Schumer’s committee provided an advance copy of Mr. Yergin’s prepared testimony. In it, Mr. Yergin did not discount the rising role of investors in energy markets. But he said their presence was more a consequence than a cause of the tight markets.

“Financial markets are today playing an increasingly important role in price formation — responding to, accentuating, and exaggerating supply and demand, geopolitics, and other trends,” Mr. Yergin says in the prepared remarks.

But he pointed to a variety of other factors that have made the run-up possible. Nigeria, for example, is producing one million barrels a day less than its production capacity because of disruptions caused by attacks in the oil-rich Niger Delta. Production has stagnated in countries like Russia and Venezuela and is even plunging in places like Mexico.

All these factors have left the global oil industry with little capacity to boost supplies. There is now less than two million barrels a day of unused capacity, a safety cushion that has declined from about five million barrels a day in 2002.

“In a tight market, prices go up,” Mr. Yergin said. “And a tight market is also a market that is more crisis-prone, more vulnerable to the impact of disruptions.”

Senator Schumer, in an interview, said he could see no easy answers to high oil prices.

“Everyone would like to believe that there is a silver bullet — like a bubble or speculation — that can solve our oil problem,” he said. Instead, he said, it would be better for the nation to focus on conserving energy and reducing its oil consumption.

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