Good morning.  I’m pleased to join you today for this meeting of the Energy and Environmental Markets Advisory Committee (EEMAC).  I want to thank Commissioner Mersinger, her staff, and Lauren Fulks, for coordinating this event.  I also appreciate my meetings with committee members to discuss the challenges that they face.  I look forward to hearing more today about the important, and very timely, topics on the agenda.

1. The CFTC plays a critical role in the whole-of-government approach to addressing continuing challenges for U.S. and global energy infrastructure.

There have been sobering reminders recently - across the country, and around the world—of how crucial it is to have reliable, resilient energy infrastructure.

Just a few weeks ago in California, the power grid was strained when a historic heatwave pushed electricity use well beyond expected levels.  Millions of residents received cellphone alerts, urging them to reduce their power to avoid blackouts.  In 2021, the grid in Texas ended up failing during a record-breaking winter storm, costing more than 200 lives and leaving more than 4 million homes and businesses without power.

What happened with power grids in California and Texas, and other states, demonstrates that climate change is straining U.S. energy infrastructure.  Much of our energy infrastructure was built decades ago, and was not designed to withstand the frequent, extreme weather events that we are now experiencing.  This infrastructure also was not built to accommodate energy requirements of new technologies, like the transaction validation processes for some cryptocurrencies that demand a significant amount of power.[1]

In this new digital world, our energy infrastructure also faces threats from cyberattacks.  Last year, a ransomware attack on Colonial Pipeline—which operates the largest U.S. pipeline system for refined oil products—caused a multi-day shutdown that disrupted supply chains and triggered widespread gasoline shortages.  Ensuring the cybersecurity of our energy infrastructure should take on special urgency as a national security priority.  And it is also critical to protect America’s families from the economic stresses that often follow cyberattacks.

Domestically and globally, the issue of energy security has also taken center stage, as leaders rush to make sure that they have the energy supplies needed to keep families warm this winter.  This is not a question just of supply—but of adequate supply.  Without an adequate supply of energy, inevitably skyrocketing prices will raise costs for families, forcing many to choose between life’s essentials, like food and medicine, and keeping their families warm through the winter.

Recent events make clear the effect that disruptions or vulnerabilities in energy infrastructure can have on prices.  Prices for electricity and natural gas surged during the grid crisis in Texas last year.  The Colonial Pipeline disruption brought gasoline prices to levels that had not been seen in seven years, but we’ve seen prices that are much higher than that since Russia’s invasion of Ukraine.  By the end of the first quarter of 2022, prices had doubled for crude oil, tripled for coal, and increased more than five times for natural gas, as compared to early 2021.[2]  Price increases and volatility have a real, direct impact on American families and businesses who have to make hard choices about how to spend limited earnings.

A whole-of-government approach is required to address the continuing challenges for U.S. and global energy infrastructure.  For its part, the CFTC plays a critical role to ensure that the markets for key energy commodities are not distorted through fraud or manipulation and that the derivatives markets are fair and orderly, performing their essential price discovery and risk management functions. 

2. The CFTC should support and protect the integrity of the markets for commodity components essential to the transition to renewable energy sources.

A related challenge is the U.S.’s transition to an economy powered by more renewable energy sources.  As the U.S. continues its transition towards more renewable energy sources, we must be mindful of the need for reliability.  Renewable sources of energy like wind and solar require storage technology, because the amount of power that they produce—over a day, or a week, or a season—may not be consistent.  Storage technology, in turn, depends on reliable access to key commodity components, like lithium, copper, and nickel, that serve as inputs to battery production.  Reliable access to these components will help companies scale battery production to support the U.S. and global transition to renewable energy sources.

It is important for the CFTC to understand vulnerabilities in the markets for the commodity components that are essential to battery production.  The CFTC must police those commodity markets to ensure that they are not distorted by fraud and manipulation.  Recent dramatic increases in battery component prices highlight the need to ensure the integrity of derivatives markets and their critical risk management and price discovery functions.

As our nation continues to develop storage technology and innovations to harness and transmit renewables at scale, we will likely need to look to a combination of renewable and traditional energy sources to meet our needs.  Even so, we must continue to prioritize—and create incentives for—the transition to green energy.  A cornerstone of that effort will be protecting our infrastructure and key commodities and derivatives markets to ensure we have the capacity and resilience to support the transition and to provide reliable access to affordable, clean energy to Americans across the country.[3]

3. The CFTC must ensure that excessive speculation does not distort, and worsen challenges in, agricultural, energy, and metals commodity markets.

Unfortunately, the challenges for hardworking families extend well beyond those presented by the energy markets.  In the last two years, commodities prices have broadly skyrocketed.  From 2020 lows, food prices have soared 84 percent, fertilizer prices have risen an astonishing 220 percent, and, as I have discussed, energy prices have climbed sharply and in some cases, reached all-time highs.[4]  American families face increasingly painful choices when they go to the grocery store to feed their families, when they fill up their car and make decisions on how far they will drive (although there has been some recent relief as gas prices have been dropping), and when they determine how much energy they can use in their homes.  In sharp contrast, according to a recent study by Vali Analytics, Wall Street’s biggest banks, commodity trading houses, and commodity-focused hedge funds are making record profits on commodities trading this year.[5]

Our nation’s farmers and producers are also bearing this burden.  In August, I went on a listening tour, visiting farmers and producers in Michigan and Arkansas.  A consistent theme was that our farmers have to make hard choices.  Farmers talked about trying to limit their fertilizer use as the cost of natural gas reached historical highs, and how this will lead to reduced crop production—crops that feed the world.  Producers told me that some farmers cannot afford the fuel costs to drive long distances to reach those that buy their crops.  Universally, I heard from farmers and producers that they expected the CFTC to fulfill its core mission—to protect the integrity of the commodity futures markets, to ensure that prices reflect the legitimate forces of supply and demand, and to combat excess speculation and manipulation.

The CFTC has an impressive surveillance program and an equally impressive cadre of commodity markets experts to rely upon as it seeks to understand these pressures of working families, farmers, and producers.  We should use them more, and more publicly.  That is why, in an internal meeting several weeks ago, I recommended that the CFTC conduct deep-dive studies to look at trading in a number of key commodities that have been experiencing significant volatility or price increases and publicly release our findings.  I reiterate my recommendation today, publicly.

I propose that the Commission conduct a series of deep-dive studies in key commodities markets, starting with those that have been experiencing the most recent stress—natural gas, crude oil, and wheat.  The CFTC has a significant amount of data and expertise at our disposal, and the objective of these reports would be supportive of our core mission:  To study whether prices are being determined by market fundamentals.

We should not overlook any factor that might contribute to increased food, energy, and metals costs.  And we should not assume that we can rely on previous conclusions without confirming those conclusions based on an independent review and analysis of the available data.  The series of studies I propose would examine all material elements driving volatility and pricing in key commodities.  One element of the studies should include an examination of the market presence of passive investment vehicles and other speculators, as well as dealers, to ensure they are providing useful liquidity or serving other useful functions and not distorting markets or otherwise undermining the price discovery process.

We should report our findings publicly.  CFTC studies would lead to greater public and market confidence that our markets are serving their price discovery and risk management functions and prioritizing the interests of the farmers, ranchers, and producers who provide food, fiber and fuel for the world.  It would show the world that the Commission is performing its responsibility as a market regulator to actively monitor the appropriateness, and application, of its rules.  Finally, this important work would ensure that American families are not paying artificially increased prices due to excess speculation.

Thank you again to Commissioner Mersinger for sponsoring the important work of this committee.  I look forward to the presentations.

[1] See, e.g., The White House Office of Science and Technology Policy, Climate and Energy Implications of Crypto-Assets in the United States (Sept. 8, 2022), available at 09-2022-Crypto-Assets-and-Climate-Report.pdf (whitehouse.gov).

[2] Ari, A., Arregui, N., Black, et al., Surging Energy Prices in Europe in the Aftermath of the War: How to Support the Vulnerable and Speed up the Transition Away from Fossil Fuels, International Monetary Fund Working Paper 2022/152 (2022).

[3] Along with new tax benefits for renewables and transition-related infrastructure, the Inflation Reduction Act allocates $5 billion in loans to finance repurposing or converting energy infrastructure.  Additionally, the Infrastructure Investment and Jobs Act provides $73 billion to upgrade power infrastructure to improve reliability and resiliency, and to facilitate the expansion of renewable energy.  It also authorizes more than $7 billion to strengthen the U.S. battery supply chain and $7.5 billion in grants to build out a national charging infrastructure for electric vehicles.

[4] World Bank Group, Commodity Markets Outlook: The Impact of the War in Ukraine on Commodity Markets, World Bank, Washington, DC., License: Creative Commons Attribution CC BY 3.0 IGO (Apr. 2022), available at Commodity Markets Outlook (worldbank.org).

[5] See, e.g., W. Shaw, J. Farchy, Wall Street’s Commodity Traders on Track to Break Profit Records, Bloomberg (Sept. 9, 2022) (noting that bank, trading house, and hedge fund commodity trading profits are the highest they have been in 14 years, even as prices and volatility push some nations into an energy crisis), available at https://www.bloomberg.com/news/articles/2022-09-09/wall-street-s-commodity-traders-on-track-to-break-profit-records?leadSource=uverify%20wall.