TODAY'S OIL PRICE & SPECULATION

[Byrne]

PERHAPS 60% OF TODAY'S OIL PRICE IS PURE SPECULATION


By F. William Engdahl, 2 May 2008

source



The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?
First, the role of the international oil exchanges in London and New York is crucial to the game. Nymex in New York and the ICE Futures in London today control global benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via oil futures contracts on two grades of crude oil―West Texas Intermediate and North Sea Brent.

A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai crude, is more or less a daughter of Nymex, with Nymex President, James Newsome, sitting on the board of DME and most key personnel British or American citizens.

Brent is used in spot and long-term contracts to value as much of crude oil produced in global oil markets each day. The Brent price is published by a private oil industry publication, Platt’s. Major oil producers including Russia and Nigeria use Brent as a benchmark for pricing the crude they produce. Brent is a key crude blend for the European market and, to some extent, for Asia.

WTI has historically been more of a US crude oil basket. Not only is it used as the basis for US-traded oil futures, but it's also a key benchmark for US production.


’The tail that wags the dog’

All this is well and official. But how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper oil.”

With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices.

Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. It is a classic case of the “tail that wags the dog.”

A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”

What the Senate committee staff documented in the report was a gaping loophole in US Government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.

The Senate report was ignored in the media and in the Congress.

The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states, “Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.”

Further, the CEA directs the CFTC to establish such trading limits “as the Commission finds are necessary to diminish, eliminate, or prevent such burden.” Where is the CFTC now that we need such limits?

They seem to have deliberately walked away from their mandated oversight responsibilities in the world’s most important traded commodity, oil.


Enron has the last laugh…

As that US Senate report noted:


“Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called “futures look-alikes.”

The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.

The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. CFTC Chairman Reuben Jeffrey recently stated: “The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”

In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (“open interest”) at the end of each day.”

Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the Bush Administration’s CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London – called “ICE Futures.”

Previously, the ICE Futures exchange in London had traded only in European energy commodities – Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange.


The CFTC opens the door

Then, in January 2006, ICE Futures in London began trading a futures contract for West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. ICE Futures as well allowed traders in the United States to trade US gasoline and heating oil futures on the ICE Futures exchange in London.

Despite the use by US traders of trading terminals within the United States to trade US oil, gasoline, and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts.

Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

Is that not elegant? The US Government energy futures regulator, CFTC opened the way to the present unregulated and highly opaque oil futures speculation. It may just be coincidence that the present CEO of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts.

A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controlled by a USA company based in Atlanta Georgia.

In January 2006 when the CFTC allowed the ICE Futures the gaping exception, oil prices were trading in the range of $59-60 a barrel. Today some two years later we see prices tapping $120 and trend upwards. This is not an OPEC problem, it is a US Government regulatory problem of malign neglect.

By not requiring the ICE to file daily reports of large trades of energy commodities, it is not able to detect and deter price manipulation. As the Senate report noted, “The CFTC's ability to detect and deter energy price manipulation is suffering from critical information gaps, because traders on OTC electronic exchanges and the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.”

The report added, “ICE's filings with the Securities and Exchange Commission and other evidence indicate that its over-the-counter electronic exchange performs a price discovery function -- and thereby affects US energy prices -- in the cash market for the energy commodities traded on that exchange.”


Hedge Funds and Banks driving oil prices

In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge against them. Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC defines a speculator as a person who “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.”

The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.


Perhaps 60% of oil prices today pure speculation

Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.

In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.

That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.

By purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.

As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.

Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.

Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”


Dollar and oil link

A common speculation strategy amid a declining USA economy and a falling US dollar is for speculators and ordinary investment funds desperate for more profitable investments amid the US securitization disaster, to take futures positions selling the dollar “short” and oil “long.”

For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains. The backdrop that supports the current oil price bubble is continued unrest in the Middle East, in Sudan, in Venezuela and Pakistan and firm oil demand in China and most of the world outside the US. Speculators trade on rumor, not fact.

In turn, once major oil companies and refiners in North America and EU countries begin to hoard oil, supplies appear even tighter lending background support to present prices.

Because the over-the-counter (OTC) and London ICE Futures energy markets are unregulated, there are no precise or reliable figures as to the total dollar value of recent spending on investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars.

The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years. Notable is the fact that the US Treasury Secretary, Henry Paulson, is former Chairman of Goldman Sachs.

[Byrne]

Ahmadinejad says market full of oil, prices artificial
Tue Jun 3, 2008 10:44am EDT

ROME (Reuters) - The global market is "full of oil" and rising crude prices are being artificially driven by forces trying to further their geopolitical aims, Iranian President Mahmoud Ahmadinejad said on Tuesday.

"While the growth of consumption is lower than that of production and the market is full of oil, prices continue to rise and this situation is completely manipulated," Ahmadinejad said in his address to a U.N. food summit in Rome.

Without naming countries, the Iranian leader said "hidden and unhidden hands are at work to control the prices mendaciously to pursue their political and economic aims."

He said the goal of "powerful and international capitalists" was to keep the price of oil and energy "artificially high" in part to justify new explorations in the North Pole and the deep seas.

In an apparent reference to the United States, he said the international community should have a mechanism to force "the bullying powers to resort to peace and amity instead of occupation and warmongering...."

(Reporting by Robin Pomeroy)

http://www.reuters.com/article/gc08/idU ... 2720080603

[nathan28]

I am on the fence about the "60% speculation" argument. While it is accurate that the amount of money in commodities trading of all stripes, especially oil, has increased dramatically, inventories are still clearing: we aren't seeing hoarding behavior. That suggests a revaluation is happening, which partly explains the seeming strength of the dollar vs. other currencies: paper money is looking like trash.

Consider that oil is clearing, and that people are okay with $4 gas--at least okay enough to keep driving--and and compare this with the housing market, where we did see hoarding behavior of a sorts--people buying mulitple houses with zero down, essentially using leverage in a way not unlike commodities futures and options. They got burnt; commodities have yet to come down significantly.

That said, all in all this looks like a crack-up boom.

[geogeo]

Every time oil and gas go higher there is a new set of bogus reasons for the sheeple to swallow. The fact is that Chinese and Indian demand is exploding, but production is level at 85 million. There is an elaborate and well-substantiated theory called peak oil, which actual explained all that is happening years. The game being played right now is to help consumers ease into higher and higher prices without creating a total friggin panic. 'Reasonable' NPR listeners and suchlike have no problem with that. Mellow out, dude--everything is going to be OK. Within each oil barrel price period there is generally a dominant narrative--which changes when a threshold is passed--and several secondary narratives that carry through into the next threshold.

The dominant narratives tend to provide an overall sense of reassurance that this is temporary, and that things will get better: for example, in the 50-85 dollar range, we were reminded in every single article that it wasn't as high as prices in 1979 adjusted for inflation. We were also told by very, very wealthy analysts that prices would never top that barrier of 100 dollars, market forces would compensate, supply and demand, and etc. In those days no one talked about speculators and hedge funds. Woven in was the fact that it was post-9-11, new kind of war, world was changing, all that stuff. We're not so petty as to complain about oil prices that much, because after all bottled water is more expensive. Anyway, if it ever did get really, really expensive, the economy would adjust, and we would transition to a post-oil economy.

But as oil prices kept spiking higher, we passed 100, then went into uncharted territory, then spent a good amount of time below 120. Secondary narratives helped the transition, as they always help day-to-day explanations:

--Nigeria
--Hugo Chavez
--summer driving season
--at other times, it's been hurricanes in the gulf

But now we're spiking higher and higher, and the predictions are getting wild, and so for a while the narrative seemed to be something involved with food vs. fuel crops and the dollar and what-have-you, but they are madly scrambling for something--a dominant narrative and several subordinate narratives-- that can make us feel comfortable with spiralling fuel costs basically until everything is better gain, because of course everything WILL get better, since, historically, no one who has ever predicted the downfall of a civilization has ever been right...

--Speculation, hedge funds, greedy rich people
--OPEC (as always!)
--Lack of refinery capacity=blame the environmentalists
--Lack of offshore drilling and in ANWR--blame the treehuggers
--Fuel subsidies (ooh--THAT's a big one! Most people in third world countries pay far more than we do and earn 1/10 as much money. Ass holes!)

I feel a master narrative emerging that will sooth us and all those millions of investors out there (the rich) and get us to acquiesce; some combination of the above. Plus we'll always have Nigeria and Chavez to explain those short-term spikes.

[slow_dazzle]

There is some evidence of speculative capital having flown to safer havens such as commodities, after the collapse of the mortgage investment market from around August of last year. That has probably forced the price higher than might have been the case, absent the upward pricing effect of investment capital bidding up oil futures. However, the same trend is observable in other commodities such as copper and fertiliser. As regards the latter the Chinese government has bid 300% over market price for potash, which is a crop yield booster.

Engdahl's logic is, however, flawed in that he fails to take account of the effect of demand within a tight market. All the evidence points to oil output being flat since 2005. So the supply seems to have hit the plateau. Dropping the price by removing the upward pressure of speculative capital will do absolutely NOTHING to increase supply because the supply has peaked. What would happen if the premium created by hedge funds and others was removed is more buyers would re-enter the market. The lack of supply to meet the additional demand thus created would simply drive the price upwards once again. In a market economy prices rise if demand exceeds supply. Period.

Oil futures for the end of 2008 are at $200 right now and if that is borne out the economic fallout will be really serious. Oil prices jumped $10 in one day last Friday so $200 per barrel by the end of the year looks like a distinct possibility. When it hits $300 the consensus is the global economy will simply shut down.

And oil is still cheaper than bottled water.

[smiths]

the truth is that no-one knows how much is the ground,

theres a few saudi geologists that have an idea, and thats it,

beyond that its speculation,
so william endghal is guessing like everyone else,

yes theres speculative money in there, how much? fuck knows

[nathan28]

Every time oil and gas go higher there is a new set of bogus reasons for the sheeple to swallow. The fact is that Chinese and Indian demand is exploding, but production is level at 85 million. There is an elaborate and well-substantiated theory called peak oil, which actual explained all that is happening years. The game being played right now is to help consumers ease into higher and higher prices without creating a total friggin panic. 'Reasonable' NPR listeners and suchlike have no problem with that...

Anyway, if it ever did get really, really expensive, the economy would adjust, and we would transition to a post-oil economy...

Secondary narratives helped the transition, as they always help day-to-day explanations...

I feel a master narrative emerging that will sooth us and all those millions of investors out there (the rich) and get us to acquiesce; some combination of the above.

Unless you actually are analyzing a market's fundamentals, or at the least supply and demand, the only thing that matters--the only thing--is price. You buy for a price and sell for a price. "Why" is largely horseshit--they call prices fluctuating over some narrative "news noise" for a reason. Prices change over speculator's perceptions of supply and demand. The fact that a giant infotainment industry has sprung up around financial markets only makes the narrative-factory that much more ridiculous. It might be a psy-op. But it might also just be some fourth-string glorified sports commentators and tarted-up news girls trying to fill dead air. Maybe a little of both.

[Eldritch]

Every time oil and gas go higher there is a new set of bogus reasons for the sheeple to swallow. The fact is that Chinese and Indian demand is exploding, but production is level at 85 million. There is an elaborate and well-substantiated theory called peak oil, which actual explained all that is happening years. The game being played right now is to help consumers ease into higher and higher prices without creating a total friggin panic. 'Reasonable' NPR listeners and suchlike have no problem with that...

Anyway, if it ever did get really, really expensive, the economy would adjust, and we would transition to a post-oil economy...

Secondary narratives helped the transition, as they always help day-to-day explanations...

I feel a master narrative emerging that will sooth us and all those millions of investors out there (the rich) and get us to acquiesce; some combination of the above.

Unless you actually are analyzing a market's fundamentals, or at the least supply and demand, the only thing that matters--the only thing--is price. You buy for a price and sell for a price. "Why" is largely horseshit--they call prices fluctuating over some narrative "news noise" for a reason. Prices change over speculator's perceptions of supply and demand. The fact that a giant infotainment industry has sprung up around financial markets only makes the narrative-factory that much more ridiculous. It might be a psy-op. But it might also just be some fourth-string glorified sports commentators and tarted-up news girls trying to fill dead air. Maybe a little of both.

Thank you, Nathan. I think you're right.

[Byrne]

It does seem that the (governmental) regulation/controls to prevent the manipulation of the oil price have been removed, as Engdahl pointed out. The following article details some of the early legislative changes.

"What’s been happening since 2004 is very high prices without record-low [oil] stocks. The relationship between U.S. [oil] inventory levels and prices has been shredded and become irrelevant."

— Jan Stuart, Global Oil Economist, UBS Securities

"What you have on the financial side is a bunch of money being thrown at the energy futures market. It’s just pulling in more and more cash. That’s the side of the market where we have runaway demand, not on the physical side."

— Tim Evans, Senior Oil Analyst, IFR Energy Services [From testimony: U.S. Senate Permanent Subcommittee on Investigations’ report, "The Role of Market Speculation in Rising Oil and Gas Prices," June 27, 2006]

The Love of Money

Record high prices without record low oil inventories, analysts saying that so much money flows into oil commodities that it gives the impression of shortages, when in fact no shortage exists. That mirrors the situation in the commodities market for food, as Bloomberg pointed out in its April 28 article, "Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin": "Commodity investors control more U.S. crops than ever before, competing with governments and consumers for dwindling food supplies." That’s right; food, oil and gasoline have become an "asset class." No longer are you fighting a neighbor at the supermarket over the last box of Cheerios®; now you’re fighting the futures traders, who are actually determining what you will pay for that cereal.

We started as a society that worships hard labor and the basic business ethic of building value into the goods you create. How’d we get from there to worshiping Wall Street’s billion-dollar boys — who create nothing, build nothing, own nothing and deliver no goods, and yet can throw so much money into products made by others that they determine what we consumers will pay for those goods?

It wasn’t always this way.

In the past, the Commodities Futures Trading Commission acted as the cop on the beat, ensuring that buyers in the market were not distorting or manipulating prices beyond what supply and demand normally dictate. Certainly, if a hard frost hit Florida and cost growers an orange crop, then bidding up the price of the remaining oranges was both a wise investment and allowed under the trading rules. Right now investors know that if they borrow and invest huge amounts in commodities futures, they can create a shortage on paper – which drives prices up just like an actual shortage of any given product would. What kept traders from cornering the market that way in the past were the government’s anti-manipulation rules.

Lay, DeLay, Gramm, Gramm & Clinton

The late, infamous Enron head, Ken Lay, realized in the eighties that he could make more money bidding up energy in the futures market than by actually creating and selling energy. But, under then-current rules, how much you could make swapping paper was limited. Fortuitously, Lay had excellent Texas political connections; and in November of 1992, the head of the Commodities Futures Trading Commission moved to exempt energy-derivative contracts and related swaps from any government oversight.

A vote was hurriedly put together before the Clinton White House would take over, and so Lay could finally start "dark" – unregulated – futures trading. The head of the CFTC was Wendy Gramm, wife of Texas Senator Phil Gramm; five weeks after she left, she became a board member of Enron in Houston.

Fast-forward to late 2000 and H.R. 5660, the Commodity Futures Modernization Act of 2000, sponsored by Republican Congressman Thomas Ewing of Illinois. That bill went nowhere, even though Tom Delay’s wife Christine was then working for a Washington lobbying firm, Alexander Strategies – which Enron had paid $200,000 to push through legislation for permanent energy deregulation in these "dark" markets.

Six months later came Senate Bill 3283, also named the Commodity Futures Modernization Act of 2000. This time around the sponsor was Republican Sen. Richard Lugar of Indiana, and now Phil Gramm was listed as one of the bill’s co-sponsors. Like it had in the House, this bill was destined to go nowhere until, late one night, it was attached as a rider to an 11,000-page appropriations bill – which was signed into law by President Clinton.

Now traders had an officially deregulated market for energy futures. Worse, that bill also deregulated many financial instruments – including the collateralized debt obligations that are at the center of today’s mortgage crisis, which may well cost us more than $1 trillion before it’s over.

Everybody Was Warned!

As USA Today wrote of this fiasco in January of 2002, "But, as a power marketer, [Enron] could buy enough energy-futures contracts in a region to create a virtual monopoly." That’s right: As early as the winter of 2002, it was widely known that the 2000 Commodities Futures Modernization Act had created a monster, capable of running up energy prices outside of the normal law of supply and demand. Worse, our government had been warned this was going to happen. Representatives of the Federal Reserve, the Securities and Exchange Commission and the CFTC had already told Congress not to deregulate energy because "the market was ripe for manipulation." Everybody was warned; that’s why this deregulation bill was stealthily inserted into that appropriations bill without a floor debate.

Phil Gramm’s office denied that he had anything to do with writing the section of that bill that actually deregulated energy. And yet Prof. Michael Greenberger, formerly a CFTC board member himself, said that Gramm’s wife Wendy, along with a few lobbyists and Wall Street attorneys, had rewritten it. When Robert Manor of the Chicago Times wrote about this situation on January 18, 2002, neither Gramm could be reached for comment.

Kill It Before It Multiplies

When Enron failed and took its private, unregulated energy exchange to the grave, another rose to take its place. The Intercontinental Exchange (ICE) was the brainchild of Morgan Stanley, Goldman Sachs, British Petroleum, Deutsche Bank, Dean Witter, Royal Dutch Shell, SG Investment Bank and Totalfina. In 2001 ICE purchased the International Petroleum Exchange in London; renamed ICE Futures, it now operates as an "exempt commercial market" under section 2(H)(3) of the Commodity Exchange Act. As the Senate hearings pointed out in the summer of 2006, "Both markets operate outside of any CFTC oversight."

If you reread the quotes at the start of this story again, you find that many officials in the government warned against what would happen in a deregulated energy market, because it was so easy to manipulate. We already know this to be true thanks to Enron’s California misdeeds. And, as we pointed out last week, British Petroleum was busted for manipulating the propane market and fined over $300 million; and Amaranth Partners was caught manipulating the natural gas market, unconscionably causing the futures price for natural gas to raise every Texan’s electric bills. (It took two years for Amaranth to be exposed.) And yes, the manipulation happened in the new "dark" and unregulated exchanges, making it almost impossible to uncover. So it’s not a question of "if" some "theoretically possible" manipulation and distortion of the market will result from this bill, championed by Phil Gramm, his wife Wendy and Christine Delay’s employer, Alexander Strategies. The reason it is not theoretical is because we keep catching well-known companies doing it on a regular basis.

No Conscience in Congress?

All you hear daily is that the world has a severe shortage of oil, or you can buy only 200 pounds of rice at one time, or we will have a gasoline crisis this summer, etc. But it takes only a minute to find hundreds of quotes from highly respected oil and economic analysts, (not to mention CEOs of the major oil companies), that completely dismiss the claim of oil, gas or food shortages that have been headlining the news.

Even more troubling is that within months of the CFMA’s going into effect, we knew it had enabled easy manipulation of any energy market, but nothing was done to fix it. Nor was anything done when the Senate held its hearings on this matter in 2006, or in the House hearings last December.

Today we call this situation the "Enron Loophole," but that’s untrue. It’s not a loophole: it was a new law passed in 2000 – and far more individuals than Ken Lay have used that law to line their pockets with hundreds of billions of American consumers’ hard-earned dollars. That’s not my opinion, that’s direct testimony by numerous experts before both the House and Senate.

Professor Greenberger warned about our "New American Economy" far better than I could:

"Should we have an economy that’s based on whether people make good or bad bets? Or should we have an economy where people build companies, create manufacturing, do inventions, advance the American society and make it more productive? We are rewarding people for sitting at their computers and punching in bets. That’s not the way our economy is going to be built, and India and China, with their focus on science and industry and building real businesses, are going to eat our lunch, unless the American public wakes up and puts an end to an economy that praises and makes heroes out of speculators."

Greenberger’s statement explains why Detroit and other American manufacturers suffer while Wall Street speculators make a fortune — and your rapidly shrinking checkbook pays for it, every time you buy food, fuel or feed.

All because there is no shortage of these goods, you’re just being told there is because it’s more profitable – for a few – that way.

Everybody was warned; that’s probably why this deregulation bill was stealthily inserted into that appropriations bill without a floor debate.

© 2008 Ed Wallace

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society.

http://www.star-telegram.com/ed_wallace ... 59081.html

[stickdog99]

Why does demand exceed supply? Because we are doing everything we can to keep Iraq's oil in the ground (very limited production) and Iran's oil in Iran (no nuclear power). Because high oil prices are taking money from lower and middle classes and putting it in the portfolios of the super wealthy.

[Byrne]

UK to examine oil market trading as prices soar
By Philip Aldrick
Last Updated: 12:55am BST 04/07/2008



Regulation of Britain's oil markets will come under political scrutiny later this month amid concerns that the spike in prices is being driven by speculators.

News that the powerful Treasury Select Committee has called a hearing into the market's regulation for "mid-July" came as Brent crude rose above $145 a barrel in London - a new high - and Gordon Brown warned oil prices may keep climbing.

The hearing is a first response to mounting pressure on politicians to take action over oil prices. America has attempted to curb speculation by imposing checks on London's oil traders through the Commodity Futures Trading Commission, leading to accusations of US imperialism.

US senators have blamed rising oil prices on "manipulation and excessive speculation" in the London oil market.

Speaking at his approval hearing before the TSC on Wednesday, Lord Turner of Ecchinswell, the incoming chairman of the Financial Services Authority, confirmed that "speculation is an issue that needs to be looked at". "So far there is no large evidence that speculation is playing a significant role in the oil price. There are a set of fundamental reasons on supply and demand as to why we have the spike in oil prices today."

The Prime Minister told the Commons Liaison Committee yesterday: "If demand succeeds supply and is likely to exceed supply for years to come, people will expect the price to rise."

The gloomy predictions came as Leeds-based haulage firm Macfarlane Transport collapsed into administration, risking the loss of 300 jobs, according to administrators KPMG.

UK drivers face further pain, with every $2 rise adding about 1p to petrol prices, according to the AA.

[stefano]

As good a thread as any to post this good leader in the new Economist, I guess. Nice read overall, but I reckon the board will be most interested in the countries at risk of serious destabilisation from cheap oil - Venezuela and Iran, and, if prices stay low, eventually Russia - and in two of the main drivers of the sudden drop - the Saudis turning open the taps and hedge funds selling some of their futures contracts.

Cheaper oil: Many winners, a few bad losers

A lower price will boost the world economy and harm some unpleasant regimes—but there are risks
Oct 25th 2014 | From the print edition

THE collapse of the Soviet Union in 1991 had many causes. None was as basic as the fall in the price of oil, its main export, by two-thirds in real terms between 1980 and 1986. By the same token, the 14-year rule of Vladimir Putin, heir to what remained, has been bolstered by a threefold rise in the oil price.

Now the oil price is falling again. Since June, it has dropped from about $115 for a barrel of Brent crude to $85 or so—a reduction of roughly a quarter. If prices settle at today’s level, the bill for oil consumers will be about $1 trillion a year lower. That would be a shot in the arm for a stagnating world economy. It would also have big political consequences. For some governments it would be a rare opportunity; for others, a threat.



The scale of shale

Predicting oil prices is a mug’s game (we speak from experience). The fall of the past three months is partly the result of unexpected—and maybe short-lived—developments. Who would have guessed that chaotic, war-torn Libya would somehow be pumping 40% more oil at the end of September than it had just a month earlier? Saudi Arabia’s decision to boost output to protect its market share and hurt American shale producers and see off new developments in the Arctic was also a surprise. Perhaps the fall was exaggerated by hedge-fund investors dumping oil they had been holding in the false expectation of rising prices.

Geopolitical shocks can surprise on the upside as well as the down. Saudi Arabia may well decide to resume its self-appointed post as swing producer and cut output to push prices up once more. With war stalking Iraq, Libya still fragile and Nigeria prey to insurgency (see article), supply is vulnerable to chaotic forces.

But many of the causes of lower prices have staying power. The economic malaise weighing down on demand is not about to lift, despite the tonic of cheaper oil (see article). Conservation, spurred by high prices and green regulation, is more like a ratchet than a piece of elastic. The average new car consumes 25% less petrol per mile than ten years ago. Some observers think the rich world has reached “peak car”, and that motoring is in long-term decline. Even if they are wrong, and lower prices encourage people to drive more, energy-saving ideas will not suddenly be uninvented.

Much of the extra supply is baked in, too. Most oil investment takes years of planning and, after a certain point, cannot easily be turned off. The fracking revolution is also likely to rage on. Since the start of 2010 the United States, the main winner, has increased its output by more than 3m barrels per day to 8.5m b/d. Shale oil is relatively expensive, because it comes from many small, short-lived wells. Analysts claim that a third of wells lose money below $80 a barrel, so shale-oil production will adjust, helping put a floor under the price. But the floor will sag. Break-even points are falling. In past price squeezes, oilmen confounded the experts by finding unimagined savings. This time will be no different.

For governments in consuming countries the price fall offers some budgetary breathing-room. Fuel subsidies hog scandalous amounts of money in many developing countries—20% of public spending in Indonesia and 14% in India (including fertiliser and food). Lower prices give governments the opportunity to spend the money more productively or return it to the taxpayers. This week India led the way by announcing an end to diesel subsidies. Others should follow Narendra Modi’s lead.

The axis of diesel

For those governments that have used the windfall revenues from higher prices to run aggressive foreign policies, by contrast, things could get uncomfortable. The most vulnerable are Venezuela, Iran and Russia.

The first to crack could be Venezuela, home to the anti-American “Bolivarian revolution”, which the late Hugo Chávez tried to export around his region. Venezuela’s budget is based on oil at $120 a barrel. Even before the price fall it was struggling to pay its debts. Foreign-exchange reserves are dwindling, inflation is rampant and Venezuelans are enduring shortages of everyday goods such as flour and toilet paper.

Iran is also in a tricky position. It needs oil at about $140 a barrel to balance a profligate budget padded with the extravagant spending schemes of its former president, Mahmoud Ahmedinejad. Sanctions designed to curb its nuclear programme make it especially vulnerable. Some claim that Sunni Saudi Arabia is conspiring with America to use the oil price to put pressure on its Shia rival. Whatever the motivation, the falling price is certainly having that effect.

Compared with these two, Russia can bide its time. A falling currency means that the rouble value of oil sales has dropped less than its dollar value, cushioning tax revenues and limiting the budget deficit. The Kremlin can draw on money it has saved in reserve funds, though these are smaller than they were a few years ago and it had already budgeted to run them down. Russia can probably cope with today’s prices for 18 months to two years, but the money will eventually run out. Mr Putin’s military modernisation, which has absorbed 20% of public spending, looks like an extravagance. Sanctions are stifling the economy and making it hard to borrow. Poorer Russians will be less able to afford imported food and consumer goods. If the oil price stays where it is, it will foster discontent.

Democrats and liberals should welcome the curb the oil price imposes on countries like Iran, Venezuela and Russia. But there is also an increased risk of instability. Iran’s relatively outward-looking president, Hassan Rouhani, was elected to improve living standards. If the economy sinks, it could strengthen the hand of his hardline opponents. Similarly, a default in Venezuela could have dire consequences not just for Venezuelans but also for the Caribbean countries that have come to depend on Bolivarian aid. And Mr Putin, deprived of economic legitimacy, could well plunge deeper into the xenophobic nationalism that has fuelled his campaign in Ukraine. Cheaper oil is welcome, but it is not trouble-free.

[Perelandra]

Check this one out.
http://rigorousintuition.ca/board2/viewtopic.php?f=8&t=38476

[American Dream]

http://www.blackagendareport.com/node/14643

Insane U.S. Oil Glut Wars

A Black Agenda Radio commentary by BAR executive editor Glen Ford

“The destruction of energy exporting economies will only intensify the global recession that has already begun.”

The people that rule the United States have determined that, the only way for the U.S. to maintain its hegemony in the world is to engineer the economic collapse of its rivals. The likelihood that such economic warfare will wind up dragging the entire planet into chaos and catastrophe does not seems to phase the Lords of Capital, who are so rich they can only be made poor at the point of a firing squad. Having surpassed Saudi Arabia and Russia as the world’s biggest producer of oil and natural gas, the Americans are now flooding the planet with fuel that no one needs in order to keep prices so low that Russia, Iran and Venezuela will suffer regime change. Washington is also eager to deploy its military and dirty tricks of all kinds to break its rivals’ will to resist U.S. empire.

The problem is, it’s very difficult to aim an oil and gas weapon. The effects tend to be general, rather than targeted. It’s kind of like poison gas; the wind blows death into everybody’s face, including the guy who popped the canister. The Americans have soaked the entire world with gasoline, and now they’re running around with matches between their fingers, laughing like maniacs, thinking they have the ultimate power because they can burn the whole place down. Yes, it is conceivable that the regimes in Russia, Iran and Venezuela could be brought low, broken, through years of depressed prices – but oil and gas prices can only be kept low if the world economy is also depressed, locked in stagnation. The destruction of energy exporting economies will only intensify the global recession that has already begun. Chaos, instability, unintended – and even unimaginable – consequences will surely characterize the next, purposely created crisis: a deliberate economic crime against humanity.

“Oil and gas prices can only be kept low if the world economy is also depressed, locked in stagnation.”

It has already become clear to the nations of the Caribbean and Central America that the disruptions imposed by the oil glut go beyond the drilling platforms of Venezuela. The 17 members of Petrocaribe have for years enjoyed access to Venezuelan fuel at cut-rate prices, with the best of credit terms, as part of the socialist country’s policy of solidarity with its neighbors. Venezuela even accepted payment in commodities, a kind of barter system. The Petrocaribe program was losing Venezuela about $2.3 billion a year, and with the collapse in world prices, Venezuela may have to scale back its generosity. Meanwhile, the U.S. is licking its chops, hoping to make the whole region dependent on American liquefied natural gas. But, we all know what dependence on the United States means in the Caribbean and Central America. It means the end of sovereignty, the end of dignity, and the certainty of continued misery for the masses of the people.

The artificial oil glut, on top of global economic stagnation, will also cause insane things to happen to a U.S. economy whose only bright spot – besides the Wall Street casinos – is an energy industry that keeps on churning out oil and gas that a stagnant world can’t use, just to spite other countries that have oil. How crazy is that? And how long can that go on?

[slimmouse]

Just spouting out a couple of pertinent personal observations here.

Do any of you here feel the kind of even short term economic benefit that you might expect, when you look at what has recently happened to Oil Prices ?

If the answer, is "fuck, not really", then what is happening here is unquestionably "collective punishment" on a scale that outsizes any other I can immediately think of.